internal_revenue_service number release date index number -------------------------------------- --------------------------------------------- -------------------------------- ---------------------------------------- in re ------------------------------- ---------------------------------- ------------------------------------ department of the treasury washington dc person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc intl b02 - plr-124780-02 date october do ---------------------ty ------------------- legend accountant attorney corporation fund management grantor_trust husband limited_partnership pfic taxpayer wife dear ------------------------------ ---------------------- ---------------------- -------------------- ------------------------------------- ------------------------------------------------ ------------------- ------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- ------------------- the rulings contained in this letter are based upon information and this is in response to a letter dated date supplemented and corrected in connection with its private_letter_ruling request taxpayer has represented the plr-124780-02 by information submitted on date date date and date requesting consent under sec_1_1295-3 to make a retroactive qualified_electing_fund qef election to treat the stock owned by taxpayer in the passive_foreign_investment_company pfic listed below as stock in a qef effective as of the first taxable_year that taxpayer owned stock in the pfic 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 facts and representations following facts owned by grantor_trust and owned by corporation corporation is wholly-owned by husband and wife who are the grantors of grantor_trust husband serves as vice president of taxpayer taxpayer is part of husband’s and wife’s investment structure company pfic is not a controlled_foreign_corporation cfc within the meaning of sec_951 through of the internal_revenue_code regarding various tax matters such as the formation of the investment structure that includes taxpayer attorney specialized in tax law while representing husband and wife attorney was aware that husband and wife and taxpayer invested in foreign_corporations either directly or indirectly through investments in foreign limited_partnership funds however attorney failed to examine whether some such foreign_corporations were pfics and as a result attorney failed to advise taxpayer of the possibility of making or the consequences of failing to make a qef election with respect to pfic taxpayer is a limited_partnership organized in the united_states it is prior to his retirement in husband and wife were advised by attorney in taxpayer acquired stock of pfic a passive foreign investment all section references are to the internal_revenue_code_of_1986 or the corresponding treasury regulations thereunder in addition to attorney husband and wife relied on accountant since to taxpayer has submitted affidavits executed by attorney and accountant which plr-124780-02 prepare their federal_income_tax returns and the federal_income_tax returns for taxpayer including matters such as the tax consequences of making or failing to make qef elections although accountant was aware that taxpayer invested in pfic he was unaware that pfic was a pfic and as a result did not advise taxpayer of the possibility of making or the consequences of failing to make a qef election reflect the above statements concerning their failures to advise taxpayer of the possibility of making or the consequences of failing to make a qef election taxpayer first became aware that it might own stock in a pfic in date when limited_partnership part of husband’s and wife’s investment structure that includes taxpayer received notification from fund management that it was investigating whether the funds invested in through husband’s and wife’s investment structure included foreign_corporations that were pfics taxpayer investigated its own investments upon limited partnership’s receipt of confirmation from fund management in july of that limited_partnership did own stock in various pfics ruling requested make a retroactive qef election under sec_1_1295-3 to treat pfic as a qef effective as of the first taxable_year which it owned stock in pfic law and analysis taxpayer requests the consent of the commissioner of internal revenue to sec_1295 provides the general_rule that any pfic shall be treated as a qef with respect to the taxpayer provided an election by the taxpayer under sec_1295 applies to such company for the taxable_year and the company complies with requirements that the secretary may prescribe for purposes of determining the ordinary_earnings and net_capital_gain of such company and otherwise carrying out the purposes of subpart b treatment of qualified electing funds sec_1295 provides that a taxpayer may make a qef election with respect to a pfic for any taxable_year of the taxpayer sec_1_1295-1 provides that a foreign_corporation with respect to which a sec_1295 election is made will be treated as a qef for its taxable_year ending with or within the shareholder’s election_year and all subsequent taxable years of the foreign_corporation that are included wholly or partly in the shareholder’s holding_period or periods of stock of the foreign_corporation plr-124780-02 sec_1295 states that an election may be made for any taxable_year at any time on or before the due_date determined with regard to extensions for filing the return of the tax_imposed_by_chapter_1 for such taxable_year election due_date to the extent provided in regulations an election may be made later than the election due_date where the taxpayer fails to make a timely election because the taxpayer reasonably believed the company was not a pfic retroactive election sec_1_1295-3 provides that a shareholder may request the consent of the commissioner to make a retroactive qef election if the shareholder satisfies the following requirements the shareholder reasonably relied on a qualified_tax professional granting consent will not prejudice the interests of the united_states government the shareholder requests consent before a representative of the internal_revenue_service raises upon audit the pfic status of the corporation for any taxable_year of the shareholder and the shareholder satisfies all procedural requirements set forth in sec_1_1295-3 as provided in sec_1_1295-3 a shareholder is deemed to have reasonably relied on a qualified_tax professional only if the shareholder reasonably relied on a qualified_tax professional who failed to identify the foreign_corporation as a pfic or failed to advise the shareholder of the consequences of making or failing to make a qef election the section further states that a shareholder will not be considered to have reasonably relied on a qualified_tax professional if the shareholder knew or reasonably should have known that the foreign_corporation was a pfic and of the availability of a sec_1295 election or knew or reasonably should have known that the qualified_tax professional was not competent to render tax_advice with respect to ownership of shares of a foreign_corporation or did not have access to all relevant facts and circumstances consequences of taxpayer’s investments taxpayer also relied on accountant for its federal_income_tax return preparation including the consequences of making or failing to make available elections such as a qef election attorney and accountant were competent to render tax_advice with respect to stock ownership in a foreign_corporation but did not identify the foreign_corporation in which taxpayer invested directly as a pfic or inform taxpayer of the availability of a qef election taxpayer reasonably relied on a qualified_tax professional within the meaning of sec_1 f i and in the present case taxpayer relied upon attorney to advise it as to the tax plr-124780-02 the second requirement of sec_1_1295-3 states that the commissioner may grant consent to a taxpayer to make a retroactive election only if granting consent will not prejudice the interests of the united_states government sec_1_1295-3 provides that the interests of the united_states government are prejudiced if granting the request would result in the shareholder having a lower tax_liability taking into account applicable_interest charges in the aggregate for all years affected by the retroactive election other than by a de_minimis amount than the shareholder would have had if the shareholder had made the qef election by the election due_date taking into account the time_value_of_money for purposes of the computation if granting relief would prejudice the interests of the united_states government the commissioner may in his sole discretion grant consent to make a retroactive election provided the shareholder enters into a closing_agreement with the commissioner that requires the shareholder to pay an amount sufficient to eliminate any prejudice to the government as a consequence of the shareholder’s inability to file amended returns for the closed taxable years treas reg ' f ii in the present case it has been determined that granting relief will not prejudice the interests of the united_states government the third requirement to be met under sec_1_1295-3 is that the request must be made before a representative of the internal_revenue_service raises upon audit the pfic status of the corporation for any taxable_year of the shareholder taxpayer represent that it made the request for a retroactive qef election before the issue was raised on audit the final requirement for a retroactive election under sec_1_1295-3 is that the procedural requirements set forth in sec_1_1295-3 must be met the procedural requirements set forth include filing a request for consent to make a retroactive election and appropriate user_fee with the office of the associate chief_counsel international treas reg ' f i additionally affidavits signed under penalties of perjury must be submitted by the shareholder and any qualified_tax professional upon whose advice the shareholder relied treas reg ' f ii and iii these affidavits must describe the events that led to the failure to make a qef election by the election due_date the discovery of such failure and the engagement and responsibilities of the qualified_tax professional and the extent to which the shareholder relied on such professional taxpayer has submitted affidavits meeting the requirements set forth in sec_1_1295-3 describing the failures of attorney and accountant to inform taxpayer of the need to make a qef election taxpayer has submitted the appropriate user_fee therefore taxpayer has met the procedural requirements of sec_1_1295-3 based on the information submitted and representations made taxpayer is plr-124780-02 granted consent to make a retroactive qef election under sec_1_1295-3 with respect to pfic effective for its taxable_year provided taxpayer complies with the rules under sec_1_1295-3 regarding time and manner for making the retroactive qef election the code provides that it may not be used or cited as precedent relevant letter is being sent to taxpayer in accordance with the power_of_attorney on file with this office a copy of this a copy of this letter must be attached to any income_tax return to which it is this ruling is directed only to the taxpayer s requesting it sec_6110 of sincerely valerie a mark lippe senior technical reviewer branch office of office of associate chief_counsel international cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi br - plr-131558-01 date date legend x state d1 this responds to your letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated under state law on d1 the shareholders of x intended that x elect to be treated as an s_corporation effective d1 however the election to be treated as an s_corporation was not timely filed law and analysis sec_1362 provides that a small_business_corporation can elect to be treated as an s_corporation sec_1362 provides when an s election becomes effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election was made if an election is made after the first two and one-half months of a corporation’s taxable_year then the corporation will generally not be treated as an s_corporation until the following taxable_year however sec_1362 provides that if no election is made pursuant to sec_1362 or if the election is made after the date prescribed for making such an election and the secretary determines reasonable_cause existed for the failure to timely make the election then the secretary can treat such an election as timely made for that taxable_year and effective as of the first day of that taxable_year plr-131558-01 in the present case x failed to timely elect s_corporation treatment effective d1 however x has established reasonable_cause for not making a timely election and is thus entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d1 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely dianna k miosi chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court ruben de los santos and martha de los santos petitioners v commissioner of internal revenue respondent docket no filed date david m henderson for petitioners elizabeth s mcbrearty david weiner and angela b reynolds for respondent memorandum opinion lauber judge with respect to petitioners’ federal_income_tax for and the internal_revenue_service irs or respondent determined deficien- cies of dollar_figure and dollar_figure respectively it also determined accuracy-related_penalties under sec_6662a which covers reportable_transaction understate- ments and alternatively under sec_6662 currently before the court are the parties’ cross-motions for partial summary_judgment petitioner husband was the sole shareholder of an s_corporation that em- ployed him and his wife it made contributions of dollar_figure million to an employee welfare_benefit_plan which purchased a life_insurance_policy with a face value of dollar_figure million covering petitioners’ lives the question presented is whether this arrangement generated current taxable_income for petitioners as a split-dollar_life_insurance arrangement under sec_1_61-22 income_tax regs the arrangement here resembles the split-dollar arrangement we considered in our country home enters inc v commissioner 145_tc_1 reaching similar conclusions here to those we reached there we will grant respondent’s mo- tion for partial summary_judgment and deny petitioners’ cross-motion background there is no dispute as to the following facts which are drawn from the par- ties’ motion papers the stipulation of facts and the exhibits attached thereto peti- tioners resided in texas when they petitioned this court 1all statutory references are to the internal_revenue_code code in effect for the years at issue and all rule references are to the tax_court rules of prac- tice and procedure we round all monetary amounts to the nearest dollar petitioner husband is a medical doctor during the tax years at issue he was the sole shareholder of dr ruben de los santos md pa an s_corporation incor- porated in texas s corp the s corp employed dr de los santos and his wife who served as the office manager for the medical practice as well as four other individuals petitioners received annual salaries of dollar_figure and dollar_figure respec- tively petitioner husband also included in his income as the sole shareholder of the s corp of its items of income and expense see sec_1366 a the legacy flex plan in date legacy benefit plans llc an illinois company lbp estab- lished the legacy employee welfare_benefit_plan legacy plan the legacy plan was a purported multiple-employer welfare_benefit_plan under sec_419a at all relevant times lbp was the sponsor and administrator of the legacy plan an employer elected to participate in the legacy plan by adopting a welfare_benefit_plan pursuant to the terms of a master_plan the legacy plan offered liv- ing benefits including disability benefits and death_benefits the latter were ulti- mately payable upon the death of a covered_employee to that person’s spouse or designated_beneficiary participating employers selected the types of benefits to be provided to their employees no employee had any right to withdraw from borrow against or sur- render his interest in the legacy plan an employee covered by the legacy plan designated the beneficiary or beneficiaries who would receive death_benefits to which that employee was entitled the legacy plan was funded by employer contributions to the legacy em- ployee welfare_benefit trust legacy trust lbp determined the amount of such contributions through a rate chart which took into account common risk factors such as age gender number of covered dependents and benefit terms the em- ployees themselves made no contributions to the legacy trust and otherwise made no financial commitment to the legacy plan at no time was the legacy trust recognized by the irs as tax-exempt under sec_501 all employer contributions to the legacy trust were irrevocable and were thereafter inaccessible by the participating employer and its creditors participat- ing employers and their creditors had no access to the income or assets including insurance contracts held by the legacy trust in no event could the assets held by the legacy trust be used for any purpose other than funding benefits for par- ticipating employees and their beneficiaries or defraying expenses of plan ad- ministration the legacy trust invested the contributed funds in multiple asset classes including cash stock bonds and life_insurance contracts in date the legacy plan was merged into the legacy employee flex benefit plan flex plan the legacy trust thereupon transferred its assets to the legacy employee flex benefit trust flex trust the flex plan enabled par- ticipating employers to offer their employees a wider range of living benefits such as day care and vacation benefits but the operative provisions of the flex plan and the flex trust were otherwise substantially_similar to the operative provisions of the legacy plan and the legacy trust as described above for convenience we will sometimes refer to these entities collectively as the legacy flex plan and the legacy flex trust b the s corp ’s participation in the legacy flex plan in date the s corp elected to participate in the legacy plan by ex- ecuting an adoption_agreement with an effective date of date the s corp selected the benefits to be provided to petitioners and its four other em- ployees under the legacy plan petitioners were entitled thereunder to a dollar_figure million death_benefit and the s corp ’s four rank-and-file employees were entitled to a dollar_figure accidental death and dismemberment ad d benefit under the flex plan petitioners continued to receive a dollar_figure million death_benefit the rank- and-file employees received a dollar_figure death_benefit and several flexible benefits including a critical illness benefit and a prepaid legal benefit the legacy plan required that life_insurance be purchased to fund the prom- ised death_benefits in date the legacy trust accordingly purchased a life_insurance_policy policy insuring the lives of petitioners the policy issued by american general life_insurance co agli was a flexible premium variable universal life policy with accumulation values based on the investment experi- ence of a separate fund the policy provided base insurance coverage of dollar_figure million equal to the death_benefit that the s corp had selected for petitioners the legacy trust later the flex trust was named as the owner and beneficiary of the policy agli considered several risk factors when issuing the policy including pe- titioners’ age and status as nonsmokers at the time petitioner husband was age and his wife was age the policy was a survivor policy under which agli would pay dollar_figure million to the legacy trust when the second of petitioners died 2the original policy documents list the policy owner as the legacy em- ployee benefit plan and trust but the parties have stipulated that the legacy trust was the owner and beneficiary of the policy when it was issued in in date the flex trust was substituted as the policy owner and bene- ficiary the legacy trust in turn would pay dollar_figure million to the beneficiary or beneficiaries whom petitioners had designated the legacy trust invoiced the s corp for the required upfront contribu- tions each invoice showed dollar_figure as the cost of ad d coverage for the four rank- and-file employees with the balance attributable to the cost of the policy during the s corp made to the legacy trust the following contributions which it treated as tax-deductible expenses of the medical practice date contribution total dollar_figure big_number big_number big_number big_number big_number during the legacy trust and later the flex trust paid premi- ums on the policy as follows date premium paid total dollar_figure big_number big_number big_number big_number big_number because of these premium payments and the investment gains thereon the accumulation value of the policy was dollar_figure at the end of and dollar_figure at the end of according to the quarterly statements issued by agli if an employer participating in the flex plan made all required contributions before date and thereafter terminated participation employees who were entitled to death_benefits would continue to receive that coverage for the rest of their lives the s corp had made by date all contributions re- quired to fund the promised death_benefits because subsequent events could not cause petitioners to lose their entitlement to the dollar_figure million death_benefit they were fully vested in that benefit during the tax years at issue c tax_return filings petitioners timely filed joint federal_income_tax returns for and reporting adjusted_gross_income of dollar_figure and dollar_figure respectively they did not report on these returns any income related to their participation in the legacy flex plan on date the irs issued petitioners a timely no- tice of deficiency for and in which it determined deficiencies and pen- alties on the basis that petitioners had received taxable economic benefits from their participation in the legacy flex plan petitioners timely petitioned this court for redetermination discussion the purpose of summary_judgment is to expedite litigation and avoid un- necessary and time-consuming trials see 116_tc_73 we may grant summary_judgment or partial summary_judgment when there is no genuine dispute of material fact and a decision may be rendered as a matter of law rule b 118_tc_226 the parties agree on all material facts relevant to the issues we must decide and they have expressed that consensus by filing cross-motions for partial summary_judgment we conclude that these issues may be adjudicated summarily respondent contends that the policy issued on petitioners’ lives incident to their participation in the legacy flex plan was part of a compensatory split-dollar_life_insurance arrangement under sec_1_61-22 income_tax regs and that petitioners must include in gross_income the economic benefits thus conferred on them petitioners do not dispute that economic benefits received from a split- dollar life_insurance arrangement constitute taxable_income rather they contend that their participation in the legacy flex plan did not involve a split-dollar ar- rangement a governing legal framework the term split-dollar was originally applied to life_insurance arrangements under which an employer paid part of the premiums on a policy insuring an em- ployee’s life with the understanding that the employer would recover part or all of the premiums from the insurance proceeds see revrul_64_328 1964_2_cb_11 revoking revrul_55_713 1955_2_cb_23 in date the department of the treasury issued final regulations that define split-dollar_life_insurance arrange- ments more comprehensively t d 2003_2_cb_1055 see sec_1_61-22 income_tax regs these regulations govern all split-dollar_life_insurance arrangements entered into or materially modified after date sec_1_61-22 income_tax regs see our country home enters inc t c pincite the parties agree that these regulations govern the outcome here the regulations generally define a split-dollar_life_insurance arrangement to include any arrangement other than group-term_life_insurance between an owner of a life_insurance_contract and a non-owner of the contract if certain conditions are met sec_1_61-22 income_tax regs one of these conditions is that one party must be entitled to recover from the insurance proceeds all or any portion of the premiums previously paid id subpara ii because the arrangement at issue here does not meet that condition respondent does not contend that petition- ers’ participation in the legacy flex plan constituted a split-dollar arrangement under the general definition set forth in the regulations the regulations set forth a special rule however that applies regardless of whether the criteria of paragraph b of this section are satisfied id subpara i under this special rule an arrangement is treated as a split-dollar_life_insurance arrangement if it is either a compensatory arrangement or a share- holder arrangement see id subpara ii and iii because neither party con- tends that the legacy flex plan involved a shareholder arrangement the question we must decide is whether it constituted a compensatory arrangement an arrangement between an owner and a non-owner of a life_insurance con- tract constitutes a compensatory arrangement if three conditions are met first the arrangement must be entered into in connection with the performance of serv- ices and must not be part of a group-term_life_insurance plan described in sec_79 id subdiv ii a second the employer or other service_recipient must pay directly or indirectly all or any portion of the premiums on the policy id sub- div ii b third as relevant here the beneficiary of the death_benefit must be designated by the employee or service provider or must be a person whom the employee or service provider would reasonably be expected to designate as the beneficiary id subdiv ii c t he person named as the policy owner of a life_insurance_contract gen- erally is the owner of such contract id para c however the regulations include attribution_rules that apply in the case of compensatory arrangements see id subpara iii if the arrangement is entered into in_connection_with_the_performance_of_services the employer or other service_recipient is treated as the owner of the life_insurance_contract if the owner is among other things a wel- fare benefit fund within the meaning of sec_419 id subdiv iii c the federal_income_tax consequences of a split-dollar_life_insurance ar- rangement are generally determined either through the economic benefit provi- sions of sec_1_61-22 through g income_tax regs or through the loan provisions of sec_1_7872-15 income_tax regs see estate of morrissette v commissioner 146_tc_171 our country home enters inc t c pincite the parties agree that if we find the legacy flex plan to involve a split-dollar_life_insurance arrangement the economic benefit provisions will apply here under those provisions the owner of the life_insurance_contract is treated as providing current economic benefits to the non-owner of the policy see sec_1 d income_tax regs b analysis petitioners first contend that there can be no split-dollar arrangement here because the legacy flex plan is not life_insurance this contention is mis- guided the regulations provide that a compensatory split-dollar arrangement exists if specified criteria are met with respect to an owner and a non-owner of a life_insurance_contract sec_1_61-22 income_tax regs petitioners do not dispute and they could not plausibly dispute that the policy is a life_insurance_contract as defined by sec_7702 the policy was issued by agli a life_insurance_company and provides insurance of dollar_figure million on petitioners’ lives petitioners contend that the legacy flex plan is not life_insurance because it lacks a sufficient element of risk but it is irrelevant under the regulations whether the legacy flex plan as whole constitutes life_insurance the relevant fact is that this plan required that life_insurance be purchased to fund the promised death_benefit and the trust purchased the policy for that reason the first step of the analysis requires that we identify the owner of the policy under the regulatory attribution_rules the legacy trust later the flex trust was the named owner of the policy but when a split-dollar arrangement is entered into in_connection_with_the_performance_of_services the employer is treated as the owner of the life_insurance_contract if the actual owner is among other things a welfare_benefit_fund within the meaning of sec_419 sec_1_61-22 income_tax regs sec_419 defines a welfare_benefit_fund as a fund that is part of an employer plan and through which the employer provides welfare benefits to employees or their beneficiaries sec_419 generally defines a welfare_benefit as any benefit other than a benefit covered by sec_83 property transferred in connection with performance of services sec_404 deferred payment plan or sec_404a foreign_deferred_compensation_plan petitioners do not challenge the status of the legacy trust and later the flex trust as a welfare_benefit_fund within the meaning of sec_419 sec_419 defines a fund to include any trust corporation or other organization not exempt from federal_income_tax neither the legacy trust nor the flex trust was tax exempt under sec_501 each trust was part of the plan of an employer through which the s corp provide d welfare benefits to employees or their beneficiaries see sec_419 and b and the benefits thus provided were welfare benefits because they were not covered by sec_83 sec_404 or sec_404a see sec_419 for purposes of applying the split-dollar regulations therefore the s corp is treated as the owner of the policy and peti- tioners are treated as the non-owners see sec_1_61-22 and income tax regs cf our country home enters inc t c pincite reaching the same conclusion on the basis of the taxpayer’s concession the first prong of the test for a compensatory arrangement requires that the arrangement between the owner and the non-owner be entered into in_connection_with_the_performance_of_services and not be part of a group-term_life_insurance plan described in sec_79 sec_1_61-22 income_tax regs petitioners concede that the s corp provided them benefits under the legacy flex plan in_connection_with_the_performance_of_services however they contend that the insurance coverage they received under the policy was part of a group- term life_insurance plan that is assertedly so because all of the s corp ’s eligi- ble employees received death_benefits from the flex plan in varying amounts and because eligibility to receive such benefits was based solely on factors re- lated to employment such as years_of_service petitioners’ argument misses the mark for at least two reasons first the insurance coverage that funds petitioners’ promised death_benefits is not group- term life_insurance see sec_79 the policy insuring petitioners’ lives covers them alone and it does not provide term_insurance rather it is a self-described flexible premium variable_universal_life_insurance policy with accumulation values based on the investment experience of a separate fund see 737_f3d_1145 7th cir distinguishing a flexible premium variable life_insurance_policy from term life_insurance second l ife insurance is not group-term_life_insurance for purposes of sec_79 unless t he amount of insurance provided to each employee is com- puted under a formula that precludes individual selection sec_1_79-1 income_tax regs this requirement is not satisfied if the formula takes into ac- count the personal risk characteristics of particular employees see our country home enters inc t c pincite eligibility to receive benefits under the legacy flex plan was open to all six s corp employees but petitioners have not established that t he amount of in- surance provided to each employee wa s computed under a formula that precludes individual selection see sec_1_79-1 income_tax regs emphasis added petitioners were entitled to a death_benefit of dollar_figure million each petitioner enjoyed the same benefit even though petitioner husband was seven years older than his wife and earned a salary four times higher the four rank-and-file em- ployees were entitled to no death_benefits under the legacy plan only to a dollar_figure ad d benefit and were entitled under the flex plan to a modest death_benefit of dollar_figure petitioners have not explained what computational formula--based on age compensation or other objective criteria--could produce a distribution of benefits that looks like this even if there were some theoretical possibility that this dis- parity could have resulted without individual selection the formula did not in fact preclude individual selection see 81_tc_505 aff’d 733_f2d_191 1st cir it seems obvious that the discrimina- tory pattern displayed by the s corp ’s selection of benefits reflected individual selection by or on behalf of petitioners see 78_tc_791 holding that an insurance_policy was not part of a group-term insurance plan because it individually selected the company’s president to receive dollar_figure of excess coverage moreover the policy insuring petitioners’ lives took into account their personal risk characteristics including their nonsmoker status see our country home enters inc t c pincite the second prong of the test for a compensatory arrangement requires that the employer or other service_recipient pay directly or indirectly all or any por- tion of the life_insurance premiums sec_1_61-22 income_tax regs during the s corp made contributions in excess of dollar_figure million to the legacy trust which used those contributions to pay premiums of dollar_figure on the policy insuring petitioners’ lives the s corp was petitioners’ employer and it paid through the legacy trust all of the premiums on the policy petitioners contend that the second prong is unsatisfied because the legacy trust did not pay these premiums immediately upon receipt of the s corp ’s con- tributions but several months or years later after commingling the cash with cash supplied by other participating employers this argument ignores the language of the regulation which states that an employer can effect premium payments di- rectly or indirectly ibid by supplying the legacy trust with the cash to pay the premiums the s corp paid those premiums indirectly the regulations contem- plate exactly this sort of indirect payment by providing that the employer will be treated as the owner of a life_insurance_contract that is actually owned for exam- ple by a welfare_benefit_fund see id para c iii c income_tax regs in such cases the employer will typically supply to the fund or to its associated trust the cash with which to pay the premiums as happened here the third prong of the test for a compensatory arrangement requires either that the employee have an interest in the policy cash_value of the life_insurance_contract or that the beneficiary of the death_benefit be designated by the employ- ee or be a person whom the employee would reasonably be expected to desig- nate as the beneficiary id para b ii c the latter requirement is clearly met here petitioners admit that they named the legacy trust and later the flex trust as the beneficiary of the dollar_figure million death_benefit under the policy and the legacy trust was obligated to pay that dollar_figure million death_benefit to the beneficiary or beneficiaries whom petitioners had designated as we concluded in our country home enters inc the fact that the proceeds from the life_insurance policies are funneled through the welfare_benefit_plan to each of the ulti- mate recipients does not blur our view or our conclusion that each of those recip- ients is the beneficiary of the death_benefit for purposes of the split-dollar regu- lations t c pincite in sum we conclude that the arrangement at issue satisfied all three criteria required to create a compensatory arrangement under the regulations we ac- cordingly hold that the policy issued on petitioners’ lives incident to their partici- pation in the legacy flex plan was part of a compensatory split-dollar life insur- ance arrangement under sec_1_61-22 income_tax regs 3petitioners assert that because the legacy flex trust was not related to them they could not gain from naming it the beneficiary of the death_benefit as noted in the text we rejected this same argument in our country home enters inc t c pincite petitioners effectively designated the recipients of the death_benefit because they were assured that the legacy flex trust would imme- diately pay the death_benefit to the beneficiary or beneficiaries whom petitioners had named c unreported income the federal_income_tax consequences of a split-dollar_life_insurance ar- rangement are generally determined through one of two regimes the economic benefit regime or the loan regime see our country home enters inc t c pincite compare sec_1_61-22 b i income_tax regs with sec_1_7872-15 income_tax regs the parties agree that the loan regime does not apply here under the economic benefit regime the non-owner of the life_insurance_contract here petitioners must take into account the full value of all economic benefits described in paragraph d of this section reduced by the consideration paid_by the non-owner to the owner for those economic benefits sec_1_61-22 income_tax regs the parties agree that petitioners paid no con- sideration to the s corp for the benefits they received under the legacy flex plan as relevant here t he value of the economic benefits provided to a non- owner id para d equals the sum of two amounts the first amount is the cost of current_life_insurance_protection provided to the non-owner id subpara i the parties agree that the cost of such current protection was dollar_figure for and dollar_figure for the second amount--the focus of dispute here--is t he amount of policy cash_value to which the non-owner has current access within the meaning of para- graph d ii of this section to the extent that such amount was not actually taken into account for a prior taxable_year id subpara ii the non-owner has current access to that portion of the policy cash_value to which he or she has a current or future right if specified conditions are met id subpara ii a even if the non-owner cannot extract cash from the policy currently he is treated as having current access to that portion of the policy cash_value to which he has a future right if such portion is inaccessible to the owner of the policy ie the employer or is inaccessible to the owner’s general creditors id subdiv ii b petitioners had a future right to the policy cash_value because they had the exclusive right to designate who would receive death_benefits under the policy see our country home enters inc t c pincite moreover once a participating employer had made contributions to the legacy flex trust those contributions were irrevocable and were inaccessible to the employer and its credi- tors employers and their creditors likewise had no access to the income or assets including insurance contracts held by the legacy flex trust thus although petitioners during could not withdraw funds from the policy or the legacy flex plan the policy cash_value in its entirety was inaccessible to the owner ie the s corp and was inaccessible to the owner’s general credit- ors see sec_1_61-22 income_tax regs although the legacy flex plan documents make clear that the policy cash_value was not subject_to the claims of any participating employer or its creditors petitioners assert that a clawback provision in the bankruptcy code could lead to a different outcome under u s c sec e a bankruptcy trustee may claw back any transfers made by a debtor within years of the petition date if the transfer among other things was made to a self-settled trust or to a similar device whose beneficiary was the debtor this provision is irrelevant here the legacy and flex trusts were not self-settled trusts and the s corp the debtor in the scenario petitioners imagine was not a beneficiary of the legacy or flex trust 4petitioners insist that they enjoyed no economic benefit beyond the cost of current insurance protection--ie dollar_figure for and dollar_figure for 2012--because they could not withdraw cash from the policy or from the legacy flex plan currently this argument ignores the governing regulation which explicitly states that a non- owner possessing future rights has current access to that portion of the policy cash_value that is inaccessible to the owner or inaccessible to the owner’s gen- eral creditors sec_1_61-22 income_tax regs we accordingly hold that petitioners had current access to the entire cash_value of the policy during and the economic benefit provided to them during those years was not limited to the cost of current_life_insurance_protection but also included the amount of policy cash_value to which they had current ac- cess to the extent that such amount was not actually taken into account for a prior taxable_year sec_1_61-22 income_tax regs we leave to further proceedings the computation of the exact amounts to be included in petitioners’ gross_income for each year as well as a determination as to whether they are liable for accuracy-related_penalties under sec_6662a or sec_6662 to reflect the foregoing an appropriate order will be issued


internal_revenue_service number release date index number - ------------------------------------ --------------------------- ------------------------------ ------------------ ---------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc tege eoeg teb presp-142941-06 date date dear ------------------ this letter is in response to your application_for an allocation of authority to issue --------- ------------------in clean renewable energy bonds crebs under sec_54 of the internal_revenue_code the code sec_54 of the code imposes a limitation of dollar_figure on the amount of crebs which may be issued to finance qualified projects the limitation sec_54 provides that the limitation is to be allocated by the secretary of treasury in such manner as the secretary deems appropriate except that no more than dollar_figure of the limitation may be allocated to finance qualified projects of qualified borrowers which are governmental bodies section of notice_2005_98 2005_52_irb_1211 provides that the limitation will be allocated among qualified projects for which a share of such limitation has been requested beginning with the project s requesting the smallest share in dollar amount and continuing with the project s requesting the next-smallest share until the total limitation has been exhausted however in the event that dollar_figure has been allocated to qualified projects of qualified borrowers that are governmental bodies the remaining shares of the limitation will be allocated under the methodology described in the previous sentence only to qualified projects of qualified borrowers that are not governmental bodies for purposes of allocating the limitation among projects all qualified projects located at the same site and owned by the same qualified_borrower are treated as a single project and each project is treated as requesting a single allocation an allocation of shares of the limitation cannot be made with respect to the project owned by the borrower listed in appendix a because such borrower is a governmental presp-142941-06 body and dollar_figure has already been allocated to applications requesting a smaller share of the limitation to finance qualified projects owned by qualified borrowers that are governmental bodies we appreciate your submission of the application_for our consideration and encourage you to continue to pursue your plans for constructing a clean renewable energy project sincerely assistant chief_counsel exempt_organizations employment_tax government entities tax exempt government entities by timothy l jones senior counsel tax-exempt_bonds branch presp-142941-06 borrower name appendix a project type project location ----------------------------- ------------ open-loop_biomass facility -------------------------------- ---------------- amount requested ----------------


internal_revenue_service number info release date index number ------------------------------------ ---------------------------------- ----------------------------- ----------------------- - department of the treasury washington dc person to contact -------------------- id no -------------- telephone number --------------------- refer reply to cc psi - genin-164285-03 date jan dear ----------------- dear ----------------- we are responding to your correspondence submitted by your representative requesting relief for a late s_corporation_election to be effective as of date based on your account history it appears that you are qualified for automatic relief under revproc_97_48 therefore please follow the procedural directions set forth in sec_4 of revproc_97_48 enclosed you may send your completed form_2553 and statement via facsimile to the ogden service_center at in addition the irs has developed two new cd-roms to help educate small_business owners on their tax responsibilities introduction to federal taxes for small_business self-employed and a virtual small_business workshop these two cd- roms are free and can be ordered by calling the irs also provides www irs businesses small a website dedicated to small_business taxpayers if you fail to receive an acceptance letter within days of the date the election and statement are transmitted you may call the listed contact person please keep this letter with your tax records and feel free to provide a copy of it to your authorized representative we hope that the above information proves helpful sincerely s dianna k miosi chief branch office of associate chief_counsel passthroughs special industries enclosures revproc_97_48 form_2553


t c memo united_states tax_court salaheddin ahmad ahmad petitioner v commissioner of internal revenue respondent docket no filed date janice burns king for petitioner lawrence b austin for respondent memorandum findings_of_fact and opinion parr judge prior to issuing a notice_of_deficiency respondent made a jeopardy_assessment against petitioner for and as follows year additions to tax sec_6651 dollar_figure big_number big_number sec_6654 dollar_figure big_number big_number within days of making the jeopardy_assessment respondent determined deficiencies in and additions to petitioner's federal_income_tax for and as follows year deficiency dollar_figure big_number big_number additions to tax sec_6651 dollar_figure big_number big_number sec_6654 dollar_figure big_number big_number the issues for decision are whether respondent's notice_of_deficiency was arbitrary we hold it was not whether petitioner has unreported income for the tax years and we hold he does to the extent set out below whether petitioner is liable for self-employment_tax for and we hold he is whether petitioner is liable for an addition_to_tax under sec_6651 for and for failure_to_file federal_income_tax returns we hold he is to the extent set out below whether petitioner is liable for an addition_to_tax under sec_6654 for and for the failure to make estimated_tax payments we hold he is to the extent set out below all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated all dollar amounts are rounded to the nearest dollar unless otherwise indicated findings_of_fact some of the facts have been stipulated and are so found the stipulated facts and the accompanying exhibits are incorporated into our findings by this reference at the time the petition in this case was filed petitioner resided in calhoun georgia calhoun i general background--petitioner in petitioner came to the united_states from the kingdom of jordan on a student visa to attend college at the time petitioner came to this country his brother mr saleh rashid saleh was already attending college at kennesaw state college later transferring to a different university on date petitioner received a bachelor of science degree in computer science from kennesaw state college during and petitioner held checking account no checking account and savings accounts nos savings account savings account savings account and savings account with wachovia bank wachovia south wall in response to a query by the court petitioner explained that four of his brothers have a surname that is different from ahmad the one he shares with his parents as a result of a clerk's error in updating the jordanian civil registration system years ago petitioner testified that the family's correct surname is rashid petitioner noted however that because it takes so much effort to go back and correct everything we said it is not a big deal and that is why we have you know two different last names street calhoun georgia petitioner made deposits in his checking and savings accounts totaling dollar_figure in dollar_figure in and dollar_figure in petitioner married tonia judd tonia in date and they were divorced on date during the divorce proceedings petitioner withdrew dollar_figure from his bank accounts including the proceeds of three certificates of deposit he transferred dollar_figure to a cousin and dollar_figure to a friend because of his fear that his wife might get some of the money later that year after the divorce papers were signed the transferees returned the money plus interest by check and petitioner redeposited the funds in his checking account petitioner became a resident_alien in prior to that time petitioner's immigration status did not permit him employment the terms of the visa notwithstanding petitioner the stipulated date of the divorce is date however the date on the divorce decree entered into evidence is date while stipulations are not set_aside lightly we have broad discretion in determining whether to hold a party to a stipulation 994_f2d_1542 11th cir affg tcmemo_1991_636 the evidence in the record demonstrates the stipulated date is simply incorrect we are not bound by stipulations of fact that appear contrary to the facts disclosed by the record rule e blohm v commissioner supra citing 364_f2d_101 5th cir revg t c memo we therefore find as fact that the date of petitioner's divorce is date on date three 6-month certificates of deposit that petitioner owned in the total amount of dollar_figure matured and petitioner received dollar_figure of interest worked in several restaurants during quitting whenever his employers pressed him for social_security information petitioner earned_income from these jobs but does not remember the amounts petitioner did not file an income_tax return for because he was concerned about the consequences of working in contravention of the immigration law despite his efforts to avoid providing required information to his employers petitioner did receive one form_w-2 wage and tax statement reporting wage income of dollar_figure for during the years in issue petitioner's brother saleh owned a restaurant during petitioner worked at saleh's restaurant by covering for employees who would fail to come in he also took saleh's wife to the market and their children to the doctor in exchange for his help saleh gave petitioner some spending money petitioner did not report this income on a federal_income_tax return for at the time of trial saleh resided in calhoun and owned a restaurant the atlanta gate in september of petitioner began to cohabit with samantha gibson gibson gibson was married but separated from her husband and was employed as a waitress in addition to wage and tip_income gibson received support payments for her two children at the time of trial petitioner and gibson were married and living together in calhoun ii bank_deposits and withdrawals a petitioner deposited a total of dollar_figure into his checking and savings accounts between june and date some of the deposits were combination deposits that is deposits of both cash and checks for example on december petitioner deposited dollar_figure in cash in his checking account along with a dollar_figure third-party check payable to tonia for petitioner's checking account deposits totaled dollar_figure petitioner made eight cash deposits totaling dollar_figure and three check deposits totaling dollar_figure petitioner made two deposits into savings account he deposited a check for dollar_figure on december and he deposited dollar_figure in cash on december the dollar_figure check deposit was a transfer of funds by check from petitioner's checking account to the savings account petitioner also received dollar_figure interest on this savings account petitioner deposited checks in combination with cash the stipulations regarding the cash deposits do not correspond to the record for example the parties stipulated that on july and nov petitioner made cash deposits of dollar_figure and dollar_figure respectively the evidence entered into the record however shows that on july petitioner deposited a single check for dollar_figure and dollar_figure in cash the nov deposit was a single check for dollar_figure and dollar_figure in cash as previously discussed we are not bound by stipulations of fact that appear contrary to facts disclosed by the record see supra note we therefore disregard the stipulations regarding these deposits and find they were made according to the evidence entered in the record b petitioner deposited a total of dollar_figure in his checking and savings accounts in petitioner made deposits into his checking account totaling dollar_figure at least of these deposits totaling dollar_figure were cash deposits petitioner made deposits totaling dollar_figure into savings account all of the deposits except one were cash deposits the sole noncash deposit of dollar_figure was a refund petitioner received from a dating service on july petitioner deposited dollar_figure into this account which was the proceeds of a loan he received from wachovia on august he withdrew dollar_figure to repay the balance remaining on this loan between april and november petitioner made three deposits totaling dollar_figure into his savings account at least one deposit of dollar_figure was in cash on the same dates that petitioner made deposits into savings account he also made deposits into savings account the three deposits into it is unclear from the record whether the deposits of dollar_figure dollar_figure dollar_figure and dollar_figure made on june sept nov and dec respectively were cash deposits due to the uncertain nature of these deposits these amounts are not included as cash deposits petitioner made deposits on apr june and nov it is unclear from the record whether the deposits made on apr and nov each for dollar_figure were deposits of cash savings account totaled dollar_figure at least two of the deposits in the amounts of dollar_figure and dollar_figure were deposits of cash petitioner received dollar_figure interest on his checking account dollar_figure on savings account dollar_figure on savings account and dollar_figure on savings account petitioner wire transferred dollar_figure sometime between january and february dollar_figure on may and dollar_figure on date from savings account to his father ahmad mohammed rashid ahmad in jordan on july petitioner wire transferred dollar_figure from savings account to omaha nebraska c petitioner deposited a total of dollar_figure in his checking and savings accounts in petitioner made deposits totaling dollar_figure in his checking accountdollar_figure at least of the deposits totaling dollar_figure were deposits of cashdollar_figure some of the deposits were combination deposits for example on june petitioner it is unclear from the record whether the deposit on apr was a deposit of cash we cannot determine the exact date of the dollar_figure wire transfer because the copy of petitioner's bank statement entered in evidence is practically illegible in this detail it is clear from the statement however that the bank statement was for the period of jan to date the wire transfer was to ahmad mohammed rashid ahmad and the amount transferred was dollar_figure the parties stipulated that a dollar_figure deposit made on nov was the transfer of the closing balance of savings account the record is unclear whether the deposit on dec of dollar_figure was a cash deposit withdrew dollar_figure from his checking account and a week later he deposited a third-party check payable to gibson in the same amount along with dollar_figure in cashdollar_figure between january and november petitioner made deposits totaling dollar_figure in savings account at least of the deposits totaling dollar_figure were deposits of cashdollar_figure two of the deposits were combination depositsdollar_figure petitioner made one deposit each to savings accounts and on april petitioner deposited dollar_figure in cash into savings account and on april he deposited dollar_figure in cash into savings account petitioner received dollar_figure of interest on his checking account dollar_figure on savings account dollar_figure on savings account and dollar_figure on savings account petitioner closed savings accounts and on date by withdrawing the balances dollar_figure and dollar_figure respectively petitioner closed savings account on date by withdrawing the balance of dollar_figure and depositing it into his checking account six of the deposits were combination deposits it is unclear from the record whether the deposits made on jan mar sept oct oct and nov in the respective amounts of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure were deposits of cash the deposit on may for the total amount of dollar_figure was a deposit of dollar_figure cash and a check for dollar_figure the deposit on aug for the total amount of dollar_figure was a deposit of dollar_figure cash and a check for dollar_figure petitioner transferred dollar_figure by wire from savings account on september to his father in jordan on november he transferred dollar_figure and on december dollar_figure from his checking account to an account in his name at the cairo bank in amman jordan between april and date petitioner's bank wachovia filed nine currency transaction reports form detailing his cash transactions in the identification section of the form wachovia reported petitioner's occupation as cook at local restaurant opinion issue whether respondent's notice_of_deficiency was arbitrary respondent determined that petitioner has a deficiency of dollar_figure for dollar_figure for and dollar_figure for these deficiencies are based on income in the amounts of dollar_figure dollar_figure and dollar_figure for and respectively petitioner asserts that because the commissioner did not produce evidence linking him to an income-producing activity the commissioner was arbitrary and erroneous in her determination so that she bears the burden_of_proof petitioner cites 932_f2d_1128 5th cir affg in part and revg in part tcmemo_1990_68 and senter v commissioner tcmemo_1995_311 in support of his position as discussed below petitioner's reliance on these cases is misplaced we sustain respondent's determinations for the taxable years at issue except as set out below the first issue to be decided is who bears the burden_of_proof in this case a statutory_notice_of_deficiency ordinarily carries with it a presumption of correctness rule a 290_us_111 due to this presumption taxpayers generally have both the burden_of_proof and the burden of going forward with evidence 83_tc_269 however if the taxpayer shows that the statutory notice is arbitrary or without foundation the burden of going forward with the evidence shifts to the commissioner id in asking this court to find that the notice_of_deficiency is arbitrary petitioner is asking us to explore the underpinnings of that notice as a general_rule we will not look behind the statutory notice to examine the evidence used in making the determination 92_tc_661 74_tc_260 affd in part and revd and remanded in part 649_f2d_152 2d cir 62_tc_324 the rare exception to this rule is where the commissioner in a case involving unreported income introduces no direct evidence but rests on the presumption of correctness and the taxpayer challenges the deficiency on the grounds that it is arbitrary portillo v commissioner supra pincite 87_tc_609 affd without published opinion 827_f2d_774 11th cir llorente v commissioner supra pincite in portillo v commissioner supra the taxpayer was a painting contractor who received a form_1099 miscellaneous income that he claimed was not correct other than the uncorroborated testimony of a witness who testified that he had paid the taxpayer the disputed amount of income there was no evidence supporting the commissioner's determination the court_of_appeals for the fifth circuit noted that like this court it is reluctant to look at the facts underlying the commissioner's notice_of_deficiency the court_of_appeals also held however that it will not give effect to the presumption of correctness in a case involving unreported income if the commissioner cannot present some predicate evidence supporting its determination id pincite more specifically the court_of_appeals articulated its rule as follows before we will give the commissioner the benefit of the presumption of correctness he must engage in one final foray for truth in order to provide the court with some indicia that the taxpayer received unreported income the commissioner would merely need to attempt to substantiate the charge of unreported income by some other means such as by showing the taxpayer's net_worth bank_deposits cash expenditures or source and application of funds id pincite4 emphasis added in senter v commissioner supra the commissioner based her determination solely on the assertion that the taxpayer filed no returns for through the commissioner reconstructed the taxpayer's income for those years based on income he reported in increased by the consumer_price_index there was no evidence presented by either party regarding whether the taxpayer had taxable_income during the years in issue because the commissioner produced no predicate evidence supporting the determination we found respondent's determination arbitrary and erroneous moreover citing portillo v commissioner supra pincite we concluded that the rule in the court_of_appeals for the fifth circuit to which any appeal of senter would lie is that once the presumption of correctness disappears the commissioner bears the burden_of_proof we think the facts of the instant case are distinguishable from those of portillo v commissioner supra and senter v commissioner supra in both of those cases the commissioner did not present predicate evidence in support of the determination that the taxpayer had unreported income in the present case however the respondent substantiated the charge with predicate evidence she used the bank_deposits and cash_expenditures_method of income reconstruction portillo v commissioner supra pincite4 thus respondent's deficiency determination was not arbitrary see also 994_f2d_1542 11th cir affg tcmemo_1991_636 once the tax_court has found the commissioner has made a minimal evidentiary showing the deficiency determination is presumed correct 937_f2d_1548 10th cir affg tcmemo_1989_552 the key is connecting taxpayers to assets not to a business since respondent's deficiency_notice was not arbitrary petitioner has the burden of going forward with the evidence as well as the ultimate burden of persuasion see dellacroce v commissioner supra pincite issue unreported income for and utilizing the bank_deposits and cash_expenditures_method of income reconstruction respondent determined petitioner had income in the amounts of dollar_figure dollar_figure and dollar_figure for and respectively every taxpayer is required to maintain adequate_records of taxable_income sec_6001 petitioner did not file a federal_income_tax return or make any estimated federal_income_tax payments for any of the years in issue nor did he maintain adequate_records from which the amount of his income or federal_income_tax liability for any of the years in issue could be computed in the absence of such records the commissioner may reconstruct the taxpayer's income by any method that in her opinion clearly reflects income sec_446 94_tc_654 the commissioner's method need not be exact but must be reasonable 348_us_121 the bank_deposits method for computing unreported income has long been sanctioned by the courts 96_tc_858 affd 959_f2d_16 2d cir though not conclusive bank_deposits are prima facie evidence of income 335_f2d_671 5th cir the bank_deposits method assumes that all money deposited in a taxpayer's bank account during a given period constitutes taxable_income 87_tc_74 64_tc_651 affd 566_f2d_2 6th cir 29_tc_601 where the taxpayer has failed to maintain adequate_records as to the amount and source of his income and the commissioner has determined that the deposits are income the taxpayer has the burden of showing that the determination is incorrect rule a 102_tc_632 parks v commissioner supra estate of mason v commissioner supra furthermore in such cases the commissioner is not required to show a likely source_of_income clayton v commissioner supra parks v commissioner supra estate of mason v commissioner supra in challenging respondent's income reconstruction petitioner introduced evidence that was intended to corroborate his claim that the deposits were due to nontaxable sources thi sec_15 in 661_f2d_1206 11th cir en_banc the court_of_appeals for the eleventh circuit adopted as binding precedent all of the decisions of the former court_of_appeals for the fifth circuit handed down prior to the close of business on date evidence primarily consists of his testimony selected checking and savings account statements five canceled checks and three written statements by his friends the written statements constitute ex_parte affidavits and are not treated as evidence under rule b upon review of the evidence presented we are not persuaded that the source of the deposits was from nontaxable income items except to the extent as follows a for petitioner deposited a total of dollar_figure in his checking and savings accounts except for the following amounts we find the deposits are income to petitioner that is subject_to tax pursuant to sec_61 based on the entire record we are persuaded that the deposits of the checks for dollar_figure and dollar_figure are the return of funds plus interest that petitioner transferred to associates with the intent to prevent his first wife tonia receiving any money in settlement of divorcedollar_figure in addition we find the check for dollar_figure payable to tonia that petitioner cashed for her by depositing it in his account is not taxable_income to him petitioner's testimony regarding the source of these amounts is corroborated by the canceled checks which correlate with petitioner's bank statements finally the parties stipulated that the dollar_figure deposit in savings account we find that petitioner has interest_income to the extent the total amount of these two deposits exceeds dollar_figure see sec_61 on december was a transfer of petitioner's funds from his checking account this amount is a redeposit therefore it is not gross_income b petitioner deposited a total of dollar_figure in his checking and savings accounts in except for the two following amounts we find the deposits are income to petitioner that is subject_to tax pursuant to sec_61 the parties stipulated the dollar_figure deposit made on july was the deposit of loan proceeds that petitioner received from wachovia it is well established that gross_income does not include loans 366_us_213 384_f2d_748 5th cir dollar_figure petitioner submitted a bank copy of the dating service's canceled dollar_figure refund check thus petitioner provided evidence that corroborates his testimony regarding the source of the sole noncash deposit for into this savings account the dollar_figure deposit is the return of a personal_expenditure for which petitioner received no tax_benefit and is therefore not taxable_income c petitioner deposited a total of dollar_figure in his checking and savings accounts in except for the following amounts we find the deposits are income to petitioner that is subject_to see supra note tax the parties stipulated that the deposit of dollar_figure into petitioner's checking account was a transfer of the balance of savings account this amount is a redeposit therefore it is not gross_income based on the entire record we find petitioner has met his burden of proving the check for dollar_figure payable to gibson which petitioner cashed for her by depositing in his account is not taxable_income to him our finding that petitioner has met the burden_of_proof as to the source of these deposits is not a grant of credence to petitioner's claims regarding the source of his other deposits nor does the evidence presented by petitioner which showed that some of the deposits were not income establish that the use of the bank_deposits method was invalid or arbitrary estate of mason v commissioner t c pincite having reached that conclusion we will comment in more detail on petitioner's evidence petitioner testified that the sources of his other deposits were family transfers repayments of loans he earlier made to friends and associates and cash reimbursements for checks he wrote to pay the bills of others petitioner provided scant evidence to corroborate his claims for example to substantiate his claim that family members transferred money to him petitioner submitted a copy of a wire transfer that originated in jordan and was sent to saleh in calhoun the wire transfer is for dollar_figure and is dated date we find however that this wire transfer does not support petitioner's testimony because the transfer was sent to saleh not to petitioner accordingly without evidence corroborating petitioner's claim that saleh transferred the funds he received to petitioner the copy of this wire transfer does not show that petitioner received any funds from his family petitioner also introduced his check register into evidence to corroborate his claim that he made many loans to friends petitioner's reliance on his check register settles on a single entry that verifies he issued a check on date for dollar_figure to guss this single entry is woefully inadequate to perform the task petitioner would assign it the entry does not indicate the purpose of the amount_paid the intent of the parties or any of the other indicia necessary to substantiate the existence of a loandollar_figure we find this entry in petitioner's check register does not provide documentary_evidence to establish the existence of the claimed loans petitioner's claim that he paid the bills of others by check and received cash reimbursements which he deposited suffers from factors which have been considered by courts as relevant in deciding whether a bona_fide loan exists include among others the existence or nonexistence of a debt_instrument provisions for security_interest payments and a fixed repayment date whether or not repayments of the loan were made the taxpayer's ability to repay the loan the borrower's receipt of compensation and the testimony of the taxpayer frierdich v commissioner tcmemo_1989_393 affd 925_f2d_180 7th cir similar deficiencies for example petitioner testified that during he often paid saleh's rent utilities and other expenses by check and saleh reimbursed him in cash this claim is allegedly supported by a single check petitioner wrote to barnett bankdollar_figure petitioner was unable to offer any evidence to corroborate his claim of the purpose of the check nor was he able to produce evidence of a reimbursing cash deposit in the amount of the check we find therefore that this check does not corroborate petitioner's claims with respect to the funds that he claimed are cash reimbursements of checks he wrote on behalf of others petitioner relies on only his testimony to carry the burden of proving the source of the balance of his depositsdollar_figure thus the issue is one of credibility wherein we must determine the extent to which the proffered testimony is believable see schad v commissioner t c pincite it is well established that we are not required to accept self-serving testimony in the absence of corroborating evidence niedringhaus v commissioner 99_tc_19 a check drawn on petitioner's checking account in the amount of dollar_figure made payable to barnett bank of atlanta was entered into evidence petitioner asserts this check was issued to pay the balance due on saleh's automobile for example petitioner testified he paid gibson's personal bills as well as her share of the household expenses by check and she reimbursed him in cash petitioner estimated gibson gave him dollar_figure in cash each week for weeks in and for weeks in all of which he deposited in his accounts this testimony is uncorroborated by any evidence tokarski v commissioner t c pincite petitioner failed to produce any corroborating evidence to support his testimony although petitioner testified that his wife mother and father all of whom live in the same apartment with petitioner and saleh who also lives in calhoun are the sources for his deposits petitioner failed to call any family members to testify in an effort to verify his storiesdollar_figure we cannot assume the testimony of absent witnesses would have been favorable to petitioner rather the normal inference is that it would have been unfavorable tokarski v commissioner supra pincite 47_tc_92 affd 392_f2d_409 5th cir 6_tc_1158 affd 162_f2d_513 10th cir moreover our analysis of petitioner's testimony reveals inconsistencies that cast doubt upon his credibilitydollar_figure petitioner's explanation for his failure to call any family members to testify is not credible petitioner explained that although he lives only hours from the place of trial he did not call his parents because the weather was nasty his parents do not speak english and are too old at or years of age for him to put them through the ordeal of testifying via an interpreter considering his parents traveled from jordan to georgia only weeks before the trial successfully navigating similar hazards of greater scale than they would have encountered on a 2-hour journey from calhoun to atlanta we find petitioner's explanation to be both inventive and implausible petitioner's explanation of why gibson and saleh could not attend the trial and contribute corroborating testimony shares an equally unreliable quality for example petitioner testified that his parents are very wealthy at one time having enough money to buy half of the continued thus there is no credible_evidence that the deposits were from nontaxable sources based on the entire record we simply do not believe that the money came from the sources petitioner claims we find therefore that petitioner has not met his burden_of_proof with respect to the funds that he claims are family transfers cash repayments of loans he made earlier or reimbursements for checks he wrote on behalf of others issue self-employment_tax respondent determined that petitioner had income in the amounts of dollar_figure dollar_figure and dollar_figure for and respectively and that he is liable for self-employment_tax of dollar_figure dollar_figure and dollar_figure for those years sec_1401 imposes a tax on self-employment_income self- employment income consists of gross_income from any trade_or_business carried on by an individual less allowable deductions attributable to the trade_or_business sec_1402 respondent's determination that petitioner is liable for self- continued capital of amman however because his father was frequently in need of cash petitioner had to wire him transfers of what were often relatively modest amounts in addition petitioner testified that many people owe him money and that he carries the balance of the loans in his head yet he can only approximate the amounts he has been repaid finally petitioner testified that he did not believe he owed taxes in and because the terms of his immigration prevented his steady employment petitioner testified that he actually did work in his legal status notwithstanding petitioner also testified he became a resident_alien during thus petitioner's immigration status was not a legal obstacle to his employment during the latter part of and forever after employment_tax is presumed to be correct and petitioner bears the burden of proving that it is erroneous rule a 33_tc_656 at trial petitioner testified that during and he worked at several restaurants petitioner also testified however that he made very little money working at these restaurants and the only form_w-2 petitioner received reported a mere dollar_figure of wage income which gives credence to his claim we are persuaded that petitioner did not earn the unreported income determined by respondent except for the amount reported on the form_w-2 as an employee although petitioner has persuaded this court that the source of his unreported income was not wages he has not met his burden of proving that he did not receive such amounts from self- employment thus we find petitioner is liable for self- employment_tax on the unreported income as determined by respondent for and except for the dollar_figure of wage income reported on the form_w-2 and the amounts that we have found hereinbefore are not income issue additions to tax under sec_6651 respondent determined petitioner is liable for additions to tax for failure_to_file income_tax returns for and under sec_6651 sec_6651 imposes an addition_to_tax for failure_to_file a return on the date prescribed determined with regard to any extension of time for filing unless it is shown that such failure is due to a reasonable_cause and not due to willful neglect sec_6651 the taxpayer has the burden of proving the addition is improper rule a 469_us_241 petitioner did not file income_tax returns for the years in issue there is no evidence in the record that suggests petitioner's failure_to_file a federal_income_tax return for any year in issue was due to reasonable_cause and not due to willful neglect accordingly we sustain respondent's determination with respect to this issue issue additions to tax under sec_6654 respondent determined that petitioner is liable for the addition_to_tax under sec_6654 for his failure to make estimated_tax payments for and subject_to exceptions provided by the statute the imposition of the addition_to_tax is otherwise automatic if the amounts of the withholdings and estimated_tax payments do not equal statutorily designated amounts niedringhaus v commissioner supra pincite 75_tc_1 petitioner bears the burden of showing that respondent's determination that sec_6654 applies to all taxable years is in error rule a niedringhaus v commissioner supra petitioner has made no such showing for the years in issue petitioner had substantial taxable_income yet he made no estimated_tax payments therefore we hold he is liable for the additions to tax under sec_6654 for those years to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number --------------------------------------- ----------------------------- -------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-152433-10 date date taxpayers ----------------------------------------------------------------------------------------------- ------------------------------------------------- year ------- dear --------------------------- this responds to a letter dated date submitted on behalf of taxpayers by their authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for taxpayers to file an election under sec_469 of the internal_revenue_code and sec_1_469-9 of the income_tax regulations to treat all interests in rental real_estate as a single rental real_estate activity according to the information submitted taxpayers are married individuals who filed their tax returns jointly taxpayers represent that in year they were in a real_property business as defined by sec_469 and were qualified under sec_469 to make an election to treat all interests in rental real_estate as a single rental real_estate activity however taxpayers filed their joint_return for year without the statement required under sec_1_469-9 under sec_469 the term passive_activity generally includes any rental_activity sec_469 provides a limited exception to this rule for taxpayers in a real_property_trade_or_business specifically sec_469 indicates that if a taxpayer meets the requirements of sec_469 the taxpayer’s rental real_estate activity will no longer be presumptively passive by its terms the exception under sec_469 is to be applied as if each interest of the taxpayer in rental real_estate were a separate activity however a taxpayer may elect to treat all interests in rental real_estate as a single activity plr-152433-10 sec_1_469-9 provides that a qualifying taxpayer makes the election to treat all interests in rental real_estate as a single rental real_estate activity by filing a statement with the taxpayer’s original income_tax return for the taxable_year sec_1_469-9 describes the information that must be contained in the statement under sec_301_9100-1 the commissioner may grant a reasonable extension of time 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_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that the grant of relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result taxpayers are granted an extension of time of days from the date of this letter to make an election under sec_469 to treat all their interests in rental real_estate as a single rental real_estate activity effective year the election must be in the form of the statement required by sec_1_469-9 and attached to an amended_return for year a copy of this letter should be attached to the election a copy is enclosed for that purpose except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether taxpayers satisfy the requirements under sec_469 or whether taxpayers materially participate in any activity this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-152433-10 in accordance with the power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives sincerely associate chief_counsel passthroughs special industries by ____________________________ charlotte chyr senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


office_of_chief_counsel internal_revenue_service memorandum number release date cc psi b02 brposton postu-159830-05 uilc date date third party communication none date of communication not applicable to territory director midwest area examination psp from branch chief branch passthroughs special industries ------------------------------------------------------- subject this chief_counsel_advice may not be used or cited as precedent legend trust ------------------------------------------------------------------------------------------------- ------------------------ decedent ------------------------------------------------------------------------------------------------- -------------------------- ira ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------- charity --------------------------------------------------------------------- charity -------------------------------------------------------------------- charity ------------------------------------------------------------------------- year ------- ------------------------- d1 postu-159830-05 --------- --------- --------- x y z issue sec_1 did trust have gross_income under sec_691 on the assignment of a portion of decedent’s ira to the charities in satisfaction of a pecuniary legacy if trust had gross_income under sec_691 was it entitled to a deduction under sec_642 for the portion of decedent’s ira assigned to the charities conclusion sec_1 trust had gross_income under sec_691 on the assignment of a portion of decedent’s ira to the charities trust was not entitled to a deduction under sec_642 for the portion of decedent’s ira assigned to the charities facts decedent died on d1 at the time of decedent’s death decedent owned an individual_retirement_account ira of which the designated_beneficiary was decedent’s revocable_trust trust article i b section of trust provides that upon the death of decedent the sum of dollar_figure shall be distributed in cash or in_kind as follows dollar_figurex to charity dollar_figurey to charity and dollar_figurez to charity collectively the charities article i b sections and provide that the residue of the trust property shall be distributed to decedent’s children outright or in trust as provided therein article ii a provides that the trustee shall possess the discretion and power to make distributions or divisions of principal in cash or in_kind or both at fair market values current at a date of distribution fixed by the trustee without any requirement that each item be distributed or divided ratably trust completed the distribution of ira in year by instructing the ira custodian to divide ira into shares each titled in the name of a beneficiary under trust thus each of the charities became the owner and beneficiary of an ira equal in value at the time of division to the dollar amount it was entitled to under trust postu-159830-05 law and analysis sec_691 of the code provides that the amount of all items of gross_income in respect of a decedent ird which are not properly includible in respect of the taxable_period in which falls the date of the decedent s death or a prior period including the amount of all items of gross_income in respect of a prior decedent if the right to receive such amount was acquired by reason of the death of the prior decedent or by bequest devise or inheritance from the prior decedent shall be included in the gross_income for the taxable_year when received of a the estate of the decedent if the right to receive the amount is acquired by the decedent s estate from the decedent b the person who by reason of the death of the decedent acquires the right to receive the amount if the right to receive the amount is not acquired by the decedent s estate from the decedent or c the person who acquires from the decedent the right to receive the amount by bequest devise or inheritance if the amount is received after a distribution by the decedent s estate of such right sec_691 provides that if a right described in sec_691 to receive an amount is transferred by the estate of the decedent or a person who received such right by reason of the death of the decedent or by bequest devise or inheritance from the decedent there shall be included in the gross_income of the estate or such person as the case may be for the taxable_period in which the transfer occurs the fair_market_value of such right at the time of such transfer plus the amount by which any consideration for the transfer exceeds such fair_market_value for purposes of this paragraph the term transfer includes sale exchange or other_disposition or the satisfaction of an installment_obligation at other than face value but does not include transmission at death to the estate of the decedent or a transfer to a person pursuant to the right of such person to receive such amount by reason of the death of the decedent or by bequest devise or inheritance from the decedent revrul_92_47 1992_1_cb_198 holds that a distribution to the beneficiary of a decedent s ira that equals the amount of the balance in the ira at the decedent s death less any nondeductible_contributions is ird under ' a that is includable in the gross_income of the beneficiary for the taxable_year the distribution is received sec_642 provides that in the case of an estate_or_trust other than a_trust meeting the specifications of subpart b of part i of subchapter_j of chapter there shall be allowed as a deduction in computing its taxable_income in lieu of the deduction allowed by sec_170 relating to deduction for charitable etc contributions and gifts any amount of the gross_income without limitation which pursuant to the terms of the governing instrument is during the taxable_year paid for a purpose specified in ' c determined without regard to sec_170 the amount of the balance in ira at decedent’s death less any nondeductible_contributions is ird under sec_691 if an estate_or_trust satisfies a pecuniary legacy with property the payment is treated as a sale_or_exchange see 114_f2d_217 2d cir because trust used ira to satisfy its pecuniary legacies trust must treat the payments as sales or exchanges therefore under sec_691 the payments are transfers of the rights to receive the ird and trust must include in its gross_income the value of the portion of ira which is ird to the extent ira was used to satisfy the pecuniary legacies the terms of trust do not direct or require that the trustee pay the pecuniary legacies from trust’s gross_income accordingly the transfer of a portion of ira in satisfaction of the pecuniary legacies does not entitle trust to a deduction under sec_642 case development hazards and other considerations this memorandum responds to a private_letter_ruling request from trust requesting various rulings regarding the rollover of ira to the beneficiaries of trust and the amendment of trust to provide for a disabled child of decedent these rulings involving issues under the jurisdiction of t ep ra were granted in a letter dated date which has not yet been publicly released after we informed the taxpayer that this office was adverse to the taxpayer on the sec_691 issue described above the taxpayer withdrew that portion of their original ruling_request because the adverse determination on this issue was not included in the letter issued by t ep ra this memorandum is necessary to inform your office of our position on the transaction the taxpayer does not agree that the partial assignment of ira to the charities results in a sale_or_exchange of the ird element of ira and thus gross_income under sec_691 with no allowable sec_642 deduction for the reasons described above the taxpayer argues that this conclusion is preempted by the application of sec_408 which provides that any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee the taxpayer maintains that this rule requiring actual payment or distribution prevents the application of the kenan priniciple and sec_691 to currently tax trust since it has not received payments or distributions from ira we disagree with this interpretation we believe that under kenan trust has received an immediate economic benefit by satisfying its pecuniary obligation to the charities with property on which neither trust nor decedent have previously paid income_tax which is a disposition for sec_691 purposes we further believe that the language of sec_408 simply prevents the immediate taxation of ira recipients on amounts in an ira which are not currently payable under a theory of constructive receipt t ep ra which has jurisdiction over sec_408 does not object to our conclusion on this issue this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views postu-159830-05 please call -----------------of this office at -------------------- if you have any further questions