internal_revenue_service department of the treasury u i l nos washington dc person to contact telephone number refer reply to cc dom fi p plr-108188-98 date apr ia plr-108188 -98 legend z k l m n p qo r ss vv w x z county a bonds b bonds plr-108188-98 bonds d bonds e_bonds f bonds h bonds aa bonds date date date date date date date dear sir or madam this is in response to a letter from your authorized representative requesting a series of rulings on your behalf regarding tax consequences associated with the transactions described below you represent the following set of facts general facts q and i collectively the districts and individually a district are political subdivisions of the state of r created under the laws of r entity to provide health care for residents of county regardless of ability to pay available to the residents of county developed hospital systems to meet their responsibilities under r law and for making health care facilities both q and i have the state legislature of r formed each plr-108188-98 r law provides for cooperation among governmental entities accordingly q and i have signed an interlocal in the state agreement of affiliation the agreement pursuant to state law the agreement provides for the cooperation and coordination of the q and i hospital systems to create an integrated health care delivery system the system the agreement provides for the joint planning coordination management and financing of operations of k admitted to the system to as the controlled entities and individually referred to as a controlled_entity these activities are carried out by and through a newly incorporated entity m the agreement does not provide for the direct sharing of profits or losses among the controlled entities or districts the controlled entities or districts is accomplished through m and any entity subsequently these entities are collectively referred any financial sharing between v s l w x the purpose of the agreement is to provide coordination of patient care services which is expected to reduce unnecessary duplication of resources increase efficiencies and decrease costs to health care consumers provide additional patient access to specialized services improve strategic planning and enhance expertise in the clinical medical educational marketplace planning finance and management services areas will not be implemented until the receipt of favorable letter rulings on all issues for which consideration was requested the agreement s v pursuant to the agreement m has been incorporated to serve the system will include the k and l which are currently subsidiaries x as the parent of the system following entities of i and w subsidiaries of the agreement requires that the governing instruments of each of these entities except x provide that m member of x but x will be subject_to the same requirements as the entities of which m will be the sole member also requires that the governing instruments of ail the controlled entities be amended to provide m with the powers over each controlled_entity specified in the agreement and z which are currently q is and will remain the sole is the sole member be amended to the agreement in addition to the controlled entities q has a subsidiary pb which will not be a controlled_entity corporation was formed to perform services that would otherwise have to be performed by q a nonprofit p the parent the districts will be the sole members of m m has been recognized as an organization described under sec_501 and as a nonprivate foundation under sec_509 to assist the districts in carrying out their duties and responsibilities pursuant to state law and pursuant to the agreement the planning and implementation of all activities by the purposes of m are plr-108188-98 l m must be consistent with the mission statement purposes and principles identified by the districts in the agreement the agreement provides that subject_to the powers reserved to the districts m will support benefit and carry out in accordance with the terms of the agreement some or all of the charitable purposes of the controlled entities by management to the controlled entities including planning directing and establishing policy related to the development and ultimate delivery of health care services by the controlled entities on an integrated cost-effective basis without unnecessary duplication providing overall planning and coordination of the delivery of health care services facilities and programs in districts' respective service areas coordinating the provision of patient care services including the implementation development and improvement of managed care strategies and securing and arranging capital to provide for the operation and implementation of the controlled entities' facilities and programs providing overall under the agreement the board_of directors of m will be the composed of an equal number of commissioners from q andi initial board_of directors of m consists of sixteen members including seven members each of the board_of commissioners of q and i as appointed from time to time by the governor of r and one representative of the medical staff of each of the districts designated by the chief of staff of each medical staff each district will approve the appointment of the representative of the medical staff of that district will be appointed by the district that such director will represent who are employed by to the controlled entities m who represents that district other than a director who is a member of the board_of commissioners of that district with or without cause district must be approved by a simple majority vote of the governing board_of that district elected by m's board_of directors from among a slate of persons that has been approved in writing by the districts or hold an appointment to the medical staff of one or more of each district may remove a director of no more than of the m directors may be physicians any appointment or removal of a director by a or otherwise retained to provide services the president ceo of m must be any additional directors upon creation of m each of the districts must make an upon initial cash capital_contribution to the corporation dissolution of m all of the assets of m remaining after payment of all costs and expenses of such dissolution and after adequate provision has been made for the discharge or assumption of its liabilities will be distributed to q and i to be used exclusively for a public purpose and bylaws of m may not be amended without the approval of the districts the articles of incorporation por plr-108188-98 i q relationship among m and the districts the agreement sets forth certain m actions that must be approved or ratified by the districts subject_to the powers reserved to the districts individually together the districts have the following rights and powers with respect to m a ‘the districts have the power to interpret and change the mission and philosophy of m and approve in advance any change to the mission and philosophy of m and approve any change to the mission and philosophy statement contained in corporate documents of the controlled entities b c e f g h i the districts have the power to ratify the strategic plans for m the districts must approve prior to their adoption the operating and capital budgets of m districts have the power to establish thresholds above which m must seek approval in advance of the expenditures from the districts for budgeted and unbudgeted capital and operating expenditures in addition the the districts have the power to establish limits on m's authority to incur new debt or to approve the’ incurrence of debt by a controlled_entity the districts have the power to establish a policy governing the entry of any entity owned or controlled by m into a joint_venture partnership affiliation or similar relationship with any entity not owned or controlled by m and approving any_action that is inconsistent with that policy m may not enter or permit any of the controlled entities to enter into any such relationship in a manner inconsistent with that policy without the approval of the districts the districts have the power to establish a policy governing the creation or admission of any new controlled_entity in or to the system and approving any_action that is inconsistent with that policy the districts must approve in advance the merger dissolution or consolidation of m and the sale or alienation of all or substantially_all of the assets of m the districts have the power to approve the addition of any new entities as members of the system in addition to any other reporting formats it may choose m must report financial information about the assets and operations of the individual controlled entities on a district by district basis and on a consolidated basis plr-108188 -98 l k the districts have the power to demand an audit of the books_and_records of m and records of m shall be provided to each district a copy of the annual audit of the books through joint action the districts may veto the following actions taken by m i ii iii iv v m's appointment and removal of directors of the controlled entities m's approval of the merger dissolution or consolidation of any controlled_entity or the sale or mortgage of all or substantially_all of the assets of any controlled_entity m's approval of the operating and capital budgets of the controlled entities and m's approval of subsequent changes or to the operating and capital budgets of a controlled_entity m's approval of an expenditure by a controlled_entity that is not contained in controlled entity's approved budget and that is established by m and in excess of any transaction threshold m's approval of the slate from which a controlled entity's board may select the controlled entity's ceo president the districts individually have the following reserved rights and powers with respect to m a b c a each district has the power to appoint directors to m's board to represent that district and to remove such directors with or without cause each district must approve in advance any sale transfer or other alienation of an interest in assets owned by that district or any controlled_entity that was previously a subsidiary of that district each district has the power to ratify or reject recommendations made by m's board which would significantly affect access to appropriate local health care delivery within the geographic boundaries of the district each district has the power to ratify m's approval of any amendments to the corporate documents of that was previously a subsidiary of that district a controlled_entity pun-1o sec_1ee-98 e f g h each district has the power to collect and use district funds for the purposes provided in that district's enabling act as permitted by r law and the covenants of any financing arrangements to which the district is a party each district has the responsibility to comply with the state licensure and federal payment program requirements for each controlled_entity within the district unless such responsibilities are assumed directly by the affected controlled_entity each district has the right to ratify or veto the appointment of the hospital administrators proposed by m for the hospitals of the districts each district has the power to approve and renew operating leases for the controlled entities of the districts in addition each of the districts has the right to take such actions as it pursuant to the agreement it deems necessary to enforce the commitments made to the controlled entities k has been recognized as an organization described under sec_501 and as a nonprivate foundation under sec_509 leases from i and operates an acute care hospital and provides home health care social services dietary counseling and patient and community education k l is a taxable not-for-profit corporation that provides primary care physician services throughout the community articles provide that no part of the net_earnings of l shall inure to the benefit of any private individual l's k and l were organized by i to assist i in carrying out its in addition the articles of duties under state law incorporation of each of these entities either provide or it represented that they will be amended upon receipt of this letter_ruling to provide that upon dissolution the residual assets of each of these entities will be distributed to i to be used exclusively for public purposes entities either provides or it amended upon receipt of this letter_ruling to provide that the sole member of each entity may remove any director from the board_of directors of each entity with or without cause and the president ceo of each entity will be elected or chosen from a slate of persons that has been approved in writing by the president ceo of the sole member is represented that they will be the bylaws of each of these is plr-108188-98 s has been recognized as an organization described under and as a nonprivate foundation under sec_509 s was organized to assist q in carrying out its sec_501 was formed to perform services that would otherwise have to be performed by duties and responsibilities under state law provides staff to q to operate an acute care hospital which includes a trauma center neonatal intensive care unit skilled nursing facility psychiatric facilities and numerous community programs in connection with the transactions described herein it pursuant to which s will lease operate and manage the acute care hospital board_of directors always will be identical to the membership of q's governing body is anticipated that s will enter into an agreement with q dollar_figure's articles of incorporation provide that s's s currently sdollar_figure v has been recognized as exempt from federal_income_tax under sec_501 and as a nonprivate foundation under sec_509 health care related_services to supportive care for terminally ill patients and their families v's purpose is to provide health care services and v provides palliative and w has been recognized as tax-exempt under sec_501 as an organization described in sec_501 and as a nonprivate foundation under sec_509 services that otherwise would have had to perform community preventive care and safety programs and administers locally the state's program that promotes healthy kids w was formed by q to provide w provides x has been recognized as exempt from federal_income_tax xx a nonprofit membership corporation was formed under sec_501 and as a nonprivate foundation under sec_509 by to acquire the assets and business of an existing health_maintenance_organization model health_maintenance_organization serving a broad segment of the population of the district and a neighboring county appoints the board_of x subject_to the restriction that the directors must be subscribers of the health_maintenance_organization and have been for at least six months a federally qualified staff is x has been recognized as an organization described in sec_501 and as a nonprivate foundation under sec_509 operates a nursing home facility y z is a taxable not-for-profit corporation that was formed to assist in carrying out its duties under state law provides primary care physician services throughout the community net_earnings of z may inure to the benefit of any private individual in addition z's articles provide that no part of the 2z s x and p have each received rulings that upon the amendment of their articles and by-laws as represented they rul c b would each meet the criteria of rev ing plr-108188-98 and therefore would be instrumentalities of addition s amendment of their articles and by-laws as represented the respective incomes of each would be excludable from gross_income under sec_115 all of the represented amendments have been made and p have each received rulings that upon the in x s v w x and z were organized by q to assist q in is represented that they will be amended upon carrying out its duties under state law in addition the articles of incorporation of each of these entities either provide or it receipt of this letter_ruling to provide that upon dissolution the residual assets of each of these entities will be distributed to to be used exclusively for public purposes each of these entities either provides or it they will be amended upon receipt of this letter_ruling to provide that the sole member of each entity may remove any director from the board_of directors of each entity with or without cause and the president ceo of each entity will be elected or chosen from a slate of persons that has been approved in writing by the president ceo of the sole member is represented that the bylaws of relationship among m and the controlled entities subject_to the powers reserved to the districts m has the following rights and powers with respect to each of the controlled entities a b c a4 e without the prior approval of m no controlled_entity may adopt an operating or capital budget and each controlled entity's budget must be consistent with the plans developed by m the operating and capital budgets of a controlled_entity in addition m must approve any subsequent changes to without the prior approval of m make an expenditure that is not contained in such controlled entity's approved budget and that is transaction threshold established by m the power to order an audit of any of the controlled entities no controlled_entity may in addition m has in excess of any m must approve by three-fourths majority of m's directors the incurrence of debt by a controlled_entity in excess of threshold amounts established by m m will develop and approve the strategic plans for and implementation of the provision of clinical services clinical research and support systems on an integrated and cost-effective basis which avoids unnecessary duplication m will develop the overall managed care strategy for each controlled_entity negotiate with third party payors on behalf of the m also will be the primary entity to of plr-108188-98 f g h i k controlled entities and will establish all terms and conditions of new or renewed managed care contracts addition m has the power to require each controlled_entity to participate in any managed care contract in m has the power to operate each controlled_entity through a lease or other contractual arrangement m will establish policies governing the creation by any controlled_entity of any new health care service or any new location for the delivery of health care services and the formation and operation of primary care controlled entities within the system controlled_entity that is not consistent with these policies integration or expansion any physician alignment initiatives and any new joint_venture health care services m also must approve any health care service m must approve any_action by a m has the right to appoint and remove with or without cause the members of the boards of directors of each controlled_entity the approval of a simple majority of m's directors representing and a simple majority of m's directors representing i appointment and removal of such directors requires m has the power to adopt uniform human resources policies for the system including position descriptions and compensation ranges adopt such policies for its operations each controlled_entity is required to m may make or direct any controlled_entity to make certain transfers of assets including operating surplus among the controlled entities in the system and m must approve in advance any merger consolidation or dissolution to which any controlled_entity is the sale of all controlled_entity or substantially_all of the assets of any in addition m a party or m must approve by a three-fourths majority of m's board the admission of additional hospitals systems or other entities to the system as controlled entities and will recommend to the districts the merger consolidation dissolution sale or mortgage of substantially_all of the assets of a controlled_entity m also has the right to participate in negotiations involving and must approve participation in any new joint_venture partnership affiliation association system alliance or similar relationship and agreements entered into by a controlled_entity with any entity not owned or controlled by m m has the power to develop approve and revise the mission or vision statement of each controlled_entity plr m n pp m must approve by a three-fourths majority of m's directors any amendments to a controlled entity's corporate documents including its articles and bylaws m has the power to adopt by a three-fourths majority of m's directors resolutions expanding the list of actions by any controlled_entity that need prior approval of m m must approve by a three-fourths majority of its board any sale transfer or other alienation of an interest ina controlled entity's assets that is not in the ordinary course of its business sell transfer or alienate any interest in assets of the controlled entities in the ordinary course of m's business without the requirement for any vote of the directors of the controlled_entity in addition m has the power to if m dissolves or otherwise ceases to be the sole member of a controlled_entity the articles and bylaws of the controlled_entity must be amended to provide that q both will have the same powers with respect to the controlled_entity as held by m before m dissolved or ceased to be the sole member or i previously received rulings you have previously received the following rulings that are relevant to this ruling_request x w u v ss unit as that term is used in revproc_95_48 1995_2_cb_125 sec_1_6033-2 and are relieved from filing form_990 pursuant to and p are affiliates of a governmental execution and implementation of the agreement will not cause m or any controlled_entity that is exempt from income_tax under sec_501 to be engaged in an unrelated_trade_or_business within the meaning of sec_513 the transfer of assets personnel or resources and the performance of activities and services by any party exempt from income_tax under sec_501 for any other party that is exempt under sec_501 pursuant to the agreement will not cause m or any controlled_entity exempt under sec_501 within the meaning of to be engaged in an unrelated_trade_or_business sec_513 o and i's execution of the agreement the the creation of m parties' implementation of the transactions contemplated by the agreement and m's and the controlled entities’ participation in the system will not alone or collectively plr-108188-98 adversely affect the status of any party as exempt from federal_income_tax under sec_501 as described in an organization sec_501 q qualifies as a political_subdivision of the state of r within the meaning of sec_1_103-1 upon amendment of their articles and bylaws s will each meet the criteria of revrul_57_128 and therefore will be instrumentalities of q subdivision of the state of r the amendments to the articles and bylaws of s have been made a political x x and p and p it has been represented that the respective incomes of s gross_income under sec_115 x and p are excludable from the bonds a_ bonds q issued the a bonds on date and used the proceeds deposit funds in a debt advance refund all of an prior to the implementation of the agreement the a bonds togther with other q funds to outstanding issue of revenue bonds service reserve fund and bonds were governmental bonds whose interest was excludable from gross_income under sec_103 after the implementation of the agreement q and s will to be the only direct users of the facilities financed or refinanced with the proceeds of the a bonds and no more than five percent of these facilities will be used by other persons whose use would be private_business_use within the meaning of sec_141 pay the costs of issuance of the a and sec_1_141-3 b_ bonds q issued the b bonds on date and used the proceeds a debt service reserve fund finance the acquisition of a togther with other q funds to health_maintenance_organization and certain related assets deposit funds in pay the costs of issuance of the b bonds prior to the implementation of the agreement the b bonds were governmental bonds whose interest was excludable from gross_income under sec_103 implementation of the agreement x will to be the only direct user of the facilities financed with the proceeds of the b bonds and no more than five percent of these facilities will be used by other persons whose use would be private_business_use within the meaning of sec_141 and sec_1_141-3 after the and o2 d plr-108188-98 bonds q issued the c bonds on date and used the proceeds advance refund the d bonds deposit funds into a debt service pay the costs of issuance of the c bonds together with other q funds to previously issued by q reserve fund and prior to the implementation of the agreement the bonds were governmental bonds whose interest was excludable from gross_income under sec_103 after the implementation of the agreement q and s will to be the only direct users of the facilities financed or refinanced with the proceeds of the c bonds and no more than five percent of these facilities will be used by other persons whose use would be private_business_use within the meaning of sec_141 and sec_1_141-3 e_bonds q issued the e_bonds on date and used the proceeds and currently refund outstanding pay the costs of issuance of the e_bonds deposit funds in a debt service reserve finance the acquisition construction and togther with other q funds to revenue bonds installation of various improvements to the main hospital facilities of q fund the implementation of the agreement the e_bonds were governmental bonds whose interest was excludable from gross_income under after the implementation of the agreement q and s will to be the only direct users of the facilities financed or refinanced with the proceeds of the e_bonds and no more than five percent of these facilities will be used by other persons whose use would be private_business_use within the meaning of sec_141 and sec_1_141-3 prior to f_ bonds f bonds were issued by q on date to finance a loan from q the proceeds of that loan were used by p to acquire an to p option and purchase real_estate improvements from unrelated parties that were previously leased by q from those parties prior to the implementation of the agreement the f bonds were governmental bonds whose interest was excludable from gross_income under q financed with the proceeds of the f bonds and no more than five percent of these facilities will be used by other persons whose use would be private_business_use within the meaning of sec_141 p and sdollar_figure will to be the only direct users of the facilities after the implementation of the agreement and sec_1_141-3 h_ bonds on date i issued the h bonds as qualified sec_501 the proceeds of the h bonds were used together with bonds other i funds to finance the cost or reimburse i for the plr cost of capital expenditures_for k including expenditures relating to expansion and renovation of facilities owned by k deposit funds into a debt service reserve fund capitalized_interest with respect to the h bonds and pay the costs of issuance of the h bonds prior to the implementation of the agreement the only users of the facilities financed by the h bonds have been i and k agreement i and k will continue to be the only direct users of the facilities and no more than five percent of these facilities has been or will be used by other persons whose use would be private_business_use within the meaning of sec_1_141-3 after the implementation of the sec_141 and finance aa_ bonds on date i issued the aa bonds as qualified sec_501 the proceeds of the aa bonds were used together with finance the cost or reimburse i for the bonds other i funds to cost of capital expenditures_for facilities owned by k deposit funds into a debt service reserve fund capitalized_interest with respect to the aa bonds and the costs of issuance of the aa bonds implementation of the agreement the only users of the facilities financed by the aa bonds have been i and k implementation of the agreement i and k will continue to be the only direct users of the facilities and no more than five percent of the facilities financed by the aa bonds has been or will be used by other persons whose use would be private_business_use within the meaning of sec_141 and sec_1_141-3 finance prior to the after the pay the a bonds b bonds c bonds e_bonds and f bonds are collectively referred to as the q bonds bonds are collectively referred to as the i bonds ‘the h bonds and aa rulings requested you have requested the following rulings w w and z as represented l and z each will meet the criteria of revrul_57_128 upon implementation of the agreement and upon amendment of the articles and bylaws of l vv and therefore each will be an instrumentality of the districts each of which are political subdivisions of the state of r v m meets the criteria of revrul_57_128 and therefore is an instrumentality of the districts each of which are political subdivisions of the state of r neither the creation of m the districts' execution of the agreement the parties' implementation of the transactions contemplated by the agreement nor m's and the controlled oe plr-108188-98 entities' participation in the system will alone or collectively adversely affect the status of s an instrumentality of one or more governmental units x and p as upon implementation of the agreement and upon amendment of the articles and bylaws of v w and z as represented the respective incomes of each will be excludable from gross_income under sec_115 m's income is excludable under sec_115 neither the creation of m the districts' execution of the agreement the parties' implementation of the transactions contemplated by the agreement nor m's and the controlled entities' participation in the system will affect adversely alone or collectively the exclusion of the income of s and p from gross_income under sec_115 x m is an affiliate of a governmental_unit as that term is used in sec_4 is relieved from filing form_990 pursuant to g of revproc_95_48 1995_2_cb_418 sec_1 of the regulations and sec_3 of rev_proc and the districts' execution of the the creation of m agreement the parties' implementation of the transactions contemplate by the agreement and m's and the controlled entities' participation in the system will not affect adversely alone or collectively the status of p or any tax-exempt_controlled_entity other than k of a governmental_unit as that term is used in sec_4 revproc_95_48 as an affiliate of the execution and implementation of the agreement will not result in the creation of an entity separate from m for federal tax purposes the execution and implementation of the agreement will not result in a change in use of the proceeds of any series of the q bonds that would cause that series of the q bonds to be private_activity_bonds under sec_141 the execution and implementation of the agreement will not result in a change_of use of the proceeds of any series of the i bonds that would cause that series of the i bonds to be other than qualified c bonds under sec_145 of plr-108188-98 instrumentality ruling requests and law and analysis whether the organization under revrul_57_128 the following factors are taken into account to determine whether an entity is an instrumentality of one or more governmental units is used for a governmental purpose and performs a governmental function whether performance of its function is on behalf of one or more states or political subdivisions whether there are any private interests involved or whether the states or political subdivisions involved have the powers and interests of an owner is vested in a public authority or authorities whether express or implied statutory or other authority is necessary for the creation and or use of the instrumentality and whether this authority exists and entity and the source of its operating_expenses whether control and supervision of the organization the degree of financial autonomy of the ruling_request vy w and z each performs a governmental function on behalf entities v l performs a and through its and through each entities' participation in the agreement and under the agreement the districts jointly and equally of q upon its implementation on behalf of i governmental function on behalf of i participation in the agreement upon its implementation on behalf of q the districts are both political subdivisions of the state of r control m formed by i in accordance with state law to assist it in carrying out the duties and responsibilities of the political subdivisions under state law l procedures established by m which is wholly controlled by the districts and policies established by the districts directly accordingly once the agreement is implemented each entity will function on behalf of q and i both political subdivisions of the state of r in addition under the terms of the agreement and must operate in accordance with the policies and and z were formed by q and l was w v w upon implementation of the agreement all four entities will become controlled entities and must conform to all policies established by m as noted above m has control_over the merger consolidation or dissolution haagetes significant expenditures and incurrence of significant new debt of any controlled_entity in addition m has the power to operate each controlled_entity through a lease or other contractual arrangement and m has the right to appoint and remove with or without cause the boards of directors of controlled_entity controlled_entity to make certain transfers of assets including operating surplus among the controlled entities in the system and m m may make or direct any dy plr-108188-98 likewise m must m must approve in advance the sale of all or substantially of the assets of any controlled_entity all approve by a three-fourths majority of its directors any sale transfer or other alienation of an interest in a controlled entity's assets that is not in the ordinary course of its business and m has the power to sell transfer or alienate any interest in assets in the ordinary course of its business without the requirement for any vote of the directors to develop and revise the mission or vision statement of each controlled_entity and m must approve by a three-fourths majority of its directors any amendments to a controlled entity's corporate documents by a three-fourths majority of its directors resolutions expanding the list of actions by any controlled_entity that need prior approval of m finally m has the power to adopt m has the power the articles of incorporation of v w and z either provide a political_subdivision to be used exclusively for public purposes is represented will be amended to provide that upon or it dissolution of each of the corporations all residual assets of the corporation will be distributed to of the state of r it is represented that the articles of incorporation of l will be amended to provide that upon its dissolution all residual assets of the corporation will be distributed to i subdivision of the state of r purposes in addition v is a inurement of its net_earnings to a private individual applied for sec_501 status and its articles of incorporation provide that there will be no inurement of w's net_earnings to any private individual corporations and their articles of incorporation provide that none of their net_earnings will inure to a private individual to be used exclusively for public sec_501 organization with no l and z operate as not-for-profit a political w has it and z have been q may remove any is represented that the by-laws of v w amended or will be amended to provide that director of the respective board_of directors with or without cause and the president or chairman as the case may be each entity will be elected or chosen from a slate of persons that has been approved in writing by the president ceo of q is further represented that the by laws of l have been amended or will be amended to provide that of the respective board_of directors with or without cause and the president or chairman as the case may be will be elected or chosen from a slate of persons that has been approved in writing by the president ceo of i i may remove any director of each entity of it applying the criteria of revrul_57_128 to the facts as represented we conclude that upon amendment of the articles and bylaws of l qualify as instrumentalities of the districts which are both political subdivisions of the state of r and z as represented l w and z will v v w plr ruling_request m was formed in accordance with state law in order to assist the districts have the power the districts must approve significant expenditures the districts in the performance of their duties and responsibilities under state law to appoint and remove all of the directors of m and have significant approval and ratification powers over the actions of m establish limits on m's ability to incur new debt approve the entry of m into a joint_venture partnership affiliation or similar relationship with any entity not owned or controlled by m approve the merger dissolution or consolidation of m and the sale or alienation of all or substantially_all of the assets of m and ratify or reject recommendations made by m's directors which would significantly affect access to appropriate local health care delivery within the geographic boundaries of the districts in addition m must report financial information about the assets and operations of the individual controlled entities to the districts and each of the districts has the right to order an audit of m's books_and_records dissolution of m distributed to the districts to be used exclusively for public purposes inurement of its net_earnings to a private individual all residual assets of the corporation will be sec_501 organization with no in addition m upon is a applying the criteria of revrul_57_128 to the facts as represented we conclude that m qualifies as an instrumentality of the districts which are both political subdivisions of the state of r ruling_request x with respect to s and p neither the creation of m the district's execution of the agreement the implementation of the transactions contemplated by the agreement nor m's and controlled entities' participation in the system will alone or collectively adversely affect the status of s x instrumentality of one or more governmental units participating in the agreement s and p will become partly controlled by m and i and will begin to function in part the benefit of m and i i function on behalf of one or more political subdivisions is an instrumentality of q and and p will continue to a political_subdivision s and p as an because m and i for by is x sec_115 ruling requests and sec_115 provides that gross_income does not include income derived from any public_utility or the exercise of any essential government function and accruing to a state or any political_subdivision of a state revrul_71_589 1971_2_cb_94 provides that the income from property held in trust by a city that was to be used by the city for certain charitable purposes is not subject_to federal_income_tax rul does not explicitly so f although rev plr-108188-98 state the holding in the revenue_ruling means that a determination was made that the income in question was derived from the exercise of an essential_governmental_function and accrued to a political_subdivision within the meaning of sec_115 revrul_71_589 specifically mentions several types of functions that the trust might perform such as support of a hospital schools maintenance of a park or other purposes ordinarily recognized as a municipal function revrul_90_74 1990_2_cb_34 concerns an organization that is formed operated and funded by political subdivisions to pool their casualty risks or other risks arising from their obligations concerning public liability workers'_compensation or employees' health the organization is excluded from gross_income under sec_115 private interests do not participate in the organization or benefit more than incidentally from the organization rul the benefit to the employees of the political subdivisions was excepted as incidental revrul_90_74 states that the income of if in rev ruling_request vy w and z were formed by q to perform services that just as the trust described in revrul_71_589 is otherwise would be performed by purposes viewed as a necessary incident of the power of the state and its political subdivisions vv and z are necessary to q's obligation to provide health care services in the county v an essential_governmental_function within the meaning of sec_115 w and z like the trust described in revrul_71_589 perform in furtherance of its statutory thus w the governing corporate documents of v no funds may accrue to the benefit of any upon liquidation all residual assets of v sec_115 also requires that any income derived from an essential_governmental_function accrue to a state or political_subdivision thereof private party w z will be distributed to q to be used exclusively for public purposes provide that there will be no inurement of the net_earnings of the entity to a private individual for the benefit of q and i retains complete authority in appointing the directors of v articles and bylaws of v complete authority in removing the directors of v that time the respective incomes of v as accruing to the state or a political_subdivision within the meaning of sec_115 and z as represented q will have in addition m which operates w and z will be regarded upon amendment of the and z all w and z and z and at w w w ruling_request m was formed by and i to perform services that otherwise would be performed by q just as the trust described in revrul_71_589 is viewed as a necessary incident of the power of the state and its political subdivisions m is necessary to q and i's obligation to provide in furtherance of its statutory purposes at thus m like the trust plr-108188-98 health care services in the county described in rev function within the meaning of sec_115 rul performs an essential governmental no funds may accrue to the benefit of any sec_115 also requires that any income derived from an essential_governmental_function accrue to a state or political_subdivision thereof private party upon liquidation all residual assets of m will be distributed to and i to be used exclusively for public purposes the governing corporate documents of m provide that there will be no inurement of the net_earnings of the entity to a private individual appointing the directors of m bylaws of m as represented q and i will have complete authority in removing the directors of m will be regarded as accruing to the state or political subdivisions of the state within the meaning of sec_115 in addition q and i retain complete authority in upon amendment of the articles and at that time the income of m ruling_request s x and p have already received rulings that once specified since the receipt of the ruling the represented amendments to their corporate governing documents were made the respective incomes of each would be excludable from income under sec_115 amendments to the corporate governing documents have been made the only changes to their operation and organization are that each entity will no longer be controlled exclusively by q and each entity will no longer operate solely for the benefit of upon implementation of the agreement control of each of the entities will be shared by q as previously discussed and i is wholly owned controlled and are political subdivisions and m operated for the benefit of q and i and p will continue to perform services that otherwise would be performed by governmental entities in furtherance of their statutory purposes will continue to perform an essential_governmental_function within the meaning of x of the net_earnings of the entity to a private individual addition the respective incomes of s be regarded as accruing to the state or a political_subdivision within the meaning of and the governing corporate documents of s and p will continue to provide that there will be no inurement and p will continue to i and m and p in x s x s x accordingly we rule that neither the creation of m the district's execution of the agreement the parties' implementation of the transactions contemplated by the agreement nor m's and the controlled entities' participation in the system will alone or collectively adversely affect the exclusion of the income of s x and p from gross_income under sec_115 affiliate of a governmental_unit ruling requests and sec_6033 generally requires the filing of annual information returns by organizations_exempt_from_taxation under sec_501 op plr-108188-98 sec_6033 provides discretionary exceptions from filing such returns where the secretary determines that such filing is not necessary to the efficient administration of the internal revenue laws sec_1_6033-2 of the regulations delegates authority to the commissioner to relieve any organization or class of organizations from filing the annual information_return in revproc_95_48 1995_2_cb_418 the commissioner exercises discretionary authority to except from filing form_930 any organization which is an affiliate of a governmental_unit revproc_95_48 provides in part that an organization that b c or would be has a ruling or determination_letter from the service which determines its status for certain other purposes of the code sec_170 an affiliate of a governmental_unit an organization that does not have such a letter would nevertheless qualify as an affiliate of a governmental_unit if the service determined based on all the relevant facts and circumstances that the organization was closely affiliated with one or more governmental units and the organization's filing of form_990 was not otherwise necessary to the efficient administration of the internal revenue laws ruling_request m is an affiliate of a governmental_unit as that term is used in sec_4 relieved from filing form_990 pursuant to regulations and sec_3 of revproc_95_48 c b of revproc_95_48 and is sec_1_6033-2 of the ruling_request the creation of m the districts' execution of the agreement the parties' implementation of the transactions contemplate by the agreement and m's and the controlled entities’ participation in the system will not affect adversely alone or collectively the status of p or any tax-exempt_controlled_entity other than k an affiliate of a governmental_unit as that term is used in sec_4 of revproc_95_48 as partnership ruling_request ruling_request the agreement provides for the joint planning coordination management and financing of operations of the various controlled entities agreement does not provide for the direct sharing of profits or losses among the controlled entities or districts sharing between the controlled entities or districts is accomplished through m these activities are carried out by and through m any financial the of plr-108188-98 the execution and implementation of the agreement will not result in the creation of an entity separate from m for federal tax purposes change in use ruling requests and under sec_103 gross_income does not include interest on a state_or_local_bond does not apply to any private_activity_bond unless it qualified_bond under sec_141 qualified bonds include qualified sec_501 bonds sec_103 provides that sec_103 sec_141 provides that is a sec_141 provides that the term private_activity_bond means any bond issued as a part of an issue which meets the private_business_use_test of sec_141 and the private_security_or_payment_test of sec_141 or loan financing test of sec_141 general that an issue meets the private_business_use_test if more than percent of the proceeds of the issue are to be used for any private_business_use sec_141 provides in which meets the private sec_141 provides in general that an issue meets the private_security_or_payment_test if the payment of the principal of or the interest on more than percent of the proceeds of the issue is under the terms of the issue or any underlying arrangement directly or indirectly a secured_by any interest in property used or to be used for a private_business_use or payments in respect of such property or to be derived from payments whether or not to the b issuer in respect of property or borrowed money used or to be used for a private_business_use sec_141 provides that the term private_business_use for purposes of sec_141 means use directly or indirectly in a trade_or_business carried on by any person other than a governmental_unit person other than a natural_person is treated as a trade_or_business for this purpose any activity carried on by a sec_1_141-1 provides that a governmental person means a state_or_local_governmental_unit under sec_1_103-1 or any instrumentality of a governmental_unit sec_145 provides that except as otherwise provided in the term qualified_501_c_3_bond means any private_activity_bond issued as a part of an issue if all property which is to be provided by the net_proceeds of the issue is to be owned by a 501_c_3_organization or a governmental_unit and such bond would not be a private_activity_bond if governmental units with respect to their activities that c organizations were treated as plr-108188-98 do not constitute unrelated trades_or_businesses determined by applying sec_513 and paragraphs sec_141 were applied by substituting percent for percent each place it appears and net_proceeds for proceeds each place it appears and of thus the private_activity_bond rules set forth in incorporated by reference in sec_141 are with certain modifications ruling_request once the agreement is implemented and the changes discussed cf revproc_82_26 c b above are made to the organizational documents of the various entities the only entities in the system that are not political subdivisions or instrumentalities will be and z the trade_or_business of an instrumentality is that of the governmental_unit for which it acts more than five percent of the facilities financed by the q bonds have been or will be used by y would be private_business_use within the meaning of and sec_1_141-3 accordingly the use of the facilities by any member of the system will not constitute private_business_use within the meaning of implementation of the agreement by itself does not result in a change in use of the proceeds of the q bonds that would cause that series of the q bonds to be private_activity_bonds under sec_141 sec_141 and the execution and or any other persons whose use sec_141 no z ruling_request the execution and implementation of the agreement will result is k sec_501 organizations political subdivisions and and m and financed a governmental_unit and k and m for the purposes of determining if in instrumentalities using property owned by i by proceeds of the i bonds i are sec_501 organizations the i bonds are qualified c bonds are treated as governmental units with respect to their activities that do not constitute unrelated trades_or_businesses determined by applying sec_513 facilities by the sec_501 organizations in the system is treated as governmental use to the extent their activities are not unrelated trade or businesses the participation in the system by controlled entities that are also sec_501 entities does not cause them to be engaged in an unrelated_trade_or_business within the meaning of asa result use of these facilities by the controlled entities that are also sec_501 entities does not result in private_business_use of the facilities therefore the use of the financed you have received rulings that sec_501 entities sec_513 use of these facilities by the political subdivisions is governmental use and accordingly does not result in private_business_use the trade_or_business of an instrumentality is that plr-108188-98 ys cf revproc_82_26 of the governmental_unit for which it acts as a result use of the facilities by instrumentalities within the system does not result in private_business_use of the facilities you have represented that no more than five percent of the facilities will be used by other persons whose use would be private_business_use within the meaning of sec_1_141-3 sec_141 and accordingly the execution and implementation of the agreement will not result in a change_of use of the proceeds of any series of the i bonds that would cause that series of the i bonds to be other than qualified c bonds under sec_145 based solely upon the representations and information submitted we rule on your requests as follows conclusion w and z as represented l and z each will meet the criteria of revrul_57_128 upon implementation of the agreement and upon amendment of the articles and bylaws of l vv and therefore each will be an instrumentality of the districts each of which are political subdivisions of the state of r v w m meets the criteria of revrul_57_128 and therefore is an instrumentality of the districts each of which are political subdivisions of the state of r the creation of m the districts’ execution of the agreement the parties' implementation of the transactions contemplated by the agreement and m's and the controlled entities' participation in the system will not alone or collectively adversely affect the status of s instrumentality of one or more governmental units and p as an x upon implementation of the agreement and upon amendment of the articles and bylaws of v w and z as represented the respective incomes of each will be excludable from gross_income under sec_115 m's income is excludable under sec_115 the creation of m the districts' execution of the agreement the parties' implementation of the transactions contemplated by the agreement and m's and the controlled entities' participation in the system will not alone or collectively adversely affect the exclusion of the income of s and p from gross_income under sec_115 x is an affiliate of a governmental_unit as that term is m used in sec_4 is relieved from filing form_990 pursuant to proc c b of rev sec_1_6033-2 and fdves vpsrgry tat plr-108188-98 the creation of m the districts' execution of the agreement the parties' implementation of the transactions contemplate by the agreement and m's and the controlled entities' participation in the system will not affect adversely alone or collectively the status of p or any tax-exempt_controlled_entity other than k unit as that term is used in sec_4 of revproc_95_48 as an affiliate of a governmental the execution and implementation of the agreement will not result in the creation of an entity separate from m for federal tax purposes the execution and implementation of the agreement will not result in a change in use of the proceeds of any series of the bonds that would cause that series of the q bonds to be private_activity_bonds under sec_141 the execution and implementation of the agreement will rot result in a change_of use of the proceeds of any series of the i bonds that would cause that series of the i bonds ts be other than qualified c bonds under sec_145 except as specifically stated above no opinion is expressed regarding the consequences of this transaction under any provision of the internal_revenue_code the income_tax regulations or the temporary income_tax regulations expressed regarding whether the provision of physician services by zand z to any qualified user as that term is defined in section dollar_figure of revproc_97_13 i r b facility results in private_business_use of that facility in addition no opinion is expressed regarding whether or nct the implementation and execution of the agreement will result ina violation of the dollar_figure limitation contained in specifically no opinion is with respect to a sec_145 this ruling is directed only to the taxpayer who requested sec_6110 provides that it may not be cited as it precedent sincerely yours assistant chief_counsel pinancial institutions products timothy l assistant to the chief branch enclosure copy for sec_6110 purposes ok


internal_revenue_service number release date index number -------------------------------- ---------------- --------------------------- re ------------------------------- legend 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 b04 plr-147173-10 date date ------------------------------------------------------------------------------ ------------------- --------------------- ---------------------------------------------- ------------------------------------------------------------- -------------------------------------------------- ------------------- -------------------------- ----------------------- ----------------------- ----------------------- ------------------------- ------------- ---------------------------------------------------- trust -------------------------------------------------------------------- decedent surviving_spouse child child child attorney attorney date date date date state court ---------------------------------------------------------------- state statute state statute state statute citation --------------------------------------------------------------------------------- citation --------------------------------------------- ------------------------------------------------- ------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------------------------- citation ---------------------------------------------------------- citation --------------------------------------------------- ---------------------------------------------------- ----------------------------------------------------------------------------- -------------------------------------------------------------------------------- plr-147173-10 ------------------------------------------------------------------------------------------------ citation --------------------------------------------------------------------------------------- citation --------------------------------------------------------- ---------------------------------------------------- -------------------------------------------------- dear ------------ this letter responds to your authorized representative’s letter of date requesting rulings on federal gift and estate_tax consequences of a judicial modification of a_trust the facts submitted are as follows decedent and surviving_spouse trustors created an inter_vivos revocable_trust trust on date trustors were the original trustees of trust upon the death of the first trustor the surviving trustor became the sole trustee trust is governed by the laws of state article iii section dollar_figure of trust provides that upon the death of the first trustor to die the trust assets shall be divided among the marital trust the by-pass trust and the survivor’s trust follows article iv distributions on death of surviving_spouse of trust provides as section dollar_figure of trust provides that on the death of the surviving_spouse unless the trustee determines that other provisions have been made for payment the trustee shall pay from the trust estate the surviving spouse's debts expenses and death taxes due by reason of the surviving spouse's death and shall charge them against property in the by-pass trust except that the non-qualified marital trust if any shall bear any estate gift generation-skipping or other transfer_taxes imposed on such trust emphasis added to the extent that other assets are available the trustee shall not use any insurance proceeds qualified_retirement_plan distributions or other assets otherwise excludable from federal estate_tax to pay debts expenses death taxes or any other obligations enforceable against the surviving trustor's estate section dollar_figure provides that upon the death of the surviving_spouse the trustee shall distribute and or retain the balance then remaining in the survivor's trust including both principal and any accrued but undistributed_income as the surviving_spouse may appoint by the surviving spouse's will or codicil thereto specifically referring to and exercising this general_power_of_appointment to such one or more persons and entities including the surviving spouse's estate the surviving spouse's creditors or the plr-147173-10 creditors of the surviving spouse's estate in exercising the foregoing general_power_of_appointment the surviving_spouse may appoint outright or in trust in present or future_interest or in any combination of these and the surviving_spouse may create new powers of appointment including general powers restrictions and conditions in or for the benefit of any of the objects of the surviving spouse's general power to whatever extent the then remaining balance of the survivor's trust has not been effectively appointed by the surviving_spouse pursuant to the above general_power_of_appointment and not consumed for the payment of debts expenses and taxes the trustee shall distribute the survivor's trust including any additions made to the trust by reason of such death such as from the surviving spouse's will or life_insurance policies on the surviving spouse's life as set forth in section dollar_figure hereinbelow decedent died on date survived by surviving_spouse child child and child surviving_spouse was appointed executor of decedent's_estate surviving_spouse is the trustee of the survivor's trust the by-pass trust and the marital trust prior to decedent's death decedent and surviving_spouse engaged attorney to provide them with estate_planning advice attorney drafted trust for decedent and surviving_spouse after decedent’s death attorney was consulted upon review of the trust provisions attorney confirmed that the language in article iv section dollar_figure contained an error article iv section dollar_figure provides that o n the death of the surviving_spouse the trustee shall pay from the trust estate the surviving spouse's debts expenses and death taxes due by reason of the surviving spouse's death and shall charge them against property in the by-pass trust emphasis added surviving_spouse contends that the language in article iv section dollar_figure of trust should refer to the survivor's trust not the by-pass trust as drafted the reference to the by-pass trust may provide surviving_spouse with a testamentary general_power_of_appointment under sec_2041 in affidavits surviving_spouse and attorney represent that it was the decedent's and surviving spouse's intent as trustors of trust to minimize estate_taxes including maximizing the use of the unified_credit accordingly the by-pass trust should have been drafted to ensure that the assets in the by-pass trust will not be included in the gross_estate of the surviving_spouse and the surviving_spouse will not have any property or other rights to the trust property that would cause the assets to be included in the surviving spouse's gross_estate upon surviving spouse’s death in order to correct the error in the trust and to accurately reflect the intent of the trustors on date surviving_spouse as the trustee of trust filed a petition with court seeking authorization to modify trust nunc_pro_tunc surviving_spouse as the plr-147173-10 surviving trustee has stated that it is and was at all times surviving spouse's intent and desire that the assets of the by-pass trust be administered so as to avoid taxation at surviving spouse's death to support the assertion that the reference to the by-pass trust was a scrivener's error surviving_spouse provided the following arguments first section dollar_figure pertains to the payment of the expenses of the first spouse to die and directs the trustee to pay the debts expenses and death taxes of the first spouse to die and charge the payment of such items against the by-pass trust sec_4 on the other hand pertains to expenses of the surviving_spouse but contains the same language contained in sec_3 surviving_spouse asserts and attorney confirms that the language in section dollar_figure was copied from section dollar_figure but improperly edited and therefore the reference to the by-pass trust rather than the survivor's trust remained second the language in the second paragraph of section dollar_figure contradicts the language in the first paragraph in sec_4 the second paragraph directs the trustee not to use any insurance proceeds qualified_retirement_plan distributions or other assets otherwise excludable from federal estate_tax to pay debts expenses death taxes or any other obligations enforceable against the surviving trustor's estate the phrase other assets otherwise excludible would necessarily include assets in the by- pass trust this language contradicts the directive to the trustee to pay these items from the by-pass trust finally the language of section dollar_figure provides that t o whatever extent the then remaining balance of the survivor's trust has not been effectively appointed by the surviving_spouse pursuant to the above general_power_of_appointment and not consumed for the payment of debts expenses and taxes the trustee shall distribute the survivor's trust including any distributions made to the trust by reason of such death such as from the surviving spouse's will or life_insurance policies on the surviving spouse's life as set forth in section dollar_figure hereinbelow this language suggests that the survivor's trust should bear the debts expenses and taxes incurred due to the death of the surviving_spouse on date the court issued an order granting the petition for modification the court approved the modifications as an equitable reformation of trust under common_law and state statute you have requested the following rulings the by-pass trust as modified does not provide surviving_spouse with a testamentary general_power_of_appointment under sec_2041 of the internal_revenue_code over the assets of trust plr-147173-10 the modification of article iv sec_4 of trust pursuant to the court's order is not an exercise or release of a general_power_of_appointment under sec_2514 that constitutes a gift_for federal gift_tax purposes surviving_spouse is not deemed to have made a gift under sec_2501 of an interest in trust as a result of the court order modifying section dollar_figure of trust ruling sec_2001 provides that a tax is imposed on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2031 provides generally that the value of the gross_estate of the decedent shall be determined by including to the extent provided for in sec_2031 through the value at the time of his death of all property real or personal tangible or intangible wherever situated sec_2041 provides that the value of the gross_estate includes the value of all property to the extent of any property with respect to which the decedent has at the time of his death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power_of_appointment by a disposition which is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent's gross_estate under sec_2035 to inclusive for purposes of sec_2041 the power_of_appointment shall be considered to exist on the date of the decedent's death even though the exercise of the power is subject_to a precedent giving of notice or even though the exercise of the power takes effect only on the expiration of a stated period after its exercise whether or not on or before the date of the decedent's death notice has been given or the power has been exercised sec_2041 provides that for purposes of sec_2041 the term general_power_of_appointment means a power which is exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_2041 provides that the lapse of a power_of_appointment created after date during the life of the individual possessing the power shall be considered a release of such power sec_20_2041-1 of the estate_tax regulations provides in part that a power_of_appointment exercisable to meet the estate_tax or any other taxes debts or charges which are enforceable against the estate is included within the meaning of a power_of_appointment exercisable in favor of the decedent's_estate his creditors or the creditors of his estate plr-147173-10 state statute provides in part that when through fraud or mutual mistake of the parties or a mistake of one party a written contract does not truly express the intention of the parties it may be revised on the application of the party aggrieved state statute provides in part that if all beneficiaries of an irrevocable_trust consent they may compel modification upon petition to the court state statute provides in part that a court may modify the dispositive provisions of a_trust if owing to circumstances not known to the settler or not anticipated by the settler the continuation of the trust under its terms would defeat or substantially impair the accomplishment of the purposes of the trust in 387_us_456 the court considered whether a state trial court's characterization of property rights conclusively binds a federal court or agency in a federal estate_tax controversy the court concluded that the decision of a state trial_court as to an underlying issue of state law should not be controlling when applied to a federal statute rather the highest court of the state is the best authority on the underlying substantive rule_of state law to be applied in the federal matter if there is no decision by that court then the federal authority must apply what it finds to be state law after giving proper regard to the state trial court's determination and to relevant rulings of other courts of the state in this respect the federal_agency may be said in effect to be sitting as a state court under state law a_trust has standing to seek reformation under state statute see citation citing citation at p in addition a probate_court has equitable power to modify a_trust if the provisions of the trust are ambiguous or if adherence to the terms of the trust would defeat the primary purpose of the trust see citation citation the equitable power of a trial_court to modify or reform a_trust extends to situations where the trust instrument contains some expression of the trustor's intention but a drafting error renders that expression ambiguous citation pincite citing citation a mistake by the scrivener or draftsman in reducing the intent of the parties to writing is ground for reformation see citation nunc_pro_tunc amendments are permitted primarily so that errors in the record may be corrected the power to amend nunc_pro_tunc is a limited one and may be used only where necessary to correct a clear mistake and prevent injustice see citation in this case the documentation submitted by surviving_spouse strongly indicates that decedent and surviving_spouse did not intend to have any control_over the assets held in the by-pass trust and that the provision in section dollar_figure of trust to charge surviving spouse's debts expenses and death taxes from the by-pass trust was the result of a scrivener's error in reforming the by-pass trust court found that the modification of trust was an equitable reformation of trust under common_law and state statute plr-147173-10 consequently we conclude that the court's order on date modifying the trust instrument nunc_pro_tunc based on a scrivener's error is consistent with applicable state law that would be applied by the highest court of that state section dollar_figure of trust as modified pursuant to the court's order does not provide surviving_spouse with a general_power_of_appointment under sec_2041 over the assets of the by-pass trust therefore based on the facts submitted and the representations made we conclude that the value of the assets in the by-pass trust will not be included in surviving spouse's gross_estate under sec_2041 upon his death ruling sec_2 sec_2501 imposes a gift_tax for each calendar_year on the transfer of property by gift during the year by an individual sec_2511 provides that the gift_tax shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2512 provides that where property is transferred for less than an adequate_and_full_consideration in money_or_money's_worth the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift_for gift_tax purposes sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power for gift_tax purposes sec_2514 provides that the term general_power_of_appointment means a power which is exercisable in favor of the individual possessing the power his estate his creditors or the creditors of his estate sec_2514 provides that the lapse of a power_of_appointment created after date during the life of the person possessing the power is considered a release of the power sec_25_2514-1 of the gift_tax regulations provides in part that a power_of_appointment exercisable to meet the estate_tax or any other taxes debts or charges which are enforceable against the possessor or his estate is included within the meaning of a power_of_appointment exercisable in favor of the possessor his estate his creditors or the creditors of his estate as discussed in the first ruling trust as modified does not provide surviving_spouse with a testamentary general_power_of_appointment accordingly based on the facts submitted and the representations made we conclude that the modification of article iv section dollar_figure of trust will not constitute the exercise or release of a general_power_of_appointment by surviving_spouse within the meaning of sec_2514 further we conclude that the modification of article iv section dollar_figure of trust pursuant to the plr-147173-10 court’s order will not be treated as a deemed transfer of an interest in trust by surviving_spouse for gift_tax purposes under sec_2501 a copy of this letter should be attached to any gift estate or generation-skipping_transfer_tax returns that you may file relating to these matters the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely by ______________________________ lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes cc


t c summary opinion united_states tax_court lisa j tomlinson petitioner v commissioner of internal revenue respondent docket nos 16445-05s 6086-06s filed date lisa j tomlinson pro_se margaret burow for respondent ruwe judge these cases were heard pursuant to the provisions of section of the internal_revenue_code in effect when the petition was filed pursuant to sec_1 unless otherwise indicated 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 respondent issued separate notices of deficiency for and respectively petitioner filed a separate petition for continued b the decisions to be entered are not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined deficiencies in petitioner’ sec_2002 and federal income taxes of dollar_figure and dollar_figure respectively and an addition_to_tax for failure_to_file timely a tax_return under sec_6651 of dollar_figure for after concessions by respondent the issues remaining for decision are whether petitioner is entitled to deduct medical_expenses of dollar_figure claimed on her schedule a itemized_deductions for whether petitioner is entitled to deduct business_expenses of dollar_figure and dollar_figure claimed on her schedules c profit or loss from business for and respectively and whether petitioner is liable for an addition_to_tax under sec_6651 for failure_to_file timely a return for continued each year due to the similarity of the issues the court granted respondent’s motion to consolidate for trial briefing and opinion on date respondent concedes that petitioner is entitled to deduct schedule a itemized_deductions of dollar_figure for home mortgage interest_paid during dollar_figure for charitable_contributions made in and dollar_figure for a casualty_loss for property in respondent also concedes that petitioner has substantiated dollar_figure of the dollar_figure in medical_expenses claimed on her return background some of the facts have been stipulated and are so found the stipulations of facts supplemental stipulation of facts and the attached exhibits are incorporated by this reference when the petitions were filed petitioner resided in oakland california for approximately the first months of petitioner was employed full time with versata inc as the vice president of human resources petitioner subsequently received disability_income as a result of a health condition that prevented her from working on date petitioner untimely filed a income_tax return on which she reported income from wages salaries tips etc of dollar_figure interest_income of dollar_figure a taxable refund of state and local income_tax of dollar_figure and a schedule c business loss of dollar_figure on date respondent issued to petitioner a notice_of_deficiency for on date petitioner untimely filed a income_tax return on which she reported income from wages salaries tips etc of dollar_figure interest_income of dollar_figure dividends of the forms w-2 wage and tax statement attached to petitioner’ sec_2002 return show that she received dollar_figure from versata inc and dollar_figure from cna group life assurance co the form_w-2 attached to petitioner’s return shows that she received dollar_figure from cna group life assurance co dollar_figure and a schedule c business loss of dollar_figure on date respondent issued to petitioner a notice_of_deficiency for schedule a medical_expenses discussion expenses paid during the taxable_year not_compensated_for_by_insurance_or_otherwise for medical_care of the taxpayer her spouse or a dependent shall be allowed as a deduction to the extent that such expenses exceed percent of adjusted_gross_income sec_213 the term medical_care includes amounts paid for insurance covering medical_care sec_213 on her return petitioner claimed itemized_deductions for medical_expenses petitioner failed to substantiate the dollar_figure in medical_expenses that remain in dispute in an attempt to substantiate the disputed medical_expenses petitioner produced evidence of payments made to national finance center the purpose of these payments is not clear copies of several of the canceled checks and cashier’s checks that document these payments contain writing that was scratched out petitioner testified that the scratched out writing was her social_security_number however the writing that was scratched out on the cashier’s checks visibly indicates the checks were made out for jon tomlinson who is petitioner’s brother jon tomlinson was not petitioner’s dependent for tax purposes respondent’s disallowance of the disputed remaining medical_expenses is sustained schedule c expenses deductions are a matter of legislative grace and taxpayers bear the burden of proving that they are entitled to any deductions claimed rule a 503_us_79 292_us_435 taxpayers are required to maintain sufficient records to enable the commissioner to determine their correct_tax liability sec_6001 sec_162 generally allows a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business such expenses must be directly connected with or pertain to the taxpayer’s trade_or_business sec_1_162-1 income_tax regs whether an expenditure satisfies the requirements of sec_162 is a question of fact 320_us_467 whether a taxpayer’s activities constitute the carrying on of a trade_or_business requires an examination of the particular facts and circumstances of each case 480_us_23 carrying_on_a_trade_or_business requires a showing of more than an initial investigation of business potential 56_tc_895 glotov v commissioner tcmemo_2007_147 personal living or family_expenses are not deductible sec_262 similarly deductions for expenditures that are properly categorized as capital expenditures are not allowable sec_263 in order for petitioner to be entitled to deduct her claimed schedule c expenses she must satisfy the requirements of sec_162 additionally certain expenses warrant the heightened substantiation requirements of sec_274 and the regulations thereunder petitioner’s return for contains a schedule c for asil investments on which she reported zero gross_receipts and a net_loss of dollar_figure respondent disallowed all of the claimed deductions for expenses which were listed on petitioner’ sec_2002 schedule c as follows expenses amount car and truck expenses dollar_figure depreciation big_number insurance big_number legal and professional services big_number office expense big_number rent or lease of other business big_number property supplies big_number travel big_number meals and entertainment big_number wages big_number accounting big_number answering service club membership big_number delivery and freight gifts big_number internet service sec_168 membership fee sec_404 parking and tolls big_number photography big_number postage big_number professional development subscriptions and publication sec_702 telephone big_number total big_number petitioner claims that asil investments was a real_estate investment business that she began while she worked full time at versata inc petitioner testified that she took a number of courses and looked at a variety of properties in petitioner testified that she made some offers on properties however she provided no other evidence of these offers there is no evidence that petitioner ever completed a purchase of property petitioner received no income from asil investments in and abandoned the venture early in if any of the expenses_incurred by petitioner were in relation to a real_estate investment venture they appear to be in the nature of investigating the business potential of creating a real_estate investment business or preparing to start such a business in order to deduct expenses under sec_162 the expenses must relate to a functioning business at the time the expenses were incurred glotov v commissioner supra sec_195 provides except as otherwise provided in this section no deduction shall be allowed for start-up_expenditures sec_195 defines start-up_expenditure as any amount-- a paid_or_incurred in connection with-- i investigating the creation or acquisition of an active trade_or_business or ii creating an active trade_or_business or iii any activity engaged in for profit and for the production_of_income before the day on which the active trade_or_business begins in anticipation of such activity becoming an active trade_or_business and b which if paid_or_incurred in connection with the operation of an existing active trade_or_business in the same field as the trade_or_business referred to in subparagraph a would be allowable as a deduction for the taxable_year in which paid_or_incurred petitioner’s activities in with relation to asil investments were at best start-up activities and did not amount to an active trade_or_business accordingly we hold that sec_195 provides that the term start-up_expenditure does not include expenditures_for which a deduction would be allowable under sec_163 interest taxes or research and experimental expenses see 96_tc_903 explaining that the phrase research or experimental for purposes of sec_174 refers to scientific or technological research see also sec_1_174-2 income_tax regs none of the expenditures listed on petitioner’s schedules c were allowable under these sections respondent’s disallowance of petitioner’ sec_2002 schedule c deductions was proper petitioner’s return for contains a schedule c on which she reported zero gross_receipts and a net_loss of dollar_figure for temps to go the schedule c for temps to go is the only schedule c attached to the return petitioner testified that the expenses claimed on her schedule c for were actually expenses_incurred in another business called gotta get up productions petitioner claimed that she held a 100-percent interest in gotta get up productions in in the notice_of_deficiency respondent disallowed the following claimed deductions for expenses listed on petitioner’s schedule c we note that many of the claimed expenses were clearly personal as opposed to business_expenses these included travel_expenses paid for with petitioner’s versata inc credit card for a stay at the oakland marriott while her house was being restored after experiencing water damage caused by a leaky roof expenses associated with a tennis club membership expenses for the rental of other business property for a studio that her brother jon tomlinson leased in date travel_expenses for four rooms at the dayton marriott for petitioner’s family to attend an event featuring petitioner’s brother jon’s art and expenses for the entire cost of petitioner’s health life disability homeowner’s and automobile insurance many other claimed expenses were unsubstantiated petitioner also testified that she was unsure whether any of the expenses claimed on the schedule c relate to temps to go expenses amount other expense sec_1dollar_figure meals and entertainment big_number travel legal and professional services car and truck expenses total big_number other expenditures are enumerated on petitioner’s return as follows expenses amount club memberships dollar_figure copyright registration big_number dues and subscriptions framing membership fee sec_175 parking photography postage big_number professional development big_number storage fees subscriptions and publication sec_199 telephone big_number total big_number on brief respondent disputes the entire dollar_figure of claimed schedule c expenses for sec_6214 provides that this court shall have jurisdiction to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount determined by the commissioner in the notice_of_deficiency if the commissioner asserts a claim at or before the hearing or rehearing consistent with the general mandate of sec_6214 this court generally will exercise its jurisdiction over an increased deficiency only where the matter is properly pleaded see 81_tc_260 affd 738_f2d_67 2d cir see also 64_tc_989 because respondent failed to plead an increase in the disallowance of petitioner’s schedule c deductions for we consider the only amount of schedule c deductions in dispute to be dollar_figure petitioner testified that gotta get up productions is a greeting card stationery and gift item business petitioner described gotta get up productions as a family business involving the prospective sale of artwork created by her brother jon tomlinson petitioner testified that she took over gotta get up productions in march or april of and that in what i had to do was identify our product offerings develop prototypes select paper figure out which offerings were going to be introduced and how they were going to be introduced to the general_public petitioner added that gotta get up productions did not open its doors until petitioner did not earn any income from gotta get up productions in when asked at trial whether the expenses she incurred in were start-up expenses petitioner replied that they were the cost of starting a business yes gotta get up productions was not incorporated during and had no paid employees in petitioner testified that the people who assisted her received no wages because they hadn’t sold anything and didn’t have anything from which they could receive any money petitioner failed to provide evidence indicating that temps to go existed as an active trade_or_business in while petitioner may have intended to create a greeting card business petitioner’s evidence indicates that her activities during were related to an attempt to start a business thus for the same reasons that we upheld respondent’s disallowance of petitioner’s schedule c expenses for we sustain respondent’s disallowance of petitioner’s schedule c deductions as determined in the notice_of_deficiency sec_6651 addition_to_tax sec_6651 imposes an addition_to_tax for failure_to_file a timely return the addition equal sec_5 percent of the amount required to be shown on the return for each month or fraction thereof that the return is late not to exceed percent sec_6651 respondent bears the burden of production with respect to the addition_to_tax sec_7491 116_tc_438 to meet his burden of production respondent must come forward with sufficient evidence indicating it is appropriate to impose the addition_to_tax see higbee v commissioner supra once respondent meets his burden of production petitioner bears the burden of proving he is not as in many of petitioner’s claimed expenses in appear to be personal in nature many other claimed expenses lack the required substantiation liable for the addition_to_tax see id pincite petitioner’s income_tax return was due on date but was not filed until date we find that respondent has met his burden of production a failure_to_file a tax_return on the date prescribed leads to a mandatory penalty unless the taxpayer shows that such failure was due to reasonable_cause and not due to willful neglect 114_f3d_366 2d cir affg tcmemo_1995_547 a showing of reasonable_cause requires taxpayers to demonstrate they exercised ordinary business care and prudence but were nevertheless unable to file the return within the prescribed time 469_us_241 sec_301_6651-1 proced admin regs generally factors that constitute reasonable_cause include unavoidable postal delays death or serious illness of the taxpayer or a member of his immediate_family or reliance on the mistaken legal opinion of a competent tax adviser lawyer or accountant that it was not necessary to file a return mcmahan v commissioner supra pincite petitioner contends that she had reasonable_cause for filing late and that the late filing of her return is because of her responsibility to care for her brother after he was released from the hospital in date petitioner argues that it took more than months to secure reliable caregivers and that her primary focus was overseeing her brother’s caregiver needs and starting a new business venture we accept petitioner’s testimony that she became responsible for her brother after he was released from the hospital in however petitioner testified that she found the time to try to start a new greeting card venture and also found caregivers for her brother by date months before the extended due_date of the tax_return and more than months before it was actually fileddollar_figure we conclude that petitioner failed to demonstrate that her failure_to_file timely a return was because of reasonable_cause and not willful neglect see sec_301_6651-1 proced admin regs accordingly petitioner is liable for the addition_to_tax under sec_6651 for to reflect the foregoing decisions will be entered under rule we note that respondent did not determine a sec_6651 addition_to_tax with regard to petitioner’s late filing of her return