department of the treasury internal_revenue_service washington d c date number release date cc ebeo fs br uilc internal_revenue_service national_office field_service_advice memorandum for district_counsel illinois district from subject michael j roach chief branch office of associate chief_counsel ebeo cc ebeo br7 this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend tp1 tp2 fund a local b group c date date date date x issue whether contributions to fund a by tp2 a subchapter_s_corporation wholly- owned by tp1 fall within the sec_419a exception to the account limit rules of sec_419a of the code facts tp1 owns tp2 a subchapter_s_corporation which apparently sold all of the assets comprising its principal line_of_business in date resulting in a large gain for tax purposes tp1 claims that tp2 engaged in the business of being a sales representative after the sale of the assets although not entirely clear it appears that tp1 caused himself and two of his children to join local b undated but signed union cards for tp1 and his two children were included with the incoming submission on or about date tp1 caused tp2 to become a member of group c a master employers group that collectively bargained with local b also on or about date tp1 as president of tp2 signed a subscription agreement in which tp2 agreed to make certain contributions to fund a a tax- exempt entity under sec_501 of the code for the purpose of providing medical_care health and hospitalization_insurance and other_benefits to its employees and eligible dependents of employees although the subscription agreement indicates that the amount of contributions benefits and other information about fund a is included in the attachment to the subscription agreement that information is not included in the attachment the benefits provided by fund a appear to include life_insurance benefits in date tp2 contributed dollar_figurex to fund a and claimed a deduction in this amount indicating that this contribution was deductible under sec_419 and sec_419a of the code because this deduction was claimed on a subchapter_s return it ultimately flowed through to tp1’s personal income_tax return on date a notice_of_deficiency was mailed to tp1 denying the flow-through loss of dollar_figurex from tp2 law and analysis sec_419 of the code provides that contributions paid_or_accrued by an employer to a welfare_benefit_fund are deductible for the taxable_year paid subject this date may be inaccurate based on information in the written protest letter which indicates that the sale of assets occurred in date rather than date to the limitation contained in sec_419 and provided the contributions would otherwise be deductible sec_419 of the code limits the amount of the deduction allowable under sec_419 to the welfare_benefit fund’s qualified_cost for the taxable_year sec_419 of the code defines qualified_cost as the sum of the qualified_direct_cost for the taxable_year and any addition to a qualified_asset_account subject_to the limitation of sec_419a qualified_cost is reduced by the welfare_benefit fund’s after-tax_income for the taxable_year according to sec_419 of the code the qualified_direct_cost of a welfare_benefit_fund for any taxable_year of the fund is the aggregate amount including administrative expenses that would have been allowable as a deduction to the employer for benefits provided by the fund during the year if the benefits were provided directly by the employer and the employer used the cash_receipts_and_disbursements_method of accounting sec_419a defines a qualified_asset_account as any account consisting of assets set_aside to provide for the payment of disability benefits medical benefits sub or severance_pay benefits or life_insurance benefits sec_419a provides that no addition to a qualified_asset_account may be taken into account under sec_419 to the extent that the addition results in the amount of the qualified_asset_account exceeding the account limit under sec_419a the account limit for any qualified_asset_account for any taxable_year is generally the amounts reasonably and actuarially necessary to fund the claims incurred but unpaid as of the close of the taxable_year for the above benefits and the administrative costs of such claims sec_419a permits an additional reserve for post-retirement medical and life_insurance benefits if certain requirements are met sec_419a of the code provides an exception from the account limit rules for collectively bargained plans under sec_419a no account limits apply in the case of any qualified_asset_account under a separate welfare_benefit_fund under a collective bargaining agreement sec_1_419a-2t q a-2 of the income_tax regulations explains that a welfare_benefit_fund is considered to be maintained pursuant to a collective bargaining agreement only if the benefits provided through the fund were the subject of arms-length negotiations between employee_representatives and one or more employers and if such agreement between employee_representatives and one or more employers satisfies sec_7701 of the code moreover the circumstances surrounding a collective bargaining agreement must evidence good_faith bargaining between adverse parties over the welfare benefits to be provided through the fund under sec_1_419a-2t q a-2 of the regulations in the case of a collectively bargained welfare_benefit_fund only the portion of the fund as determined under allocation rules to be provided by the commissioner attributable to employees covered by a collective bargaining agreement and from which benefits for such employees are provided is considered to be maintained pursuant to a collective bargaining agreement case development hazards and other considerations if you have any further questions please call the branch telephone number michael j roach chief branch office of associate chief_counsel ebeo


internal_revenue_service national_office technical_advice_memorandum number release date index uil no case mis no tam-107591-99 cc dom corp b1 date attention taxpayer’s name taxpayer’s address taxpayer’s identification no years involved legend taxpayer subsidiary company date date date date date date 6_month month date date date date date year year a b c d e f g h i j k l m n o p q r s issue whether the end result test under the step_transaction_doctrine is an appropriate test to determine whether to treat cash distributions from a wholly owned subsidiary_corporation subsidiary to its parent_corporation taxpayer of dollar_figuree dollar_figurej and dollar_figured as taxable dollar_figureboot in a transaction conclusion the end result test is an appropriate test to determine whether to treat the cash distributions of dollar_figuree dollar_figurej and dollar_figured as taxable dollar_figureboot in a transaction facts background on date as part of a restructuring taxpayer parent_corporation of an affiliated_group_of_corporations established company as a division of taxpayer on date subsidiary a subsidiary of taxpayer was incorporated as a shell corporation and a shares of voting common_stock were issued to taxpayer on date taxpayer and subsidiary entered into a dollar_figureconveyance agreement in which taxpayer agreed to transfer the assets and liabilities of company to subsidiary in exchange for an additional a shares of subsidiary stock on date taxpayer unconditionally transferred the assets and liabilities of company to subsidiary on date the board_of directors approved the issuance of a shares of subsidiary stock in consideration for taxpayer’s transfer of the company assets and liabilities to subsidiary and a dividend to taxpayer of b shares of subsidiary stock also on this date taxpayer issued a press release announcing that i taxpayer would sell c of its stock in subsidiary pursuant to an initial_public_offering dollar_figureipo ii subsidiary would take out a dollar_figured loan and iii subsidiary would distribute the loan proceeds to taxpayer in a dollar_figurespecial distribution if the offering proceeded within the next three-month period subsidiary made several distributions to taxpayer which includes the three cash distributions at issue in this case on date subsidiary distributed dollar_figuree to taxpayer during month taxpayer released press reports and documents filed with the securities_and_exchange_commission dollar_figuresec regarding the public offering of subsidiary stock which stated that i taxpayer intended to contribute dollar_figuref to subsidiary s capital ii subsidiary intended to distribute to taxpayer all available cash at the end of month and iii subsidiary intended to distribute to taxpayer just prior to the planned ipo an amount equal to its net_cash_flow from the end of month to the consummation date of the ipo on date subsidiary filed a restated certificate of incorporation under which the authorized common_stock of subsidiary was increased from a shares to g shares immediately thereafter subsidiary issued h additional shares of stock to taxpayer as authorized on date as a result taxpayer owned a total of i shares of subsidiary’s issued and outstanding common_stock on date subsidiary entered into a credit agreement with a third party bank to borrow dollar_figured the dollar_figured of revolving credit facility was intended to finance the dollar_figured special distribution announced on date on date subsidiary paid a dividend to taxpayer in the amount of dollar_figurej which was equal to all available cash at the end of month on date subsidiary distributed the dollar_figured special distribution to taxpayer on date taxpayer completed the ipo of k shares of stock it held in subsidiary the net price per share of the ipo proceeds received by taxpayer totaled dollar_figurel as a result taxpayer’s ownership of subsidiary stock dropped from m to less than c in its year federal tax_return taxpayer reported dividends of dollar_figuren as a result of the month and month distributions from subsidiary additionally as a result of regular cash distributions taxpayer reported another dollar_figureo in distributions from subsidiary because subsidiary had dollar_figurep in earnings_and_profits during year these distributions including the regular distributions were dividends that were eliminated pursuant to former sec_1 f the distributions did not create an excess_loss_account in subsidiary in its year federal tax_return taxpayer made an election under sec_1_1502-76 to treat subsidiary as not having been a member of the taxpayer consolidated_group for the year taxable_year as a result of this election taxpayer reported that of the total dollar_figured special distribution dollar_figureq the portion attributable to subsidiary s year earnings was eligible for the dividends received deduction under of the code the amount of dollar_figurer was characterized as a return_of_capital and offset taxpayer’s basis in its subsidiary stock under c the remaining amount of dollar_figures was reported as capital_gain under c finally taxpayer reported the entire net_proceeds of dollar_figurel received in the ipo as taxable capital_gain because of full basis recovery as result of the dollar_figured special distribution agent’s position the internal revenue_agent takes the position that the transfer of taxpayer’s company assets to subsidiary and the cash distributions from subsidiary to taxpayer were part of an integrated transaction in which the cash distributions should be treated as taxable boot under b in making this determination the agent applies the dollar_figureend result test under the step_transaction_doctrine taxpayer’s position taxpayer contends that the cash distributions should not be integrated with the transfer of the taxpayer s company assets to subsidiary and therefore the cash distribution should not be treated as taxable dollar_figureboot under taxpayer maintains that dollar_figurebinding commitment is the only appropriate test under the step_transaction_doctrine for determining whether the cash distributions by subsidiary to taxpayer should be integrated with taxpayer s transfer of the company assets to subsidiary discussion sec_351 provides that no gain_or_loss shall be recognized if property is transferred to a corporation by one or more persons dollar_figuresolely in exchange for stock_or_securities in such corporation if immediately_after_the_exchange such person or persons are in control of the corporation as defined in c sec_351 of the code provides that if a would apply to an exchange but for the fact that there is received in addition to the stock_or_securities permitted to be received under a other_property or money dollar_figureboot then gain if any to such recipient shall be recognized to the extent of the other_property or money received and no loss to such recipient shall be recognized sec_368 of the code defines the term dollar_figurecontrol to mean the ownership of stock possessing at least of the total combined voting power of all classes of stock entitled to vote and at least of the total number of shares of all other classes of stock of the corporation under the judicially developed step_transaction_doctrine a series of formally separate steps may be collapsed and treated as if they constituted a single integrated transaction the courts have applied three tests to determine if the step_transaction_doctrine should apply the dollar_figurebinding commitment test the dollar_figuremutual interdependence test and the dollar_figureend result test under the binding_commitment_test a series of formally separate transactions will be stepped together or collapsed if when the first step is taken there is a binding commitment to take the later steps 391_us_83 under the mutual_interdependence_test a series of formally separate transactions will be stepped together or collapsed if they dollar_figureare so interdependent that the legal relations created by one transaction would be fruitless without a completion of the series see eg 11_tc_397 aff’d 177_f2d_513 3d cir finally under the end result test a series of formally separate transactions will be stepped together or collapsed if they appear to be dollar_figurereally arranged parts of a single transaction intended from the outset to reach the ultimate result 88_tc_1415 the agent has not argued that taxpayer s transfer of company assets to subsidiary should be integrated with subsidiary s subsequent cash distributions to taxpayer under the binding_commitment_test the information submitted shows no indication that there existed a binding agreement for subsidiary to make the subsequent cash distributions to taxpayer the agent also has not argued that taxpayer s transfer of company assets to subsidiary should be integrated with subsidiary s subsequent cash distributions to taxpayer under the mutual_interdependence_test the information submitted indicates that taxpayer unconditionally transferred company assets to subsidiary pursuant to the conveyance agreement the transfer of company assets to subsidiary combined with subsidiary s stock_dividend of b shares enabled taxpayer to complete the ipo of k shares of subsidiary stock in exchange for dollar_figurel the ipo permitted taxpayer to accelerate its receipt of a portion of subsidiary s expected future cash_flow so that taxpayer could expand its repurchase programs of its own stock repurchase a portion of subsidiary stock sold in the ipo and increase taxpayer s immediate financial capacity to pursue investment opportunities in addition taxpayer s transfer of company assets to subsidiary limited the exposure of taxpayer to potential liabilities arising out of the business involving company assets also the transfer allowed subsidiary to utilize an accounting system more compatible with subsidiary s business in order to maximize earnings and return on investment thus taxpayer s transfer of company assets to subsidiary served an economic purpose apart from the subsequent cash distributions however we reject taxpayer s contention that the binding_commitment_test is the only appropriate test for determining whether the cash distributions by subsidiary to taxpayer should be integrated with taxpayer s transfer of the company assets to subsidiary taxpayer cites 65_tc_1025 in support of its position in intemountain lumber the taxpayer incorporated and transferred assets to a newly formed corporation in exchange for stock the taxpayer executed a binding contract providing for the sale of of the shares of stock and the grant of an irrevocable proxy to vote the shares to a third party over a five year period intermountain lumber is distinguishable from the facts in the instant case in intermountain lumber an individual shareholder contracted to sell stock to an outside third party but here not only is there no contractual commitment to sell subsidiary stock but taxpayer is the sole shareholder dealing with its wholly owned corporation further the court s holding in intermountain lumber concerned the dollar_figurecontrol immediately after test under in the instant case the dollar_figurecontrol test is not at issue the facts of the instant case are similar to those in makover v commissioner 26_tcm_288 in which the court tested whether to apply the step_transaction_doctrine under both the mutual_interdependence_test and the end result test in makover a partnership transferor transferred its business_assets to a newly formed corporation in exchange for all of its stock and at the same time loaned the corporation dollar_figure in cash in exchange for a demand note the issue was whether the incorporation should be treated as a transfer of assets and cash in exchange for stock and the demand note so that the transfer of the demand note would be treated as taxable dollar_figureboot in a transaction with respect to the mutual_interdependence_test the court found that the corporation could have borrowed whatever funds it needed from outside third parties and that the transfer of the partnership business to the corporation could have been accomplished without the transfer of the cash with respect to the end result test the court held that the note did not constitute dollar_figureother property under b because the transfer of the cash from the transferor to the corporation was not part of the plan for incorporating the partnership s business thus while the court declined to apply either the mutual_interdependence_test or the end result test the court s analysis supported the position that both are appropriate tests to determine whether to integrate taxpayer s transfer of company assets to subsidiary with subsidiary s subsequent cash distributions to taxpayer in the instant case the agent argues that the transfer of company assets to subsidiary and subsidiary s subsequent cash distributions should be integrated based upon month public announcements of the pending transactions which were consummated as described and the month sec filings which provided details of the ipo the dollar_figured loan and the distribution of those proceeds as one of the cash distributions the end result test as applied by the courts and the service examines the parties intent at the beginning of the transaction as to what the end result will be at a future date see 14_tc_757 54_tc_600 requires that the intent necessary to support the end result test is the parties dollar_figureactual intent and not their dollar_figureconstructive or dollar_figurehypothetical intent in the instant case the end result test requires an examination of whether taxpayer actually intended on date when taxpayer transferred company assets to subsidiary that subsidiary would make the subsequent cash distributions to taxpayer a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


internal_revenue_service department of the treasury uil no washington dc number release date person to contact telephone number refer reply to cc ebeo - plr-113003-98 date date dear sir or madam this is in response to your letter dated date regarding your church’s application_for exemption from the payment of employer social_security_taxes you were denied the exemption because you did not timely file form_8274 certification by churches and qualified church-controlled organizations electing exemption from employer social_security_taxes the law setting forth the filing of elections for tax exemption was enacted by congress and there are no statutory provisions to permit an exception for any reason if the due_date is missed while we can sympathize with your situation we have no authority to extend the period for filing the form_8274 or to grant an exception to the timely filling requirement imposed by the law accordingly you should continue to file form_941 in accordance with sec_31 a of the employment_tax regulations we regret that we cannot be more helpful to you in this matter sincerely harry beker chief branch office of the associate chief_counsel employee_benefits and exempt_organizations


internal_revenue_service number release date index number ------------------------------------- ------------------------------- -------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------ telephone number --------------------- refer reply to cc psi plr-125539-08 date date legend legend x --------------------------------------------------- ---------------------------------- date -------------------------- trust -------------------------------------------- --------------------------------------------------- dear ------------ this responds to a letter dated date submitted on behalf of x by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the code x made an election to be treated as an s_corporation x’s election was inadvertently terminated effective date because x’s stock was held by trust and the trustee of trust failed to make a valid electing_small_business_trust esbt election trust is represented as being eligible to be an esbt effective date also x represents that the termination was not motivated by tax_avoidance or retroactive tax planning x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to plr-125539-08 acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we conclude that the termination of x’s s_corporation_election on date was inadvertent within the meaning of sec_1362 pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from date and thereafter provided x’s s_corporation_election was valid and provided that the election was not otherwise terminated under sec_1362 trust will be treated as an esbt from date provided that trust is otherwise eligible to be an esbt until its esbt status terminates this ruling is conditioned upon the trustee of trust filing a properly completed esbt election effective date with the appropriate service_center within days following the date of this letter and upon trust filing any initial or amended returns that are necessary to comply with this ruling within days following the date of this letter a copy of this letter should be attached to the esbt election and any relevant initial or amended_return if trust does not comply with these conditions this letter is null and void except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s authorized representative sincerely bradford r poston senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc intl br1-plr-117970-98 date date a ty country b year year year date c this is in response to a letter dated date from your authorized representative requesting a ruling under sec_877 of the internal_revenue_code_of_1986 code that your loss of permanent resident status expatriation did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code additional information was submitted in a letter dated date the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by penalty of perjury statements 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 a was born in country b in year in year a was transferred by his employer to the united_states and obtained his green card soon thereafter in year a was transferred back to country b a surrendered his green card on date c on the date of a’s expatriation his net_worth exceeded the amount set forth in sec_877 sec_877 generally provides that a citizen who loses u s citizenship or a u s long-term_resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the plr-117970-98 taxable_year will be subject_to the special rules of sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2107 and sec_2501 provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former u s citizen or former u s long-term_resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 if the individual’s average income_tax_liability or the individual’s net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 a former u s citizen whose net_worth or average tax_liability exceeds these thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary’s determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 under notice_98_34 1998_27_irb_30 modifying notice_97_19 1997_1_cb_394 a former long-term_resident whose net_worth or average tax_liability exceeds the applicable thresholds will not be presumed to have a principal purpose of tax_avoidance if that former resident is described within certain categories and submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes notice_98_34 requires that certain information be submitted with a request for a ruling that an individual's expatriation did not have for one of its principal purposes the avoidance of u s taxes a is eligible to request a ruling pursuant to notice_98_34 because he is a resident and fully liable to tax on his worldwide income in country b the country in which he was born a submitted all of the information required to be submitted by notice_97_19 as modified by notice_98_34 including additional information requested by the service after review of the submission accordingly based solely on the information submitted and the representations made it is held that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 therefore a will not be presumed under sec_877 to have as one of his principal purposes for expatriating the avoidance of u s taxes it is further held that a will not be treated under sec_877 as having as one of his principal purposes for expatriating the avoidance of u s taxes plr-117970-98 because the information submitted clearly establishes the lack of a principal purpose to avoid taxes under subtitle a or b of the code except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition no opinion is expressed as to a’s u s tax_liability for the taxable years prior to or after his expatriation under sections of the code other than sec_877 sec_2107 and sec_2501 a copy of this letter must be attached to a’s u s income_tax return for the year in which a obtained the ruling whether or not a is otherwise required to file a return this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative senior technical reviewer sincerely yours w edward williams cc intl br1 cc


number release date id office uilc cca_2010112210185244 ---------------------------- from --------------------- sent monday date am to ------------------------ cc subject re question ------ the irs may not assess a tax_liability after the assessment statute_of_limitations expires for assessing that tax_liability the irs and a taxpayer cannot agree to extend an already expired limitations_period in certain circumstances a taxpayer can voluntarily pay an unassessed tax_liability to satisfy this unassessed tax_liability but that does not involve the irs assessing a barred year _____________________________________________


internal_revenue_service department of the treasury index number washington dc - person to contact telephone number refer reply to cc intl br 4-plr-119978-98 date feb i999 taxpayer u sec_1 u sec_2 f1 f2 f3 f4 fs f6 f7 we - om plr-119978-98 f8 state a state b country c country d country e country f country g product aa business bb business cc date h date date j date k date l dear t i this responds to your letter dated date requesting a ruling as to the federal_income_tax consequences of transactions under sec_367 of the interna revenue code and temporary treasury regulation treas reg sec_1_367_a_-3t the information submitted for consideration is summarized below 199921ic5 plr-119978-98 - the ruling contained in this letter is predicated upon the facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as part of the audit process taxpayer is a domestic_corporation organized under the laws of state a taxpayer and its affiliates domestic and foreign are engaged in the development manufacture sale and service of product aa taxpayer owns all the stock of u sec_1 and u sec_2 domestic corporations organized under the laws of state b u sec_1 and u sec_2 are included in taxpayer's consolidated federal tax_return u sec_1 owns all the stock of f1 a corporation organized under the laws of country c and all the stock of f2 a corporation organized under the laws of country d f2 owns all of the stock of f3 a corporation organized under the laws of country d f3 owns all of the stock of f4 another corporation organized under the laws of country d taxpayer owned all the stock of f5 a country e corporation on date h taxpayer transferred all except for a nominal interest of f5's common_stock to u sec_1 on date j taxpayer also transferred all of f5's preferred_stock to u sec_1 on date u sec_1 transferred the f5 common_stock to f6 a country e corporation wholly owned by u sec_1 and entered into a 10-year gain_recognition_agreement with respect to that transfer under notice_87_85 and sec_1_367_a_-3t g on date j u sec_1 transferred all of f5's preferred_stock to f7 a country f corporation wholly owned by u sec_1 f7 then immediately transferred the f5 stock to f8 a country g corporation owned entirely by f7 except for a nominal interest held by u sec_1 u sec_1 entered into a 10-year gain_recognition_agreement with respect to its transfer of f5 preferred_stock to f7 pursuant to notice_87_85 and sec_1_367_a_-3t g under the gain_recognition_agreement u sec_1 warranted with respect to f7's transfer of f5 preferred_stock to f8 that u sec_1 will be informed of any disposition of fs stock by f8 and will recognize the appropriate amount of gain realized on the initial transfer of f5 stock to f7 f5 had five business divisions and sold two divisions business bb and business cc to other affiliates within taxpayer's affiliated_group f5 sold all of the assets of business bb to f4 effective on date k for cash and notes f5 also sold all of the assets of business cc to u sec_2 and f1 effective on date l for cash and notes u sec_1's transfer of f5 common to f6 and f5 preferred_stock to f7 occurred prior to date the effective date of final regulations governing the transfer of foreign plr-119978-98 stock under sec_367 thus such transfers of foreign stock are subject_to the rules of sec_1_367_a_-3t and notice_87_85 see sec_1 -367 a -3 g under the final regulations of sec_1_367_a_-3 there is an election to apply provisions of fhe final regulations to transfers occurring before date if certain conditions are met the effect of the election would be to reduce the term of year gain recognition agreements entered into before the date effective date to a term of 5-years which in this case would cause u sec_1's gain recognition agreerments with respect to f5 stock to expire see sec_1_367_a_-3 the terms of the election also provide that the provisions of sec_1_367_a_-3t g will apply and for this purpose the term substantial portion under sec_1_367_a_-3t g iii will be interpreted to mean substantially_all as defined in sec_368 the election applies however only to the extent that a gain_recognition_agreement has not been triggered prior to date in this case f5's sale of business bb and business cc assets occurred before date and constituted potential triggering events under u sec_1's gain recognition agreements with respect to f5 stock if a gain_recognition_agreement under the temporary regulations is currently in effect with respect to the transfer of foreign stock sec_1_367_a_-3t g iii provides that a disposition by the transferred corporation f5 of all or a substantial portion of its assets outside the ordinary course of business will cause the u s transferor u sec_1 to recognize a proportionate amount of gain realized but not recognized on the initial transfer taxpayer is considering making an election under sec_1_367_a_-3 and requests a ruling that f5's disposition of business bb and business cc assets did not trigger the recognition of gain under the gain recognition agreements entered into with respect to f5 stock based solely on the information submitted and on the representations set forth herein it is held as follows no gain will be recognized under the date and date j gain recognition agreements entered with respect to the transfers of f5 stock to f6 and f7 if the business bb and business cc assets disposed by f5 do not constitute a substantial portion of the assets of f5 under sec_1_367_a_-3t g iii a disposition of a substantial portion of f5's assets for these purposes means a disposition by f5 of substantially_all within the meaning of sec_368 of its assets no opinion is expressed about the tax treatment of the proposed transactions under any other provisions of the code or the regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transactions that are not specifically covered by the above ruling plr-119978-98 this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that this ruling may not be used or cited as precedent a copy of this letter and the substitute gain_recognition_agreement as described above should be attached to the federal_income_tax retum of the taxpayers involved for the taxable years in which any of the transactions that are the subject of this ruling are consummated sincerely charles p besecky seed chief branch office of associate chief_counsel international


internal_revenue_service number release date index numbers ----------------------------------------- ------------------------------------------------------------ --------- ------------------------------------ ------------------------------------- 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 b03 plr-145903-13 date may legend x y ------------------------------------------------------------------------------------------------ ------------------------- ------------------------------------------------------------------------------------------------ --------------------------- country ------ date ------------------------ dear -------------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to treat x as a disregarded_entity for federal tax purposes facts x was formed under the laws of country and has been wholly owned by y since date x represents that it is a foreign_entity eligible to elect to be classified as a disregarded_entity for federal tax purposes x intended to be classified as a disregarded_entity effective date however due to inadvertence x failed to timely file form_8832 entity classification election law and analysis plr-145903-13 sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301 b unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301 c i will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government plr-145903-13 conclusion based solely on the information submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 as a result x is granted an extension of time of days from the date of this letter to file a properly executed form_8832 with the appropriate service_center electing to be treated as a disregarded_entity effective date a copy of this letter should be attached to the form_8832 this ruling is contingent on the owner of x filing within days of this letter all required federal_income_tax returns and information returns including amended returns consistent with the requested relief being effective date these returns must include but are not limited to form_8858 information_return of u s persons with respect to foreign disregarded entities such that the form reflects the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition sec_301_9100-1 provides that the granting of an extension of time for making an election is not a determination that the taxpayer is otherwise eligible to make the election this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representatives plr-145903-13 the ruling contained in this letter is 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 ruling_request it is subject_to verification on examination sincerely associate chief_counsel passthroughs special industries by ________________________________________ mary beth carchia senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number ------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------ -------------------------------------- ---------------------------------- department of the treasury washington dc person to contact ---------------- id no ---- -------- telephone number --------------------- refer reply to cc ita plr-148671-06 date december ----------------------------------------------------------------------------------------- legend taxpayer ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------- -------------------------------------------------- former adviser ----------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------ ------------------------------------------ former affiliate --------------------------------------------------------------------------- ------------------------------------------ transfer agent ----------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- ------------------------------------------ transfer agent -------------------------------------------------------------- ------------------------------------------ distribution plans -------------------------------------------------------------------- order ----------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ ---------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ -------------------------- plr-148671-06 -- --------------- ------------------ ----------------- ----------------- --------------- ----------------- ----------------- ----------------- --------------- ------------------------- -------------------------- ----------------- ---------------------- ---------------------- -------------------------- x dollar_figurea dollar_figureb dollar_figurec dollar_figured dollar_figuree dollar_figuref dollar_figureg dollar_figureh month day date date date date date date dear ------------- this letter responds to a ruling_request submitted on behalf of taxpayer by a letter dated date and supplemented by correspondence dated date date date date date date and date the ruling_request relates to the tax treatment of the amounts received pursuant to the distribution plans facts taxpayer is registered as an open-end management investment_company under the investment_company act of u s c sec_80a-1 et seq as amended the act taxpayer is classified as a domestic_corporation for federal_income_tax purposes and has elected to be treated as a regulated_investment_company ric under sec_851 of the internal_revenue_code the code taxpayer uses the accrual_method of accounting and files its federal_income_tax returns on the basis of a fiscal_year ending on month day taxpayer invests primarily in common stocks of companies and other equity securities at the close of each of taxpayer’s taxable years ending prior to the date of this letter_ruling more than of the value as defined in sec_851 of the code of taxpayer’s total assets did not consist of stock_or_securities in foreign_corporations taxpayer represents that at the close of each taxable_year that ends after the date of this letter_ruling and during which it receives an amount pursuant to the distribution plans more than of the value as plr-148671-06 defined in sec_851 of its assets will not consist of stock_or_securities in foreign_corporations accordingly during that time period taxpayer will not be eligible to make an election under sec_853 relating to foreign tax_credits allowed to shareholders taxpayer has x classes of shares that represent interests in the same portfolio of securities but have different arrangements for shareholder services and the distribution of shares taxpayer represents that these arrangements satisfy the requirements of rule 18f-3 of the act and that the classes of shares constitute qualified groups of shares within the meaning of revproc_99_40 1999_2_cb_565 under these arrangements each class of shares is specially allocated the fees and expenses associated with shareholder servicing and distribution of shares of that class each class of shares also is specially allocated certain other fees and expenses such as transfer agency fees on the basis of amounts actually incurred by that class investment advisory fees and custodial fees are not specially allocated among the classes but rather are allocated based on the relative net asset value of each class of shares former adviser is registered with the sec as an investment adviser and served as such to taxpayer and other rics collectively the funds and individually a fund during the period covered by the order former affiliate is an affiliate of former adviser and is registered with the sec as an investment adviser and broker-dealer transfer agent initially provided transfer agency services directly to the funds the funds’ business was highly profitable to transfer agent during this initial period as a result of a favorable fee schedule and the relatively low cost of servicing the funds the order finds that former adviser in the course of a review of transfer agent options recommended to the funds’ boards of directors that transfer agent be replaced with transfer agent an affiliate of former adviser who would undertake to provide transfer agency services to the funds more economically the boards of directors of the funds adopted this recommendation transfer agent then subcontracted with transfer agent to perform substantially the same work it had previously performed but at a significant discount from the fees it had previously charged the funds transfer agent provided a customer service call center and provided oversight and quality control_over the work of transfer agent the order further finds that while offering the funds a limited fee reduction through the institution of fee caps former adviser retained the majority of the savings it had negotiated with transfer agent the order therefore finds that transfer agent earned net fees far in excess of costs for the period covered by the order the order further finds that former adviser and former affiliate willfully violated certain provisions of the investment advisers act of u s c sec_80b-1 et seq as amended the advisers act by failing to disclose to the boards of directors of the plr-148671-06 funds when proposing the new transfer agency arrangement with its affiliate transfer agent that transfer agent had offered to continue as transfer agent at a substantially lower fee also undisclosed to the boards of directors was a side letter entered into between former adviser former affiliate and transfer agent under which former adviser agreed to recommend the appointment of transfer agent as sub-transfer agent to transfer agent in exchange for a guarantee by transfer agent of specified amounts of asset management and investment banking fees to former adviser and former affiliate respectively and the fact that transfer agent would earn a large profit while performing only limited functions while transfer agent continued to perform substantially_all transfer agency functions although former adviser and former affiliate did not admit or deny any wrongdoing or liability the order provides for the imposition of sanctions on former adviser and former affiliate including the payment to the funds of certain escrowed transfer agency fees under the terms of the order transfer agent was required to escrow all transfer agency fees received from the funds throughout the remaining term of its contracts less any payments made to sub-transfer agents and actual operational costs and expenses from these escrowed amounts former adviser and former affiliate were required to make distributions to the funds in amounts equal to the difference between the amounts actually paid_by the funds for transfer agency services and the amounts that the funds would have paid under the new transfer agency contract had the new contract been in effect during the escrow period the escrow arrangement covered transfer agency fees for the period from date through date the amount of dollar_figurea was deposited into escrow and placed in certain investments distributions were made to the funds on a class by class basis that is by treating each class of shares in a fund entitled to share in the escrowed amounts as a separate fund and separately determining the distributable_amount for each class distributions were made on date and date disgorgement prejudgment_interest and civil money penalties the order requires former adviser and former affiliate to pay disgorgement in the amount of dollar_figureb plus prejudgment_interest of dollar_figurec credited against the total amount of required disgorgement were previous payments totaling dollar_figured which represents the amount generated under the revenue guarantee in the side letter dollar_figuree was credited against prejudgment_interest of dollar_figurec the remaining dollar_figuref of disgorgement which relates to profits earned by transfer agent from the funds between date and date plus prejudgment_interest of dollar_figureg was required to be paid to the united_states treasury additionally former adviser was required to pay civil money penalties of dollar_figureh to the united_states treasury former adviser and former affiliate agreed that in any related investor action they would not benefit from any offset or reduction of any investor’s claim by the amount of any fair fund distribution to such investor that is proportionately attributable to the civil penalty the order additionally requires former adviser and former affiliate to pay plr-148671-06 the order provides that a fair fund be established pursuant to section a of the sarbanes-oxley_act of pub_l_no for the amounts paid_by former adviser and former affiliate the disgorgement prejudgment_interest and civil money penalty amounts were paid to the sec and transferred to the fair fund established under the terms of the order upon the sec’s approval of the proposed distribution plan the amounts in the fair fund will be returned to former adviser and former affiliate for distribution in accordance with the plan interest and penalties as well as earnings on the foregoing awaits sec approval as presently proposed distributions will be made to the funds on a class by class basis that is by treating each class of shares in a fund entitled to share in the distributed amounts as a separate fund and separately determining the distributable_amount for each class year on its federal_income_tax returns for the years in which it incurred transfer agency fees paid to transfer agent taxpayer deducted these fees in computing icti the transfer agency fees deducted did not reduce net_capital_gain taxpayer distributes all of its investment_company_taxable_income icti each the proposed distribution plan for distribution of disgorgement prejudgment law and analysis with respect to the escrow arrangement the distributions made on date and date are recoveries of transfer agency fees incurred during the period from date through date to the extent they are a return of amounts held in escrow and the distributed earnings on those amounts are gross_income under sec_61 of the code the tax treatment of recoveries of transfer agency fees is discussed below with respect to the proposed distribution plan distributions attributable to the dollar_figuref are recoveries of transfer agency fees incurred during the period from date through date distributions attributable to amounts in excess of dollar_figuref - whether designated as prejudgment_interest penalty or some other amount - are gross_income under sec_61 issue - does taxpayer have gross_income from the recovery_of transfer agency fees incurred during prior years sec_61 of the code provides that except as otherwise provided gross_income means all income from whatever source derived the supreme court of the united_states has stated that gross_income includes any undeniable accessions to wealth clearly realized and over which the taxpayers have complete dominion 348_us_426 to the recovery during the taxable_year of any amount deducted in any prior taxable sec_111 provides that gross_income does not include income attributable plr-148671-06 year to the extent such amount did not reduce the amount of tax_imposed_by_chapter_1 of the code sec_162 provides the general_rule that there shall be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business generally the tax_benefit_rule requires a taxpayer who received a tax_benefit from a deduction in an earlier year to recognize income in a later year if there occurs an event that is fundamentally inconsistent with the premise on which the deduction was initially based the term tax_benefit_rule encompasses two concepts an inclusionary part and an exclusionary part the inclusionary part has been developed in the courts and requires a taxpayer to include a previously deducted amount in the current year’s income when a fundamentally_inconsistent_event has occurred the exclusionary part is currently codified at sec_111 and permits a taxpayer to exclude an amount that did not previously provide a tax_benefit when it was deducted the tax_benefit_rule allays some of the inflexibilities of the annual accounting system under specific circumstances hillsboro national bank v commissioner and united_states v bliss dairy inc 460_us_370 its purpose is to approximate the results produced by a tax system based on transactional rather than annual accounting id pincite the tax_benefit_rule will cancel out an earlier deduction when the later event is fundamentally inconsistent with the premise on which the deduction was initially based even if there is no actual recovery_of funds id pincite- one must consider the facts and circumstances of each case in light of the purpose and function of the provisions granting the deductions id pincite although it is usually helpful to determine whether the later event would have foreclosed the deduction if it had occurred within the same tax_year that inquiry is not an exclusive test see 267_f3d_1344 fed cir in earlier years taxpayer deducted the transfer agency fees incurred during those years accordingly to the extent a recovery is attributable to an amount deducted on a prior year’s income_tax return such amount would be income under the tax_benefit_rule and subject_to the provisions of sec_111 issue -- what is the character of the recovered transfer agency fees issue a -- should the taxable amounts be recharacterized with reference to the different types of income in the year of recovery revrul_92_56 1992_2_cb_153 holds that if in the normal course of its business a ric receives a reimbursement from its investment_advisor and the reimbursement is includible in the ric’s gross_income the reimbursement is qualifying plr-148671-06 income under sec_851 the revenue_ruling does not specifically discuss the characterization of such a reimbursement however the following section of the revenue_ruling which discusses the effect on other revenue rulings is relevant in revrul_64_247 1964_2_cb_179 a company recovered excess management fees from its investment manager the recovery was made as a result of legal action brought against the company's former officers and directors who had owned the investment manager in revrul_74_248 1974_1_cb_167 a company's former investment_advisor paid the company an amount the advisor had improperly received for assigning its advisory contract the payment was made pursuant to a settlement agreement that was reached after the company's shareholders filed a derivative action against the investment_advisor in both rulings the payments were includible in the company's gross_income the rulings held that the payments did not cause the companies to fail to meet the definition of ric contained in sec_851 of the code provided the companies in all other respects qualified for ric status for the taxable_year in question the rulings also held that for purposes of sec_854 relating to limitations applicable to dividends received from rics the payments should be allocated between interest and dividends in proportion to the interest and dividends derived by the company during the taxable_year in which the payments were includible in gross_income rev ruls and predate the amendment of sec_851 of the code which specifies that qualifying_income includes other income derived by a ric with respect to its business of investing in stock securities or foreign_currencies see section b and d tax_reform_act_of_1986 vol c b accordingly rev ruls and are obsolete to the extent they imply that the payments therein would not be qualifying_income under sec_851 rev ruls and are also obsolete to the extent they would treat the payments in part as dividend income under sec_854 emphasis added the full meaning of the emphasized language quoted above can be determined by reviewing the version of sec_854 that was in effect at the time rev ruls and were issued at that time sec_854 required that the aggregate_dividends_received by a ric during its taxable_year be less than of its gross_income excluding gain from the sale of stock_or_securities for a distribution of dividends to its individual shareholders to be eligible for any exclusion under former sec_116 and for a distribution of dividends to its corporate shareholders to be eligible for any deduction plr-148671-06 under sec_243 if such distributions were eligible the specific amount that qualified for exclusion or deduction was calculated by taking into account only that portion of the dividend that bears the same ratio to the amount of such dividend as the aggregate_dividends_received by the ric during its taxable_year bear to its gross_income for the taxable_year in rev ruls and the holding with respect to sec_854 resulted in the payment having no effect on whether dividends distributed to the ric’s individual shareholders qualified for any exclusion under former sec_116 or whether dividends distributed to corporate shareholders qualified for any deduction under sec_243 even though the ric’s gross_income was increased by the full amount of the payment the amount treated as aggregate_dividends_received by the ric during its taxable_year was increased by only a pro_rata portion of the payment as a result to the extent that the payment to the ric resulted in increased dividend distributions to its shareholders such increase was only partially eligible for the exclusion under former sec_116 and the deduction under sec_243 at the time revrul_92_56 was issued sec_854 of the code still limited the aggregate amount that could be designated as dividends to the aggregate_dividends_received by the ric for the taxable_year however the threshold requirement in old sec_854 which was discussed above was removed prior to the time revrul_92_56 was issued in light of the amendments to sec_851 of the code and the issuance of revrul_92_56 we conclude that the taxable amounts should not be recharacterized with reference to the different types of income in the year of recovery issue b -- should the taxable amounts be recharacterized with reference to the different types of income in the years the transfer agency fees were incurred and deducted in revrul_64_247 the taxpayer recovered amounts after bringing a legal action against certain of its former officers and directors to recover excess management fees paid to a corporation owned by the former officers and directors for all its prior taxable years the taxpayer qualified to be taxed as a regulated_investment_company under subchapter_m chapter subtitle a of the internal_revenue_code of management fees were a type of expense deductible under sec_162 in the prior years such an expense would have reduced income from any dividends any taxable interest and any excess of the net_short-term_capital_gain over the net_long-term_capital_loss under then sec_852 investment_company_taxable_income did not include the excess of the net_long-term_capital_gain over the net_short-term_capital_loss the ruling held that the recovered amounts did not cause the taxpayer to fail to meet the definition of ric contained in sec_851 provided that in all other respects the plr-148671-06 taxpayer qualifies for ric status for the taxable_year in question the ruling also held that for purposes of sec_854 relating to limitations applicable to dividends received from rics the recovered amounts should be allocated between interest and dividends in proportion to the interest and dividends derived by the taxpayer during the taxable_year of the recovery implicit in that holding is a determination that the recovered amounts did not otherwise have a characterization besides generic ordinary_income the second holding of the revenue_ruling as well as the first would have been stated differently if absent the revenue_ruling the recovered amounts would have been characterized with reference to the different types of income in the years the management fees were deducted revrul_64_247 was obsoleted by revrul_92_56 the term obsolete describes a previously published ruling that is not considered determinative with respect to future transactions see c b iv revrul_64_247 was not revoked the term revoked describes situations where the position in the previously published ruling is not correct and the correct position is being stated in a new ruling id revrul_64_247 is still instructive because it was obsoleted and not revoked accordingly we conclude that the taxable amounts should not be recharacterized with reference to the different types of income in the years the transfer agency fees were incurred and deducted taxpayer should treat these taxable amounts as ordinary non-dividend income for purposes of making designations with respect to dividends for the taxable_year in which taxpayer has income from the recovery_of transfer agency fees the rulings contained in this letter are based upon information and except as expressly provided herein no opinion is expressed or implied 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 concerning the tax consequences including the source of the recovered transfer agency fees for purposes of subchapter_n of any aspect of any transaction or item discussed or referenced in this letter the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling this ruling is directed only to the taxpayer requesting it sec_6110 of plr-148671-06 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely christopher f kane chief branch office of associate chief_counsel income_tax and accounting


t c no united_states tax_court robert j dwyer and catherine dwyer petitioners v commissioner of internal revenue respondent docket no filed date p husband age at the time made a premature withdrawal from his individual_retirement_account ira in p was actively engaged as a stock trader specializing in trading corporate stock on a short-term basis throughout during the latter part of the year he was diagnosed as suffering from clinical depression held ps are liable for the 10-percent additional tax on the premature ira withdrawal sec_72 i r c although ps claimed the exception for disability contained in sec_72 i r c p husband was not disabled within the definition of that term contained in sec_72 i r c and sec_1_72-17a income_tax regs since he was not prevented by his illness from engaging in any substantial_gainful_activity robert j dwyer and catherine dwyer pro_se andrew j mandell for respondent nims judge for the year respondent determined the following deficiency in petitioners' federal_income_tax and penalties deficiency addition_to_tax sec_6651 penalty sec_6662 dollar_figure dollar_figure dollar_figure unless otherwise stated all section references are to sections of the internal_revenue_code in effect for the year and all rule references are to the tax_court rules_of_practice and procedure after concessions the only issue remaining for decision is whether petitioners are liable under sec_72 for the percent additional tax on an early distribution from a qualified_retirement_plan findings_of_fact some of the facts were stipulated and are so found the stipulation of facts and attached exhibits are incorporated herein by this reference petitioners resided in remsenburg new york when they filed their petition robert j dwyer petitioner or robert is a stock trader specializing in trading corporate stock on a short-term basis he wa sec_53 years old in sometime in petitioner organized hampton partners of which he was the sole general_partner and one of three limited partners the three limited partners contributed a total of dollar_figure to hampton partners with petitioner contributing dollar_figure hampton partners was formed with the objective that petitioner would use the contributed capital to generate profits in the stock market during the first six months of petitioner made numerous stock trades that generated large profits however in the latter part of the year the partnership lost a substantial amount in a trade involving stock of united airlines a dispute then arose among the partners resulting in lawsuit's being filed involving claims by the other partners against petitioner and a counterclaim by him against them petitioner repaid the other partners against the advice of his accountant in the way he thought the money should go back but the partners were not satisfied petitioner had never been sued before and he found the litigation to be very stressful and career threatening in october petitioner withdrew dollar_figure from his individual_retirement_account ira out of which amount he placed dollar_figure in his own brokerage account the dollar_figure was reported as a taxable_distribution on petitioners' form_1040 during the last three months of petitioner traded in excess of stocks and had stock sales for his own account grossing over dollar_figure million petitioner felt that if he could somehow stay in business as a big butter and egg man he could somehow float into nirvana but instead he floated down the east river since he lost a substantial part of the dollar_figure he had withdrawn from his ira petitioner intended to treat the ira withdrawal as a loan that he intended to repay with the money he earned through his stock trading but because of his continuing losses he was unable to do so sometime in petitioner was diagnosed as having a biochemical depression as a result of the acrimonious lawsuit which at the time seemed to petitioner to have resulted almost from a character failure on his part petitioner's clinical depression significantly deepened in the opinion of dr steven gardner a diplomate of the american board_of psychiatry and neurology depression is recognized to be a devastating psychiatric disease according to dr gardner the etiology of depression is multifactorial and the evolution of the signs and symptoms and the degree of dysfunction are neither abrupt nor uniform the first physician with whom petitioner consulted in placed him on a combined medication consisting of prozac and pamelor which were subsequently found to be counteracting each other giving petitioner no relief from his condition and causing him to be very disoriented subsequently petitioner consulted a second physician dr gardner who prescribed only pamelor which in about six weeks' time cleared up petitioner's condition petitioner continued to see dr gardner for about two years but discontinued seeing him after that time because he could no longer afford the consultation fees petitioner is no longer on medication petitioner regularly exercises to avoid putting myself in positions any longer where i can have this kind of a setback respondent determined an additional tax of dollar_figure on the dollar_figure premature_distribution from petitioner's ira opinion the legislative_history accompanying the enactment of former sec_408 explains the purpose of what is now sec_72 as follows premature distributions from iras frustrate the intention of saving for retirement and sec_72 discourages this from happening s rept pincite c b supp thus in the event of a distribution to an individual from his or her ira before such individual attains age the individual's tax on the amount distributed is increased by percent of the total_distribution h conf rept pincite 1974_3_cb_415 sec_72 and provides in relevant part sec_72 10-percent additional tax on early distributions from qualified_retirement_plans -- imposition of additional tax --if any taxpayer receives any amount from a qualified_retirement_plan as defined in sec_4974 the taxpayer's tax under this chapter for the taxable_year in which such amount is received shall be increased by an amount equal to percent of the portion of such amount which is includible in gross_income subsection not to apply to certain distributions --except as provided in paragraphs and paragraph shall not apply to any of the following distributions a in general -- distributions which are-- iii attributable to the employee's being disabled within the meaning of subsection m sec_72 provides meaning of disabled --for purposes of this section an individual shall be considered to be disabled if he is unable to engage in any substantial_gainful_activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration an individual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such form and manner as the secretary may require s rept supra pincite c b supp pincite states that generally it is intended that the proof of disability be the same as where the individual applies for disability payments under social_security the regulations promulgated pursuant to the statutory authorization contained in sec_72 provide that an individual will be considered to be disabled if he or she is unable to engage in any substantial_gainful_activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or to be of long-continued and indefinite duration sec_1_72-17a income_tax regs significantly the regulations also provide that an impairment which is remediable does not constitute a disability sec_1 17a f income_tax regs notwithstanding the apparent severity of petitioner's illness in which according to dr gardner persisted into the spring of the illness did not fall within the definition of disabled as contemplated by sec_72 and and m and the regulations thereunder petitioner continued to function as an active stock trader in the face of his clinical depression and in fact withdrew his ira funds to further that activity thus his condition fails to meet the regulatory requirement that the individual be so impaired as to be unable to engage in any substantial_gainful_activity sec_1_72-17a income_tax regs petitioners argue that robert's activities during resulted in a net_loss of dollar_figure which they say is not an indication of participating in a gainful activity but we have held in another context which by analogy is relevant here that a taxpayer may be engaged in a profit-making activity even without actually making a profit in a given year if the individual has an actual and honest profit-making objective see 78_tc_642 affd without published opinion 702_f2d_1205 d c cir we equate a substantial_gainful_activity in this context with an actual and honest objective of making a profit obviously petitioner did not have failure to make a profit as his objective even though as it turned out he failed to make a profit from his trading activities in petitioners criticize as being too restrictive the regulatory standard of a mental disease impairment that would be considered as preventing gainful activity the standard is contained in sec_1_72-17a income_tax regs which reads as follows vi mental diseases eg psychosis or severe psychoneurosis requiring continued institutionalization or constant supervision of the individual petitioners argue that robert was under constant supervision for two years and that the alternative regulatory requirement of continued institutionalization is outdated because medical practice in the latter part of the 20th century attempts not to institutionalize patients the fact that robert was never institutionalized does not of course mean that the issue must automatically be decided in favor of the government but we do not believe that robert's psychiatric consultations rise to a level that could properly be categorized as constant supervision petitioners assert that more americans are affected annually by clinical depression than by heart disease or cancer we would simply respond by recognizing that many seek professional help with the expectation or hope that their depression manifestations can be alleviated just as persons suffering from other illnesses many of them quite serious seek and obtain periodic medical assistance to alleviate their conditions but periodic professional consultation such as petitioner's alone does not in our judgment equate with the constant supervision envisioned by the regulation and petitioners have not suggested that robert suffered from psychosis or severe psychoneurosis such as would require his continued constant supervision petitioners also assert that the remediability of petitioner's condition was uncertain in and that the fact that the condition abated is a tribute to medical science but was by no means a certainty in while this may or may not be true we would again point out that regardless of the potential permanency of his condition or the absence thereof petitioner was not so impaired as to be unable to actively pursue the substantial_gainful_activity of securities trading in which profession he was engaged throughout the year in question in conclusion we might also point out that congress has provided a means of access to iras before retirement in some cases of medical problems which though serious do not result in permanent disability sec_72 permits premature ira_distributions without penalty to the extent such distributions do not exceed the amount allowable as a deduction under sec_213 for medical_care determined without regard to whether an individual itemizes deductions petitioners have not claimed the protection of this section presumably because they reported only dollar_figure in unreimbursed medical and dental expenses on their form_1040 which amount was not deductible by petitioners because it did not exceed percent of their adjusted_gross_income as required by sec_213 for the foregoing reasons we hold that petitioners are liable for the 10-percent additional tax on a premature_distribution from robert's qualified_plan in pursuant to sec_72 see also to the same effect kovacevic v commissioner tcmemo_1992_609 and kane v commissioner tcmemo_1992_218 to reflect this holding and concessions decision will be entered under rule


t c memo united_states tax_court michael k jones petitioner v commissioner of internal revenue respondent docket no filed date patrick j o'brien for petitioner aretha jones for respondent memorandum opinion dawson judge this case was assigned to special_trial_judge carleton d powell pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_183 the court agrees with unless otherwise indicated section references are to the internal_revenue_code in effect for the year in issue rule continued and adopts the opinion of the special_trial_judge that is set forth below opinion of the special_trial_judge powell special_trial_judge respondent determined a deficiency in petitioner's federal_income_tax in the amount of dollar_figure and additions to tax pursuant to sec_6651 and sec_6654 in the amounts of dollar_figure and dollar_figure respectively petitioner resided in ridgefield connecticut at the time the petition was filed the issues are whether petitioner had unreported income from the brownson institute whether petitioner had itemized_deductions exceeding the standard_deduction amount and whether the additions to tax are applicable the facts may be summarized as follows prior to petitioner had been a seminary student in philadelphia pennsylvania in petitioner left the seminary and moved to washington d c to seek employment as a professional writer by the end of petitioner had accepted a job as a speech writer with the u s department of energy doe this appointment was subject_to obtaining a security clearance however petitioner began working as an employee in either late or very early in and the security clearance was obtained in february or march of during this time continued references are to the tax_court rules_of_practice and procedure petitioner continued to interview with other prospective employers dinesh d'souza d'souza is an officer with the brownson institute the institute and a long-time friend of petitioner at times during their friendship d'souza lent funds to petitioner that he had repaid d'souza also served as a guarantor on a loan petitioner received from a financial_institution at the time of the trial petitioner was repaying that loan the institute publishes crisis a magazine dealing with religious issues however the institute does not engage in any other type of publishing activity petitioner had previously submitted and been paid for articles published in crisis d'souza also was aware of petitioner's aspiration to write a book tentatively titled the questioning catholic while pursuing his seminary studies in d'souza agreed to help petitioner finance the continuation of his theology studies rather than directly lending money to petitioner d'souza had the institute transfer dollar_figure to petitioner from its account there were no notes or other documents executed to show that a bona_fide debt was created between petitioner and the institute no security was given and no interest was required from petitioner d'souza did not discuss the transfer with other officers of the institute apparently d'souza expected repayment to come from royalties that might be generated by the questioning catholic petitioner returned to the seminary in september of and completed his studies as of the date of trial petitioner has not written the book nor has he repaid the loan respondent received a form_w-2 from doe showing wage income of dollar_figure and a form 1099-misc from the institute reflecting the payment of dollar_figure to petitioner respondent also received a form 1099-int from perpetual savings bank indicating an interest payment in the amount of dollar_figure and a form 1099-g from the commonwealth of virginia indicating payment of a state tax_refund in the amount of dollar_figure petitioner does not recall receiving the form 1099-misc from the institute while petitioner filed returns in the past he does not recall whether he prepared or filed a return for respondent did not receive a return for petitioner's taxable_year and prepared a substitute return for him respondent determined that the wages interest and state tax_refund were includable in gross_income respondent also determined that the dollar_figure payment received from the institute was includable in gross_income in determining petitioner's tax_liability respondent allowed one personal_exemption and the standard_deduction of a single filer in the amount of dollar_figure respondent also determined that petitioner was liable for the tax on self- employment income on the dollar_figure payment received from the institute petitioner has the burden_of_proof on each of the issues in dispute rule a petitioner's records have been lost this however does not relieve him of his burden cady v commissioner tcmemo_1990_260 petitioner concedes that he received the wages from doe petitioner did not offer any evidence with regard to the interest_income or the state tax_refund and we sustain respondent on these issues furthermore while petitioner testified that he incurred some job search expenses and that he made some charitable_contributions he did not show that the deductions for these expenses exceeded the standard_deduction amount regarding the funds received from the institute it is well established that funds received as a loan do not constitute taxable_income to the recipient 198_f2d_357 2d cir affg 16_tc_649 for tax purposes a bona_fide debt is one arising from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money sec_1_166-1 income_tax regs further under sec_102 gross_income does not include amounts received 'out of petitioner testified that he made charitable_contributions of approximately dollar_figure each week or dollar_figure for the year he also testified that he had job search expenses of approximately dollar_figure each month for the first or months of petitioner also contends that his monthly living_expenses of dollar_figure were deductible as job search expenses however he was employed from at least very early in and these expenses were nondeductible living_expenses sec_262 affection respect admiration charity or like impulses' or from a 'detached and disinterested generosity' as a gift 363_us_278 quoting 343_us_711 and 351_us_243 osborne v commissioner tcmemo_1995_71 we agree with respondent that no bona_fide debt existed between petitioner and the institute there was no agreement of any type between them regarding repayment of the funds petitioner offered no security and no interest was required or paid however this does not dispose_of the issue as the testimony made clear the institute served merely as a conduit to effectuate a transfer of funds from d'souza to petitioner the institute provided the funds solely upon d'souza's request it did not receive any services by petitioner and it did not acquire any publishing or royalty rights held by petitioner it is also clear that d'souza intended the transfer to be either a gift or a loan to petitioner under either scenario however the dollar_figure is not taxable_income to petitioner and we need not explore the issue further it also follows that petitioner would not be liable for any_tax on self-employment_income respondent determined that petitioner was liable for an addition_to_tax under sec_6651 for failure_to_file a return sec_6651 provides for an addition_to_tax in the case of a failure_to_file a return unless it is established that the failure was due to reasonable_cause and not due to willful neglect petitioner has not established that he filed a return or that the failure_to_file was due to reasonable_cause respondent's records indicate that petitioner did not file a return for the year at issue petitioner acknowledges that some additional tax in excess of withholding would have been due and he has not shown that any additional_amount was paid indeed petitioner cannot recall preparing or mailing the return petitioner had timely filed his federal_income_tax returns for other years and knew that he was required to file a return it may be that petitioner was at the seminary during this time and his mail service may not have been reliable petitioner may not have actually received his forms w-2 and however the lack of records does not relieve a taxpayer from the obligation to file a return 56_tc_1324 affd without published opinion 496_f2d_876 5th cir we sustain respondent's determination on this issue respondent also determined that petitioner was liable for an addition_to_tax pursuant to sec_6654 for failure to pay estimated_tax under sec_6654 individuals are generally required to pay in four equal installments during the year a required_annual_payment that equals the lesser_of i percent of the tax shown or required to be shown on the return or ii percent of the tax shown on the individual's return for the previous year where an individual is subject_to wage withholding the total amount of tax withheld during the year is deemed to have been paid in equal amounts on the due_date of each installment sec_6654 petitioner reported and paid tax in the amount of dollar_figure for and doe withheld federal_income_tax in the amount of dollar_figure during the year thus petitioner made the required_annual_payment in the installments mandated by sec_6654 accordingly there is no underpayment of estimated_taxes for the year at issue based on the foregoing decision will be entered under rule