internal_revenue_service number release date index number ------------------------- ---------------------- ---------------------------- ------------------------ in re ------------------------------- 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-155359-07 date date legend legend husband wife revocable_trust property trust purchasing trust state date date year year x ------------------------- ---------------------- ------------------------------------------- ---------------------------------------------------------------------------- ----- -------------------------------------------------------- -------------------------------- ------------ ------------------ --------------------------- ------- ------- ---- dear ---------------------------- this is in response to a letter dated date and subsequent correspondence requesting rulings under sec_2501 and sec_2702 regarding the proposed transfer of property to trust the facts submitted and representations made are as follows purchasing trust was established on date purchasing trust is an irrevocable_trust established for the benefit of husband and wife’s issue currently the trustee of purchasing trust is not related to or employed by husband or wife the terms of purchasing trust provide that during the lifetime of husband and wife the trustee may add any charitable_organization as a beneficiary of purchasing trust in year husband and wife established a joint revocable_trust revocable_trust husband and wife are the trustees of revocable_trust article iii sec_3_1 of revocable_trust provides that the during the lifetime of husband and wife trustees are plr-155359-07 to distribute community_property belonging to both husband and wife held in revocable_trust as directed by either husband or wife in addition the trustee is to distribute separate_property belonging to husband or wife held in revocable_trust as directed by husband or wife in year revocable_trust purchased property from an unrelated third party property consists of a single family home situated on x acres husband and wife use property as a vacation home property has never been rented out for commercial purposes husband and wife propose to execute trust which is intended to meet the requirements of a qualified_personal_residence_trust qprt as described in sec_25 c husband is to be the trustee of trust the proposed terms of trust provide that the trustee is to hold property for the exclusive rent-free use by husband and wife during their joint lives and until the death of the survivor of husband and wife upon the death of the survivor of husband and wife the trustees of trust are to distribute the remaining assets of trust to the trustee of purchasing trust to be added to the principal of purchasing trust during the joint lives of husband and wife and the life of the survivor all expenses of property are to be paid_by husband and wife and purchasing trust in the same manner in which expenses are borne by the holders of legal life estates and remainder interests under the law of state where property is located no person other than husband and wife will hold any term_interest in trust concurrently with either husband or wife after executing trust husband and wife through revocable_trust will transfer property to trust and purchasing trust will transfer to husband and wife cash and marketable_securities with an aggregate fair_market_value on the date of transfer equal to the value of the remainder_interest in trust based upon the fair_market_value of property on the date of transfer as determined by an independent expert appraiser and the general actuarial principals of sec_7520 it has been represented that the transaction which is the subject of this ruling_request was first proposed to husband and wife on date at which date there were sufficient liquid funds in purchasing trust to fully fund the purchase of the remainder_interest in trust it has also been represented that purchasing trust was funded prior to date in an independent transaction that is not related to the transaction that is the subject of this ruling_request finally it has been represented that neither husband nor wife is suffering from any condition or illness such that there is at least a percent probability that either husband or wife will die within one year in addition neither husband nor wife has ever transferred an interest in a residence in a transaction described in sec_2702 husband and wife are requesting the following rulings plr-155359-07 property constitutes a personal_residence for purposes of sec_2702 and sec_25_2702-5 husband and wife’s sale through revocable_trust of a remainder_interest in trust to purchasing trust qualifies for the qprt exception to the special valuation rule_of sec_2702 and therefore the remainder_interest should be valued for federal transfer_tax purposes in accordance with the general actuarial valuation rules under sec_7520 husband and wife’s sale through revocable_trust of a remainder_interest in trust to purchasing trust will constitute a sale for adequate_and_full_consideration in money or money’s worth and will not constitute a gift_for federal gift_tax purposes provided purchasing trust pays for the remainder_interest in trust with cash or marketable_securities having an aggregate fair_market_value equal to the value of the remainder_interest determined in accordance with the general actuarial valuation rules under sec_7520 law and analysis sec_2501 imposes a tax on the transfer of property by gift by an individual sec_2511 provides that the tax imposed by sec_2501 applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2512 provides that if a gift is made in property the value thereof at the date of the gift shall be considered the amount_of_the_gift sec_2512 provides that where property is transferred for less than an adequate_consideration in money_or_money's_worth then the amount by which the value of the property exceeded the value of the consideration is deemed a gift sec_2702 provides that solely for purposes of determining whether a transfer of an interest in trust to or for the benefit of a member_of_the_transferor's_family is a gift and the value of such transfer the value of any interest in such trust retained by the transferor or any applicable_family_member as defined in sec_2701 shall be determined as provided in sec_2702 sec_2702 provides that the value of any retained_interest that is not a qualified_interest is treated as being zero the value of any retained_interest that is a qualified_interest is determined under sec_7520 sec_2702 provides that section sec_2702 shall not apply to any transfer of an interest in trust all the property in which consists of a residence to be used as a personal_residence by persons holding term interests in such trust plr-155359-07 sec_25_2702-5 of the gift_tax regulations provides in part that sec_2702 does not apply to a transfer in trust meeting the requirements of that section a transfer in trust meets the requirements of the section only if the trust is a personal_residence_trust as defined in section sec_25_2702-5 a_trust meeting the requirements of a qualified_personal_residence_trust qprt as defined in sec_25_2702-5 is treated as a personal_residence_trust a_trust of which the term holder is the grantor that otherwise meets the requirements of a personal_residence_trust or a qprt is not a personal_residence_trust or a qprt if at the time of transfer the term holder of the trust already holds term interests in two trusts that are personal_residence trusts or qprts of which the term holder was the grantor for this purpose trusts holding fractional interests in the same residence are treated as one trust sec_25_2702-5 provides that a qprt is a_trust meeting all the requirements of sec_25_2702-5 these requirements must be met by provisions in the governing instrument and these governing instrument provisions must by their terms continue in effect during the existence of any term_interest in the trust under sec_25_2702-5 and ii in general a qprt is a_trust the governing instrument of which prohibits the trust from holding for the entire term of the trust any assets other than one residence to be used or held for use within the meaning of sec_25_2702-5 as a personal_residence of the term holder and certain additional assets as described in sec_25_2702-5 ii sec_25_2702-5 provides that a personal_residence of a term holder is either - - a the principal_residence of the term holder within the meaning of sec_1034 b one other residence of the term holder within the meaning of sec_280a but without regard to sec_280a or c an undivided fractional interest in either sec_25_2702-5 provides that a personal_residence may include appurtenant_structures used by the term holder for residential purposes and adjacent land not in excess of that which is reasonably appropriate for residential purposes taking into account the residence's size and location the fact that a residence is subject_to a mortgage does not affect its status as a personal_residence the term personal_residence does not include any personal_property eg household furnishings sec_25_2702-5 provides that a residence is a personal_residence only if its primary use is as a residence of the term holder when occupied by the term holder the principal_residence of the term holder will not fail to meet the requirements of the preceding sentence merely because a portion of the residence is used in an activity meeting the requirements of sec_280a or relating to deductibility of expenses related to certain uses provided that such use is secondary to use of the residence as a residence a residence is not used primarily as a residence if it is used to provide transient lodging and substantial services are provided in connection with the provision plr-155359-07 of lodging eg a hotel or a bed and breakfast a residence is not a personal_residence if during any period not occupied by the term holder its primary use is other than as a residence sec_25_2702-5 provides that if spouses hold interests in the same residence including community_property interests the spouses may transfer their interests in the residence or a fractional portion of their interests in the residence to the same qprt provided that the governing instrument prohibits any person other than one of the spouses from holding a term_interest in the trust concurrently with the other spouse sec_2702 provides that for purposes of sec_2702 the transfer of an interest in property with respect to which there is one or more term interests shall be treated as a transfer of an interest in trust under sec_2702 and sec_25_2702-4 for purposes of sec_2702 if an individual acquires a term_interest_in_property in the same transaction or a series of related transactions one or more members of the individual's family acquire an interest in the same property the individual acquiring the term interests in the property is treated as having acquired the entire property and then transferring to the family members the interests acquired by such persons in the transaction or series of transactions the transfer is treated as made in exchange for the consideration if any provided by the family members for the acquisition of their interests in the property sec_2702 provides that the term term_interest means either a life interest in property or an interest in property for a term of years sec_25_2702-4 example considers a situation where k owns rental real_estate valued at dollar_figure k sells a remainder_interest in the property to k's child retaining the right to receive the income from the property for years the purchase_price paid_by k's child for the remainder_interest is equal to the value of the interest determined under sec_7520 k's retained_interest is not a qualified_interest and is therefore valued at zero therefore k has made a gift in the amount of dollar_figure less the consideration received from k's child sec_2702 provides that the term member_of_the_family has the meaning given such term by sec_2704 sec_2704 defines member_of_the_family to mean with respect to an individual a such individual's spouse b any ancestor or lineal descendant of such individual or such individual's spouse c any brother or sister of the individual and d any spouse of any individual described in clauses b or c sec_7520 provides that the value of an annuity an interest for life or a term of years and a remainder or reversionary_interest is to be determined under tables prescribed by the secretary_of_the_treasury using the interest rate as prescribed under sec_7520 plr-155359-07 ruling based on the facts submitted and the representations made the size of property is comparable to that of properties in proximity to property used for residential purposes accordingly for purposes of sec_25_2702-5 property includes adjacent land not in excess of that which is reasonably appropriate for residential purposes taking into account the residence's size and location in addition the residence located on property satisfies the primary use requirements of sec_25_2702-5 accordingly we conclude that property constitutes a personal_residence within the meaning of sec_2702 and sec_25_2702-5 ruling sec_2 and in the instant case husband and wife will transfer through revocable_trust their respective interests in property to trust and in a related transaction husband and wife will transfer through revocable_trust a remainder_interest in property under the terms of trust to purchasing trust in exchange for purchasing trust's payment to husband and wife of cash and securities equal in value to the actuarial value of the remainder_interest as determined under sec_7520 the transaction comes within the purview of sec_2702 and sec_25_2702-4 and is similar to the transaction described in sec_25 d example except that example does not involve a transfer to a qprt therefore the transaction is treated as a transfer by husband and wife of their respective remainder interests in property coupled with the retention by each under the terms of trust of a life interest in property assuming neither husband nor wife is terminally ill as that term is defined in sec_25 b husband and wife will each receive adequate_consideration for the transfer of their respective remainder_interest to purchasing trust further husband's retained_interest and wife's retained_interest will be valued under the actuarial_tables prescribed under sec_7520 assuming that trust constitutes a qprt that meets the requirements of sec_25_2702-5 accordingly we conclude that the transfer of property to trust followed by the sale of the remainder_interest to purchasing trust in exchange for cash or marketable_securities having an aggregate fair_market_value equal to the value of the remainder_interest as of the date of transfer determined under the actuarial_tables prescribed under sec_7520 will not constitute a taxable gift by either husband or wife for federal gift_tax purposes under sec_2501 except as specifically ruled herein we express no opinion on the federal tax consequences of the proposed transaction under the cited provisions or under any other provisions of the code specifically we express no opinion regarding whether trust qualifies as a qprt under sec_25_2702-5 in addition we express no opinion on whether the corpus of trust will be includible in the gross_estate of either husband or plr-155359-07 wife under sec_2036 or any other provision of the code further we are expressing no opinion regarding the fair_market_value of property on the date property is contributed to trust this ruling is directed only to the taxpayer requesting it sec_6110 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 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 sincerely george masnik george masnik branch chief branch passthroughs special industries enclosures copy for ' purposes


internal_revenue_service number release date index number ------------------------------------------------ ------------------------------------------------------------ --------------- ------------------- -------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------------- id no -------------- ----------------- telephone number --------------------- refer reply to cc psi plr-122611-16 date december legend x --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ------------------------ ----------------------------------------------- y country ------------ date 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 be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was formed under the laws of country on date and classified for u s federal tax purposes as an association under the default rule_of sec_301_7701-3 y a domestic_corporation acquired all of the interests in x and x represents that as of date it was a foreign_entity eligible to elect to be classified as a disregarded_entity for u s federal tax purposes and y intended x to be treated as a disregarded_entity however no entity classification election was filed at that time x represents that it intended to file an election form_8832 entity classification election to change its classification to disregarded_entity for federal tax purposes effective date plr-122611-16 law and analysis sec_301_7701-3 provides in part 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 at least two members can elect to be classified as either an association or a partnership and 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 default classification for an eligible_entity that does not make an election sec_301_7701-3 provides that unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two 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 an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 with the appropriate service_center under sec_301_7701-3 this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed and no more than months after the date the election is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides the rules for 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 the regulatory elections that do not met the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government plr-122611-16 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 accordingly x is granted an extension of time of one hundred twenty days from the date of this letter to file form_8832 effective date with the appropriate service_center a copy of this letter should be attached to each form_8832 this ruling is contingent on the owners of x filing within days of this letter all required returns for all open years consistent with the requested relief to the extent appropriate these returns must include but are not limited to form_8858 information_return of u s persons with respect to disregarded entities such that the forms and returns reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns except as expressly set forth herein no opinion is expressed or implied concerning the federal tax consequences of the facts described above under any other provision of the code 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 a copy of this letter is being sent to x’s authorized representatives sincerely associate chief_counsel passthroughs special industries by david r haglund david r haglund branch chief branch passthroughs special industries enclosures copy of letter copy for sec_6110 purposes cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc fip 4-plr-132135-00 date date date a taxpayer number b parent number c dear this is in reply to your letter dated date a in which your representatives requested a ruling on taxpayer’s behalf with respect to number b contracts the policies intended to meet the definition of a life_insurance_contract under sec_7702 of the internal_revenue_code specifically taxpayer asks for a waiver of a reasonable error under sec_7702 such that the policies will be treated as life_insurance contracts for federal tax purposes the policy numbers for the number b contracts are set forth in exhibit hereto taxpayer is a stock_life_insurance_company as defined by sec_816 and is subject_to taxation under part i of subchapter_l of the code taxpayer primarily writes flexible premium universal_life_insurance term life_insurance and deferred_annuity contracts taxpayer is wholly owned by parent taxpayer joins in filing a life nonlife federal_income_tax return with parent and its affiliates taxpayer represents that all number b policies are life_insurance contracts under the laws of the states or other jurisdictions in which they are issued further if the requested ruling is granted taxpayer represents that the policies will satisfy the guideline_premium_limitation test of sec_7702 and the cash_value_corridor_test of sec_7702 the errors causing the failures to meet the definition of a life_insurance_contract are of three types in the case of three policies changes were made after issue that included a decrease in the death_benefit of the contract the computerized system correctly calculated the new guideline_premium_limitation but clerical personnel failed to follow procedures outlined in taxpayer’s procedure manual so that the correct actions could be taken to ensure continued compliance with sec_7702 specifically the clerks in the policy change department are required to request that the actuarial plr-132135-00 department verify whether or not the reduction would cause the policy to violate the guideline_premium_limitation in two cases taxpayer has verified that no such request was made in the third case the actuarial department failed to notify the policy change department that the face reduction would cause the policy to violate guideline premium limitations in all three instances the computerized compliance system contained a screen that disclosed that there were now excess premiums in the contracts but clerical personnel failed the check the screen had proper procedure been followed the disclosure of excess premiums would have initiated the manual process that would have verified the payment of future excess premiums so that refunds could have been timely made in one other case the computerized compliance system failed properly to account for a change in death_benefit option between an option b contract cash_value taken into account in the determination of death_benefit and an option a contract level death_benefit without regard to the cash_value upon a change in death_benefit option the computerized compliance system recomputes the guideline_premium_limitation by taking the attained age decrement method into account taxpayer has learned despite extensive testing of the compliance system that a minor programming error has in this one instance produced an overstated guideline_premium_limitation instructions as to how the attained age decrement method should be incorporated into the computer_software were not followed due to a programming error in number c cases guideline premiums were accepted in excess of the pertinent guideline_premium_limitation due to one cause only taxpayer computed its guideline premium limitations using sec_7702 to determine how to account for qualified_additional_benefits rather than sec_7702 as mandated by sec_7702 specifically the limitations were determined on the basis of charges other than mortality charges specified in the contract as opposed to the lesser charges expected to be actually paid all number c of these failures occurred on or after the date the effective date of the technical_and_miscellaneous_revenue_act_of_1988 tamra changes made to sec_7702 and ii taxpayer states that its insurance contracts were monitored carefully to ensure compliance with the guideline premium test by using an automated administration system and well managed administrative procedures further as part of their overall tax compliance system taxpayer’s management kept abreast of legislative changes primarily through regular updates of current events in tax-related legislation provided by a tax service for example relevant information the tamra legislation was distributed to all functional areas eg actuarial legal administration and information_technology areas in addition to these updates taxpayer regularly consulted reputable actuaries to understand viewpoints from outside the company taxpayer also referred to articles from sources such as the society of actuaries the american council of life insurers the american academy of actuaries and the national underwriter and its representatives attended industry conferences taxpayer also consulted legal counsel plr-132135-00 and other advisors when sec_7702 was modified by tamra taxpayer made prompt modifications to its business procedures to ensure continued compliance with the standards applicable to life_insurance contracts issued after the effective date of sec_7702 major changes were required in three areas new rules relating to modified endowment contracts new rules governing reasonable mortality charges and the change in the type or amount of other charges that could be taken into account as to this final change taxpayer noted the modifications made by tamra but concluded after review that no changes needed to be made to their compliance systems based on their interpretation of revised sec_7702 sec_7702 provides a statutory definition that a life_insurance_policy must meet to be treated as a life_insurance_contract for federal tax purposes more specifically a contract must be a life_insurance_contract under applicable law and must also meet either of two alternative tests the cash_value_accumulation_test of sec_7702 or the guideline premium and cash_value_corridor_test of sec_7702 and d in general sec_7702 applies to contracts issued after date sec_7702 provides one of the computational rules for determining the net_single_premium used to ascertain compliance with the cash_value_accumulation_test specifically it states that the determination shall be made on the basis of the rules of subparagraph b i and in the case of qualified_additional_benefits subparagraph b ii of subsection c this language was included in sec_7702 as originally enacted and has not been modified although this requirement nominally refers only to the determination required for the cash_value_accumulation_test this provision is the only direction provided by the statute as to how charges for qualified_additional_benefits are to considered from a computational standpoint sec_7702 dealing with the guideline_premium_limitation requirements does not have a specific computational rule for qualified_additional_benefits none of the legislative_history explicitly discusses the rules in sec_7702 the legislative_history however is absent of any the legislative_history provides additional support for concluding that sec_7702 is the operative rule for qualified_additional_benefits see h_rep_no pt 98th cong 2d sess date p footnote distinguishing mortality charges from charges for additional benefits senate committee on finance 98th cong 2d sess deficit_reduction_act_of_1984 explanation of provisions approved by the committee on date pincite footnote s prt same see also staff of joint_committee on taxation general explanation of the revenue provisions of the deficit_reduction_act_of_1984 98th cong 2d sess footnote stating that the discussions therein relating to mortality and other charges are generally applicable to both the cash_value accumulation and guideline premium tests plr-132135-00 indication that there be two separate standards for inclusion of such charges - one for the cash_value_accumulation_test and one for the guideline_premium_limitation furthermore there is no indication in tamra that congress intended to change the existing rules dealing with qualified_additional_benefits the rules specifically applicable to the guideline_premium_limitation appear in sec_7702 which provides that the premiums_paid under the contract at any time must not exceed the greater of the guideline_single_premium or the sum of the guideline level premiums to that date the guideline_single_premium is the single premium at issue that is needed to fund the future_benefits under the contract using the mortality and other charges specified in sec_7702 and a minimum interest rate assumption of six percent the guideline_level_premium is the level annual equivalent of the guideline_single_premium payable until a deemed_maturity_date between the insured's attained ages and using a minimum interest rate of four percent the computational rules of sec_7702 and the definitions of sec_7702 apply to both the guideline single and guideline_level_premium contracts qualifying as life_insurance under sec_7702 must also satisfy the cash_value corridor of sec_7702 the corridor specifies a minimum ratio of death_benefits as defined under sec_7702 to cash surrender values qualified_additional_benefits that may be taken into account in the determination of the guideline premium limitations are described in sec_7702 as i ii iii iv v guaranteed insurability accidental death or disability benefit family term coverage disability waiver benefit or other benefit prescribed under regulations sec_7702 states that for purposes of sec_7702 qualified_additional_benefits shall not be treated as future_benefits under the contract but the charges for such benefits shall be treated as future_benefits future_benefits is in turn defined under sec_7702 to mean death_benefits and endowment benefits the basis upon which the determination of the guideline_single_premium is to be made for purposes of the guideline_premium_limitation is set forth in sec_7702 prior to the tamra amendment sec_7702 and c b ii read i the mortality charges specified in the contract or if none is specified the mortality charges used in determining the statutory_reserves for such contract ii any charges not take into account under clause i specified in the plr-132135-00 contract the amount of any charge not so specified shall be treated as zero and tamra changed sec_7702 by removing the reference to charges specified in the contract and inserting any reasonable charges other than mortality charges which on the basis of the company’s experience if any with respect to similar contracts are reasonably expected to be actually paid but also changed the language of sec_7702 after the amendment neither clause contained a reference to the charges specified in the contract although the practical effect was that sec_7702 was now both a cap and a floor on the mortality charges to be taken into account2 while sec_7702 served only as a ceiling the new language reads i ii reasonable mortality charges which meet the requirements if any prescribed in regulations and which except as provided in regulations do not exceed the mortality charges specified in the prevailing commissioners standard tables as defined in sec_807 as of the time the contract is issued any reasonable charges other than mortality charges which on the basis of the company’s experience if any with respect to similar contracts are reasonably expected to be actually paid taxpayer divided qualified_additional_benefits between those that provide family term riders and those that provide other qualified_additional_benefits other_benefits family term riders are provided in one of two different forms an additional insured rider coverage for a family_member not to extend beyond the base insured’s attainment of age and a child’s rider all designated children but not to extend beyond the earlier of the child’s attainment of age or the base insured’s attainment of age the tables of cost of insurance charges for the additional insured rider are based on the same commissioners standard ordinary cso table as used for the base coverage the bulk or number c of the policies at issue involve other_benefits namely accidental death disability waiver and monthly disability and payer death and disability benefits other_benefits the contract for each benefit specifies a cost of insurance charge but the cost of insurance charges for each of these benefits is less than the maximum rate specified in the contract the effect of the modification of this clause is not at issue in this ruling but has been discussed in the sec_5011 of tamra tamra’s legislative_history see h_r conf_rep no 100th cong 2d sess notice_88_128 1988_2_cb_540 proposed_regulations under sec_7702 and numerous articles see also revrul_92_19 1992_1_cb_227 and updates thereto plr-132135-00 for all number b policies taxpayer took into account for purposes of determining the guideline_premium_limitation the full charge specified in the contract for each of these types of qualified_additional_benefits taxpayer did not reduce the amount taken into account even where the amounts reasonably expected to be actually paid were known to be less than the maximum charges taxpayer’s methodology was to apply sec_7702 which does not take into account actual charges but rather reasonable charges taxpayer argues that its position was consistent with the approach taken in the off-the-shelf computerized compliance system supplied to it and warranted as being compliant with the new rules added by tamra the system was programmed to use the maximum rate specified in the contract for all qualified_additional_benefits and did not include the ability to use a lower rate if expected to be actually paid taxpayer believed that neither the code nor legislative_history clearly tied qualified_additional_benefits to being governed by sec_7702 or ii after consideration the actuaries erroneously reached two conclusions the reasonable charges other than mortality charges described in sec_7702 referred only to expense loads and cost of insurance charges for family term riders and other qualified_additional_benefits were considered mortality charges to be taken into account under sec_7702 accordingly the actuaries directed that the compliance system continue to treat the charges for qualified_additional_benefits as being governed by the maximum rates specified in the contract despite the legislative change to sec_7702 taxpayer argues that because the riders were qualified_additional_benefits under sec_7702 then under sec_7702 the benefits themselves were not to be treated as future_benefits under the contract but rather that the charges for the benefits were to be treated as future_benefits taxpayer then concluded that future_benefits under section f included death_benefits and that the death_benefit ie the charge for the rider under the rider was a mortality charge accordingly they looked at sec_7702 found nothing in its language or supporting legislative_history related directly to the guideline_premium_limitation to contradict their conclusions and decided that the charges for this rider should be governed by sec_7702 as the maximum charges specified in the contract and the rate actually being charged for expense charges such as monthly administration charges and percentage of premium loads were identical no change in the guideline_premium_limitation was deemed necessary for these charges due to the legislative change none of the number c policies included in taxpayer’s submissions involve errors related to expense charges plr-132135-00 taxpayer’s actuaries concluded that the charges for other_benefits were to be treated as death_benefits and thence as mortality charges because charges for death_benefits are commonly known as mortality charges the actuaries concluded that charges for other_benefits should be governed by sec_7702 sec_7702 provides that if a taxpayer establishes to the satisfaction of the secretary_of_the_treasury that the requirements of sec_7702 were not satisfied due to reasonable error and reasonable steps are being taken to remedy the error the secretary may waive the failure to satisfy such requirements under the facts submitted and representations made the failure of the first four of the policies to satisfy the requirements of sec_7702 is due to reasonable error as the failure to recognize that excess premiums had been paid was due to clerical_error taxpayer had procedures existing at that time that if properly followed would have resulted in the policies complying with the statute further taxpayer will within days of receipt of this ruling refund any excess premium with interest at the contract crediting rate as of the date of refund which is a reasonable step to remedy the failure of the policies to satisfy the requirements of sec_7702 also taxpayer has in place automated procedures designed to prevent future noncompliance as to the remaining number c contracts we do not agree with taxpayer’s conclusions as to the legal analysis of sec_7702 the code and legislative_history referring to the treatment of qualified_additional_benefits under sec_7702 provide a sound basis for the conclusion that charges for qualified_additional_benefits are controlled by sec_7702 this treatment is the same for both the cash_value_accumulation_test and the guideline_premium_limitation requirements after considering taxpayer’s arguments we find that its error was reasonable taxpayer will also within days of receipt of this ruling conform its compliance system to take the charges for all qualified_additional_benefits into account under sec_7702 if as a result of the adjustment any policy contains excess premiums taxpayer will also within days of receipt of this ruling either refund the excess premium together with interest at the contract crediting rate or raise the death_benefit sufficiently to ensure compliance with sec_7702 together these are reasonable steps to cure the error made among other grounds for its error being reasonable taxpayer argues that it should have been able to rely on the accuracy and correct analysis contained in the programming for off-the-shelf compliance software marketed to the insurance industry we do not find this argument either persuasive or determinative taxpayers are required to independently analyze test and verify all assumptions and methodology contained in such software and may not avoid culpability for any errors therein the obligation to comply with the requirements of sec_7702 belongs to taxpayer and responsibility for failures to comply may not be delegated however as with internally developed software there can be errors that are reasonable and thus waivable plr-132135-00 accordingly based on the information submitted it is held that the failure of the number b policies to satisfy the requirements of sec_7702 is waived pursuant to sec_7702 this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours donald j drees jr senior technician reviewer branch office of associate chief_counsel financial institutions products attachment exhibit


t c memo united_states tax_court mark d and sheldon c morgan petitioners v commissioner of internal revenue respondent docket no filed date lewis r wiener for petitioners daniel j parent for respondent memorandum opinion jacobs judge by separate notices of deficiency both dated date respondent determined the following deficiencies and accuracy-related_penalties with respect to petitioners' federal income taxes deficiency accuracy-related_penalty sec_6662 dollar_figure big_number big_number big_number --- dollar_figure big_number big_number year pursuant to an amended answer filed date respondent seeks a dollar_figure increase in the deficiency for so that the total amended amount of the proposed deficiency for that year is dollar_figure following concessions by petitioners the issues for decision are the proper characterization loans as contended by petitioners or wages as contended by respondent of monthly payments received by petitioner mark d morgan from robert randall co we hold that such payments are wages includable in petitioners' income whether petitioners are entitled to claimed employee_business_expense deductions for and for automobile expenses because of petitioners' failure to provide sufficient substantiation we hold they are not whether the increased deficiency asserted by respondent for is time-barred we hold that it is not whether petitioners are liable for the accuracy-related_penalty under sec_6662 for and we hold they are all section references are to the internal_revenue_code for the years under consideration all rule references are to the tax_court rules_of_practice and procedure all dollar amounts are rounded some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference general findings petitioners husband and wife resided in carmichael california at the time they filed their petition challenging respondent's determinations petitioners timely filed joint federal_income_tax returns for each of the years under consideration on date petitioners were issued a refund of dollar_figure for tax_year the refund resulted from petitioners' request for a tentative refund based upon a claimed net_operating_loss_carryback from for convenience and clarity we have combined additional findings_of_fact and opinion with respect to each issue issue characterization of advances from robert randall co petitioner husband mark d morgan hereinafter referred to as petitioner has been involved for many years in real_estate activities particularly the construction of real_estate in date he began working for robert randall co which is in the business of developing and managing apartment complexes previously petitioner had been employed by gibraltar community builders inc gibraltar during petitioner received wages from gibraltar totaling dollar_figure for the first months of petitioner received wages from gibraltar totaling dollar_figure on date petitioner and robert randall the president and apparently the sole or at least the majority shareholder1 of robert randall co entered into an agreement called and hereinafter referred to as the sunbelt project working agreement pursuant to which petitioner agreed to be the regional manager responsible for locating acquiring and developing properties in the sacramento area for multifamily housing on behalf of partnerships or other entities to be controlled by robert randall or his affiliate in accordance with the provisions of the sunbelt project working agreement beginning in date and throughout all years under consideration robert randall co made monthly payments labeled advances to finance petitioner's living_expenses in addition to these advance sec_2 robert randall co paid wages to petitioner fica social_security_tax was withheld on these wages but federal income taxes were not the_amount_of_wages and advances paid to petitioner were as follows the record is not clear on this point robert randall testified that he was the chief_executive_officer the president the chairman and the owner of robert randall co the use of the word advances is not meant to give a legal characterization of the monthly payments amount of wages dollar_figure big_number big_number big_number year amount of advances dollar_figure big_number big_number big_number the advances include the following amounts designated as an automobile allowance dollar_figure big_number big_number big_number the advances were paid on a monthly basis as follows date date-date date-date dollar_figure big_number big_number robert randall co did not withhold for income_tax or fica tax on the advances as of the date of trial petitioner had not repaid any of the advances the advances were not evidenced by notes nor was collateral given nor did robert randall co inquire into petitioner's ability to repay the advances there were no specific repayment terms or fixed maturity dates rather the advances were to be charged against petitioner's share of profits of partnerships to be formed between petitioner and robert randall respondent determined that the advances petitioner received from robert randall co constitute taxable compensation_for services petitioners claim that the advances were nontaxable loans except for petitioners bear the burden of proving their characterization of the advances rule a 290_us_111 if petitioners meet their burden_of_proof then the advances are not includable in their income see 62_tc_200 48_tc_640 for only respondent bears the burden of proving the advances constitute taxable_income inasmuch as that is a new_matter first raised in respondent's amended answer rule a whether the advances should be characterized as loans or payments for services is a factual determination 55_tc_85 52_tc_255 affd 422_f2d_198 5th cir for a payment to constitute a loan at the time the funds are transferred the recipient must intend to repay the advance and the transferor must intend to enforce repayment 88_tc_604 affd without published opinion 855_f2d_855 8th cir further the obligation to repay must be unconditional and not contingent upon a future event 375_f2d_36 5th cir 229_f2d_703 7th cir affg tcmemo_1954_ an intent to repay a purported loan by the performance of services in the future does not result in the exclusion of the underlying funds from the recipient's income beaver v commissioner supra pincite in such a case the purported loan proceeds are nothing more than an advance salary or other payment for services which are includable in the recipient's income when received various objective factors are used in deciding whether an advance_payment is a loan or compensation see haag v commissioner t c pincite n for a listing of some of these factors in the instant case the following factors lead us to conclude that the advances petitioner received from robert randall co should be characterized as compensation rather than loans the advances were from an employer to an employee petitioner's wage compensation from his previous employment with gibraltar was significantly higher than the form w- wages petitioner received from robert randall co the monthly advances began as soon as petitioner started working for robert randall co the amount of the advances was pre-set the advances were paid in regular monthly intervals there were no set repayment terms or fixed maturity_date at the time the advances were made there was no stated_interest petitioner had not repaid any of the advances as of the date of trial there was no indication that petitioner could repay the advances from his own resources the transferor did not inquire into petitioner's financial status before making the advances there was no collateral for the advances petitioner would not have taken the position with robert randall co if the latter had not paid him a substantial amount in addition to his form_w-2 salary the value of services petitioner rendered was far in excess of his form_w-2 salary robert randall co could not have hired someone with petitioner's qualifications for the amount of form_w-2 salary paid to petitioner the transferor would have caused the advances to petitioner to stop if petitioner had stopped providing services based on our determination that the advances were not loans but rather represent compensation_for services the advances are includable in petitioner's income in the year paid issue automobile expenses on petitioners' tax returns for and petitioners claimed employee_business_expense deductions with regard to petitioner's purported business use of an automobile as follows year amount dollar_figure big_number big_number respondent disallowed these deductions at trial petitioner failed to provide any evidence or substantiation such as a log or diary for the claimed expenses other than his own testimony that he feels that he drove approximately big_number miles a year for business purposes sec_274 provides that no deduction shall be allowed with respect to any listed_property as defined in sec_280f unless the taxpayer substantiates by adequate_records or sufficient evidence corroborating the taxpayer's own statement the amount of such expense the time and place of the expense the business_purpose of the expense and the business relationship of the expense a passenger_automobile is considered listed_property sec_280f because petitioner failed to satisfy the record keeping or other substantiation requirements of sec_274 petitioners are not entitled to the claimed employee business deductions for automobile expenses for and issue statute_of_limitations defense the next issue for consideration is whether respondent is time-barred from amending her answer to increase the amount of the deficiency for by recharacterizing the advances petitioner received in as wages for petitioners reported a total gross_income of dollar_figure consisting of wages dollar_figure interest dollar_figure and unemployment_compensation dollar_figure in addition they reported the sale of their home but excluded the gain therefrom pursuant to sec_1034 the reported selling_price for the home was dollar_figure the excluded gain was dollar_figure petitioners did not report in the dollar_figure received in advances from robert randall co as previously discussed the dollar_figure constitutes compensation which is includable in petitioner's gross_income sec_6501 provides if the taxpayer omits_from_gross_income an amount properly includable therein which is in excess of percent of the amount of gross_income stated in the return the tax may be assessed or a proceeding in court for the collection of such tax may be begun without assessment at any time within years after the return was filed further sec_6503 provides for the suspension of the running of the period of limitations if a proceeding is placed on the docket of this court from the issuance of the deficiency_notice until a decision of the court becomes final in the instant case petitioners filed their return on date the notice_of_deficiency for was issued on date the petition requesting a redetermination of respondent's deficiency determination for was filed on date sec_6503 the dollar_figure which petitioners failed to include in their income is in excess of percent of the amount of gross_income stated on the return thus on the date respondent's notice of even if the sale of petitioners' home is taken into account for sec_6501 purposes the dollar_figure capital_gain on the sale not the dollar_figure gross_sales price is used in continued deficiency for was issued the 6-year period of limitations had not yet expired and the omitted dollar_figure could have properly been included in respondent's deficiency_notice accordingly respondent is not time-barred from asserting an increased deficiency in her amended answer with respect to the omitted dollar_figure of wage income issue accuracy-related_penalty respondent determined an accuracy-related_penalty under sec_6662 for and sec_6662 imposes a penalty equal to percent of the portion of an underpayment that among other things is a substantial_understatement_of_income_tax an understatement of income is substantial if it exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 the deficiencies here determined are substantial understatements the accuracy-related_penalty does not apply with respect to any portion of the underpayment if it is shown that there was reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion sec_6664 petitioners claim that they relied on their accountant to correctly prepare their returns reliance by a taxpayer on the advice of a qualified adviser will constitute reasonable_cause and good_faith continued computing the gross_income reported on the return see 82_tc_546 affd 774_f2d_644 4th cir if under all of the facts and circumstances the reliance was reasonable and the taxpayer acted in good_faith sec_1 b income_tax regs considering all the facts and circumstances presented we do not find persuasive petitioner's defense that he relied on his accountant to correctly prepare his returns the accountant did not testify and we found petitioner's self-serving testimony in this regard to be not credible in conclusion we hold that petitioners are liable for the accuracy-related_penalty on the entire underpayment for and to reflect the foregoing and because of the increased deficiency for decision will be entered under rule


department of the treasury internal_revenue_service washington d c contact person identification_number telephone number employer_identification_number se t eo ra t tax_exempt_and_government_entities_division number release date date date uil legend grantor_trust crut crut a b charity dear facts the information submitted states that the trust was a grantor_trust and as such the this responds to a letter dated date and subsequent correspondence submitted on behalf of crut by its authorized representatives requesting rulings under sec_507 sec_4941 and sec_4947 of the internal_revenue_code code grantor reported and paid income taxes on all taxable_income of the trust during his lifetime the trust agreement named a as a successor trustee upon the death incompetency or incapacity of the grantor the trust divided into two separate cruts upon the grantor’s death and after payment of death obligations and specific bequests the provisions of both cruts named a as trustee crut pay sec_5 percent annually of the trust assets determined the first day of the crut’s taxable_year to a for life and then to b if he survives a crut pay sec_5 percent annually of the trust assets determined the first day of the crut’s taxable_year to b for life and then to a if she survives b the trust assets are to be distributed to charity after the last to die of either a or b distributed to another qualifying sec_501 of the code charitable_organization the beneficiaries are not related to one another nor are they related to grantor all of the individual beneficiaries and charity’s executive director are of full legal capacity b has been examined by his physician who is experienced and well qualified in his profession and has if charity is not in existence then the assets are to be conducted a physical examination of b and has stated under penalties of perjury that b does not have any condition which is expected to result in a shorter than average life expectancy b is not aware of any physical condition that would decrease his normal life expectancy b has signed an affidavit to that effect the management of charity believes that receiving funds earlier rather than later will help ensure the survival of the organization by providing continuous program services charity asserts that receiving the present_value of the remainder_interest now would allow the continuity and growth of its activities should die from unforeseen events the assets would pass to his heirs rather than have the assets stay in the crut b would prefer that the assets come to him now so that if he all interested parties the income beneficiaries the trustee and the remainder charity have agreed to liquidate the trust and to compute the present_value of the life income and the charitable_remainder interest in accordance with the method described in sec_1_664-4 of the income_tax regulations regulations using the sec_7520 of the code rate in effect at the time and distribute the respective amounts to the life-income beneficiaries and to the charity the trustee has submitted to a court of competent jurisdiction to approve termination of crut the court has ruled in favor of the termination additionally the trust does not by its term prohibit early termination requested rulings you have requested rulings that the termination of the crut is not a taxable_event under sec_507 and sec_4941 of the code law sec_507 of the code provides generally that except as provided in sec_507 the status of any organization as a private_foundation shall be terminated only if such organization notifies the internal_revenue_service that it is terminating its private_foundation_status and pays the termination_tax under sec_507 sec_507 of the code imposes a tax on each organization whose private_foundation_status is voluntarily or involuntarily terminated under sec_507 sec_4941 of the code imposes an excise_tax on self-dealer --there is hereby imposed a tax on each act of self-dealing between a disqualified_person and a private_foundation the rate_of_tax shall be equal to percent of the amount_involved with respect to the act of self-dealing for each year or part thereof in the taxable_period the tax imposed by this paragraph shall be paid_by any disqualified_person other than a foundation_manager acting only as such who participates in the act of self- dealing in the case of a government_official as defined in sec_4946 a tax shall be imposed by this paragraph only if such disqualified_person participates in the act of self-dealing knowing that it is such an act on foundation_manager --in any case in which a tax is imposed by paragraph there is hereby imposed on the participation of any foundation_manager in an act of self-dealing between a disqualified_person and a private_foundation knowing that it is such an act a tax equal to percent of the amount_involved with respect to the act of self-dealing for each year or part thereof in the taxable_period unless such participation is not willful and is due to reasonable_cause the tax imposed by this paragraph shall be paid_by any foundation_manager who participated in the act of self-dealing sec_4941 d a of the code provides that the term self-dealing includes any direct or indirect sale_or_exchange or leasing of property between a private_foundation and a disqualified_person or a transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_4946 of the code provides that the term disqualified_person with respect to a private_foundation includes a substantial_contributor to a private_foundation including the creator of a_trust a family_member of a substantial_contributor including children and a foundation_manager including a trustee sec_4947 of the code provides in the case of a_trust which is not exempt from tax under sec_501 not all of the unexpired interests in which are devoted to one or more of the purposes described in sec_170 and which has amounts in trust for which a deduction was allowed under sec_170 sec_545 sec_642 sec_2055 sec_2106 or sec_2522 sec_507 sec_508 sec_4941 sec_4943 except as provided in subsection b sec_4944 except as provided in subsection b and sec_4945 shall apply as if such trust were a private_foundation this paragraph shall not apply with respect to-- a any amounts payable under the terms of such trust to income beneficiaries unless a deduction was allowed under sec_170 sec_2055 or sec_2522 sec_53_4946-1 of the foundation and similar excise_tax regulations foundation regulations provides that for purposes of sec_4941 of the code only the term disqualified_person shall not include any organization which is described in sec_501 other than an organization described in sec_509 sec_53_4947-1 of the foundation regulations provides that under sec_4947 of the code paragraph c ii of this section does not apply to any amounts payable under the terms of a split-interest trust to income beneficiaries unless a deduction was allowed under sec_170 sec_2055 or sec_2522 with respect to the income_interest of any such beneficiary revrul_69_486 1969_2_cb_159 concerns a non-pro rata distribution of trust property in_kind by a trustee who has no authority to make such distribution but did so as a result of a mutual agreement by the beneficiaries one of which is a charitable_organization the distribution was made as a final distribution of trust property the trust property consisted of notes that had not appreciated in value and common_stock that had appreciated in value by agreement all of the notes were distributed to the charity and the stock to the individual beneficiary the ruling holds that the distribution was equivalent to a pro_rata distribution of the stock and notes to both followed by an exchange of the charity’s share of the common_stock for the individual’s pro_rata chare of the notes analysis crut is described in sec_4947 of the code by having an income_beneficiary b and a charitable remainderman the charity described in sec_509 and sec_170 of the code by being described in sec_4947 crut is subject_to the provisions of sec_507 and sec_4941 as if it were a private_foundation person with respect to crut because b’ is not a disqualified_person with respect to the charitable_remainder beneficiary the charity since charity is a public charity described in sec_509 b is not a substantial_contributor to crut is not a family_member of a substantial_contributor including children nor a foundation_manager including a trustee as such b is not a disqualified_person with respect to the trust b is not a disqualified since sec_4941 of the code only applies to a transaction between a disqualified_person and a private_foundation the early termination of crut is not a self-dealing transaction with respect to b furthermore because the effects of the transaction is to vest the income_interest and remainder_interest in the remainder beneficiary the trust will no longer be a split interest trust and sec_4947 and sec_507 of the code will not apply rulings based solely on the representations made and the information submitted we have reached the following conclusion the early termination of crut will not be considered an act of self-dealing under sec_4941 a of the code the early termination of crut will not result in the imposition of a termination_tax under sec_507 of the code 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 specifically no opinion is expressed as to whether trust otherwise qualifies as a charitable_remainder_unitrust under sec_664 this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolved questions concerning your federal_income_tax status this ruling should be kept in your permanent records this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely robert c harper jr manager exempt_organizations technical group enclosure notice