internal_revenue_service number release date index number -------------------------------------- ------------------------- ---------------------------------- 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 plr-104418-16 date date legend decedent --------------------------- ------------------------------------------------------ ------------------- spouse ------------------------- --------------------------- date date --------------------------- ---------------------------- dear ---------------- this letter responds to your personal representative’s letter of date and subsequent correspondence requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code code portability election to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations submitted are as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is nine months after decedent’s date of death or the last day of the period covered by an extension plr-104418-16 decedent’s form_706 was due on date the estate discovered its failure to elect portability after the due_date for making the election decedent’s estate represents that the value of decedent’s gross_estate is less than the basic exclusion amount in the year of the decedent’s death and that during her lifetime decedent made no taxable_gifts decedent’s estate requests an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election plr-104418-16 once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 sec_20_2010-2t a of the estate_tax regulations as in effect on date provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely filed form_706 under sec_20_2010-2t a the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted under sec_20_2010-2t a the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute a request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election the due_date for the portability election is prescribed by statute in the case of an estate required to file an estate_tax_return under sec_6018 see sec_2010 sec_6075 plr-104418-16 and a in the case of an estate that is not required to file an estate_tax_return under sec_6018 the due_date is prescribed by regulation see sec_20_2010-2t a see also sec_20_2010-2 and revproc_2014_18 2014_7_irb_513 sec_2 accordingly in the latter case a taxpayer may seek an extension of time to elect portability under the provisions of sec_301_9100-3 sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date decedent’s estate represents that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed 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 if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-104418-16 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 associate chief_counsel passthroughs special industries by lorraine e gardner lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


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 intl b02 plr-124186-08 date september internal_revenue_service number release date index number ------------------------ -------------------------------- -------------------------- -------------- ----------------------------- ty ------- ty ------- legend taxpayer --------------------------------------------------- --------------------- year year year year fc country x country y trust ------- ------- ------- ------- ---------------------------- ------------------ ----------- ------------------------- trustee o trustee r ---------------------------- ------------------------------ law firm p law firm q ------------------------------------------------------------------------------------------ ---------------------- ---------------------------------------------------------- dear ------------------ this is in response to your letter received by our office on date submitted by your authorized representative requesting the consent of the plr-124186-08 commissioner of the internal_revenue_service to make a retroactive qualified_electing_fund qef election under sec_1295 of the internal_revenue_code code and sec_1_1295-3 with respect to your investment in fc the rulings contained in this letter are based upon information and representations submitted by taxpayer and accompanied by a penalties of perjury statement executed by the appropriate parties while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination facts taxpayer is a u s citizen and a named beneficiary of the trust established under the laws of country x by taxpayer's grandmother a citizen and resident of country y in year the trust acquired shares in fc a corporation organized under the laws of country y at all times since its formation the trust was administered and managed by various foreign nationals who served as the trustees of the trust trustee o who served as a trustee of the trust at all times since inception is an attorney with substantial experience in transnational tax planning and was a partner at law firm p during all the years at issue trustee o is competent to render international tax_advice trustee o and the other trustees had full access to all the records of the trust and trustee o was aware at all relevant times that taxpayer resided permanently in the united_states taxpayer is not a tax professional and has no experience in international tax matters taxpayer represents that as a beneficiary of the trust taxpayer had no control_over the assets of the trust and relied on the trustees to manage the assets of the trust at all times the trustees and in particular trustee o never informed taxpayer that the trust held shares of fc that fc was a passive_foreign_investment_company pfic under sec_1297 of the code for u s federal_income_tax purposes and of the consequences of such investment and of the possibility of making any elections qef or otherwise with respect to such shareholdings for u s federal_income_tax purposes in year after the death of taxpayer's father taxpayer engaged law firm q and others to determine the extent of the family's assets in year during its evaluation of the trust's assets law firm q determined that fc had been a pfic since year and informed taxpayer of fc's characterization as a pfic at that time taxpayer has submitted an affidavit signed under penalties of perjury describing the events that led to the failure to make the qef election by the election due_date plr-124186-08 including the role of the trustees taxpayer has also submitted affidavits of trustee o and trustee r corroborating the representations made by taxpayer taxpayer represents that as of the date of this request_for_ruling the pfic status of fc has not been raised by the irs on audit for any of the taxable years at issue ruling requested taxpayer requests the consent of the commissioner of the internal_revenue_service to make a retroactive qef election with respect to fc for year under sec_1_1295-3 law sec_1295 of the code provides that any pfic shall be treated as a qef with respect to a taxpayer if an election by the taxpayer under sec_1295 applies to such company for the taxable_year and the company complies with such requirements as the secretary may prescribe for purposes of determining the ordinary_earnings and net capital_gains of such company under sec_1295 a qef election may be made for any taxable_year at any time on or before the due_date determined with regard to extensions for filing the return for such taxable_year to the extent provided in regulations such an election may be made after such due_date if the taxpayer failed to make an election by the due_date because the taxpayer reasonably believed the company was not a pfic under sec_1_1295-3 a taxpayer may request the consent of the commissioner to make a retroactive qef election for a taxable_year if the shareholder reasonably relied on a qualified_tax professional within the meaning of sec_1_1295-3 granting consent will not prejudice the interests of the united state sec_3 government as provided in sec_1_1295-3 the request is made before a representative of the internal_revenue_service raises upon audit the pfic status of the corporation for any taxable_year of the shareholder and the shareholder satisfies the procedural requirements of sec_1 f the procedural requirements include filing a request for consent to make a retroactive election with and submitting a user_fee to the office of the associate chief_counsel international sec_1_1295-3 additionally affidavits signed under penalties of perjury must be submitted that describe plr-124186-08 the events which led to the failure to make a qef election by the election due_date the discovery of such failure the engagement and responsibilities of the qualified_tax professional and the extent to which the shareholder relied on such professional sec_1_1295-3 and iii conclusion based on the information submitted and representations made with taxpayer’s ruling_request we conclude that taxpayer has satisfied sec_1_1295-3 accordingly consent is granted to taxpayer to make a retroactive qef election with respect to fc for year provided that taxpayer complies with the rules under sec_1_1295-3 regarding the time and manner for making the retroactive qef election this private_letter_ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this ruling must be attached to any_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer's authorized representative sincerely ethan a atticks senior technical reviewer branch international cc


internal_revenue_service number release date index number ------------------------------------- -------------------------------------- --------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------------ telephone number ---------------------- refer reply to cc tege eoeg eo2 plr-125533-17 date date legend foundation ------------------------------------- dear ------------------------------------- this letter responds to a letter from your authorized representative dated date and subsequent correspondence requesting rulings under internal_revenue_code irc sec_4942 and sec_4944 facts foundation is recognized by the internal_revenue_service as an organization described in sec_501 and a private_operating_foundation under sec_509 foundation’s mission is to operate and support educational programs and projects assisting underserved and impoverished children and families foundation represents that it accomplishes its mission by operating a program that achieves lasting positive outcomes for the children and families it serves foundation states it builds the capacity of providers and community based organizations to enhance their financial sustainability operational effectiveness management knowledge and ability physical and organizational infrastructure and policy environment in addition foundation represents it provides technical assistance to policy makers to enhance the regulation and support of early learning providers offers technical assistance and financing to service providers to enhance the adoption and use of best practices in childhood development and conducts research and evaluation to identify lessons learned from these efforts foundation proposes to operate a loan program the primary purpose of the loan program is to further foundation’s educational and charitable purposes by making loans to service providers that provide educational programs and other support to impoverished children and families the loan program includes making direct loans to plr-125533-17 service providers who lack the stable revenue needed to qualify for commercial loans and to more financially-secure organizations to fund charitable and educational projects that are financially risky and may not have been undertaken without the financial support offered by foundation additionally foundation will make loans to intermediaries that have unique expertise in lending money to and assisting educational and community-based organizations of which intermediaries will identify qualified_service providers and make loans of the foundation’s funds to these service providers utilizing intermediaries in this way helps foundation effectively use its loans to further its charitable and educational_purposes the borrowers under the loan program include providers of education health housing or other social services serving foundation’s exempt_activities in addition to lending money to non-profit organizations foundation may also loan money to for-profit organizations foundation represents all loans must be used to advance the charitable and educational_purposes of the foundation foundation represents that production_of_income or appreciation of property is not a significant purpose of the loan program foundation states that the loan program typically involves high-risk loans and repayment terms are designed to be favorable to the service provider foundation states that specific repayment terms are determined by the nature of the individual loan and the financial status of the borrower foundation represents these loans may have a longer repayment period below market rate interest rates charge no interest require only a portion of the loan to be repaid or provide that the loan may be forgiven altogether foundation states a large portion of its work focuses on capacity building of higher-risk service providers and therefore expects that a sizable portion of the loans will consist of forgivable loans in addition foundation represents that all loans made under the loan program prohibit the recipients from using the loan to fund prohibited activities such as influencing_legislation participating in a political campaign and undertaking any activity for any purpose other than one specified in sec_170 foundation states none of the loans will be made to disqualified persons as defined in sec_4946 foundation represents it conducts the loan program through a staff of full-time salaried experts in education and related areas as well as expert consultants that specialize in key areas to supplement the work of its staff foundation represents it will provide technical assistance and oversight to enhance the quality of the services that all providers and community based organizations provide to foundation’s target population foundation represents it will establish guidelines for the operation of loans provided through an intermediary advise on how loans to service providers are to be structured plr-125533-17 and provide qualifications required for service providers seeking a loan foundation states that this includes but is not limited to standards for curriculum staff facilities and criteria governing how borrowers should use their loans in addition foundation represents it requires and monitors regular reports from intermediaries foundation represents it will oversee the operations of partners by providing a primary program and financial contact from foundation’s staff foundation states it will require service providers and intermediaries to work closely with foundation regarding major decisions such as planning substantive elements and providing financial and activity reports to foundation foundation provides technical assistance including training knowledge sharing data collection assistance and educational materials rulings requested law and analysis requested ruling loans made by foundation pursuant to the loan program constitute program-related investments under sec_4944 and are not investments that jeopardize the carrying out of an exempt_purpose section sec_170 refers to organizations organized and operated exclusively for among other things charitable and educational_purposes sec_4944 imposes an excise_tax on the making of an investment by a private_foundation in such a manner as to jeopardize the carrying out of any of its exempt purposes sec_4944 provides that program-related investments shall not be considered as jeopardizing the carrying out of exempt purposes if the primary purpose of the investment is to accomplish one or more of the purposes described in sec_170 and no significant purpose is the production_of_income or the appreciation of property sec_53_4944-3 provides that a program-related_investment is an investment which possesses the following characteristics i the primary purpose of the investment is to accomplish one or more of the purposes described in sec_170 ii no significant purpose of the investment is the production_of_income or the appreciation of property and iii no purpose of the investment is attempting to influence legislation or participating or intervene in including the publishing or distributing of plr-125533-17 statements any political campaign on behalf of or in opposition to any candidate for public_office sec_53_4944-3 provides that an investment shall be considered as made primarily to accomplish one or more purposes described in sec_170 if it significantly furthers the accomplishment of the private foundation’s exempt_activities and if the investment would not have been made but for such relationship between the investment and the accomplishment of the foundation’s exempt_activities sec_53_4944-3 provides that in determining whether a significant purpose of an investment is the production_of_income or the appreciation of property it shall be relevant whether investors solely engaged in the investment for profit would be likely to make the investment on the same terms as the private_foundation however the fact that an investment produces significant income or capital appreciation shall not in the absence of other factors be conclusive evidence of a significant purpose involving the production_of_income or the appreciation of property sec_53_4944-3 example involves a business_enterprise located in a deteriorated urban_area and owned by economically disadvantaged minority group conventional sources of funds are unwilling or unable to provide funds to the business_enterprise a private_foundation makes a loan to the business_enterprise bearing interest below the market rate for commercial loans of comparable risk private foundation’s primary purpose for making the loan is to encourage the economic development of such minority groups the loan has no significant purpose involving the production_of_income or the appreciation of property the loan significantly furthers the accomplishment of private foundation’s exempt_activities and would not have been made but for such relationship between the loan and private foundation’s exempt_activities therefore the loan is a program-related_investment even though private_foundation may earn income from the investment in an amount comparable to or higher than earnings from conventional portfolio investments sec_53_4944-3 example involves a business_enterprise which is not owned by low-income person or minority group members the continued operation of the business_enterprise is important to the economic well-being of a deteriorated urban_area because the business_enterprise employs a substantial number of low-income persons from the area conventional sources of funds are unwilling or unable to provide funds to the business_enterprise at reasonable interest rates a private_foundation makes a loan to business_enterprise at an interest rate below the market rate for commercial loans of comparable risk the loan is made pursuant to a program run by the private_foundation to assist low-income persons by providing increased economic opportunities and to prevent community deterioration no significant purpose of the loan involves the production_of_income or the appreciation of property the investment significantly furthers the accomplishment of private foundation’s exempt_activities and plr-125533-17 would not have been made but for such relationship between the loan and private foundation’s exempt_activities therefore the loan is a program-related_investment sec_53_4944-3 example involves a business_enterprise which is financially secure and the stock of which is listed and traded on a national stock exchange private_foundation makes a loan to business_enterprise at an interest rate below the market rate in order to induce business_enterprise to establish a new plant in a deteriorated urban_area which because of the risks involved business_enterprise would be unwilling to establish absent such inducement the loan is made pursuant to a program run by private_foundation to enhance the economic development of the area by providing employment opportunities for low-income persons at the new plant and no significant purpose involves the production_of_income or the appreciation of property the loan significantly furthers the accomplishment of private foundation’s exempt_activities and would not have been made but for such relationship between the loan and private foundation’s exempt_activities accordingly even though business_enterprise is large and established the investment is program-related sec_53_4944-3 example involves a non-profit corporation that provides child cares services in a low-income neighborhood enabling many residents of the neighborhood to be gainfully_employed non-profit corporation has determined that the demand for its services warrants the construction of a new child_care_facility in the same neighborhood non-profit corporation is unable to obtain a loan from conventional sources of funds including from a commercial bank because of non-profit corporation’s credit record private_foundation has agreed to deposit funds into bank and bank lends an identical amount to non-profit corporation to construct the new child_care_facility the deposit agreement provides that private_foundation will earn an interest rate on the deposit which is substantially less than what private_foundation could otherwise earn on this sum of money if private_foundation invested it elsewhere the loan agreement between bank and non-profit corporation requires non-profit corporation to use the proceeds from the loan to construct the new child_care_facility private foundation’s primary purpose in making the deposit is to further its educational_purposes by enabling non-profit corporation to provide child care services within the meaning of sec_501 no significant purpose of the deposit involves the production_of_income or the appreciation of property the deposit significantly furthers the accomplishment of private foundation’s exempt_activities and would not have been made but for such relationship between the deposit and private foundation’s exempt_activities accordingly the deposit is a program-related_investment generally sec_4944 imposes a tax on jeopardizing investments however sec_4944 provides an exception for program-related investments the primary purpose of the loan program is to further foundation’s educational and charitable purpose as described in sec_170 furthermore the loans would not have been made but for such relationship between the loan and the accomplishment of plr-125533-17 foundation’s exempt_activities sec_53_4944-3 and sec_53_4944-3 example sec_4 and foundation will make loans to service providers that lack stable revenue needed to qualify for commercial loans paying market-rate interest under the foundation’s loan program foundation will make loans bearing interest rates below market interest rates or interest free the loans made under the foundation’s loan program have no significant purpose of income production or the appreciation of property sec_53_4944-3 sec_53_4944-3 example foundation may also make loans to more financially secure for-profit organizations solely for supporting the educational and charitable activities of the foundation the loans made to more financially secure entities will be made at a below market rate interest in order to induce these entities to engage in education and charitable work that they may not otherwise engage in loans made to these organizations have no significant purpose that involves the production_of_income or the appreciation of property and would not have been made but for such relationship between these entities the loan program and foundation’s exempt_activities sec_53 b example in addition foundation will make loans to intermediaries that have unique expertise in lending money to and assisting educational and community-based organizations the intermediaries will identify qualified_service providers and make loans of the foundation’s funds to these service providers intermediaries and service providers can only use the loan amount to advance foundation’s charitable and educational_purposes utilizing intermediaries in this way helps foundation effectively use its loans to further its charitable and educational_purposes sec_53_4944-3 example finally all loans made under the foundation’s loan program prohibit the recipients from using the loan for any purpose other than one specified in sec_170 and to fund prohibited activities which include influencing_legislation participating in a political campaign and undertaking any activity sec_53_4944-3 and iii therefore the loans made under the foundation’s loan program are program-related investments as described in sec_4944 and sec_53_4944-3 requested ruling loans made by foundation pursuant to the loan program constitute qualifying distributions made directly for the active_conduct of activities constituting foundation’s charitable and education purposes within the meaning of sec_4942 sec_4942 defines qualifying_distribution in relevant part as any amount_paid to accomplish one or more purposes described in sec_170 plr-125533-17 sec_4942 in relevant part provides an organization which is an operating_foundation must make qualifying distributions within the meaning of sec_4942 directly for the active_conduct of the activities constituting the purpose or function for which it is organized and operated sec_53_4942_a_-3 in relevant part defines the term qualifying_distribution to mean any amount including program related investments as defined in sec_4944 and reasonable and necessary administrative expenses paid to accomplish one or more purposes described in sec_170 other than any contribution to a private_foundation which is not an operating_foundation or to an organization controlled directly or indirectly by the contributing private_foundation or one or more disqualified persons with respect to such foundation sec_53_4942_b_-1 in relevant part provides except as provided in subparagraphs or qualifying distributions are not made by a foundation directly for the active_conduct of activities constituting its charitable educational or other similar exempt_purpose unless such qualifying distributions are used by the foundation itself rather than by or through one or more grantee organizations which receive such qualifying distributions directly or indirectly from such foundation thus grants made to other organizations to assist them in conducting activities which help to accomplish their exempt_purpose are considered an indirect rather than direct means of carrying out exempt_purpose of the grantor foundation regardless of the fact that the exempt_activities of the grantee organization may assist the grantor foundation in carrying out its own exempt_activities sec_53_4942_b_-1 provides that if a foundation makes or awards grants scholarships or other_payments to individual beneficiaries including program related investments within the meaning of sec_4944 made to individuals or corporate enterprises to support active programs conducted to carry out the foundation’s exempt_purpose such payments will be treated as qualifying distributions made directly for the active_conduct of exempt_activities only if the foundation apart from the making or awarding of the grants scholarships or other_payments otherwise maintains some significant involvement - as defined in in sec_53 b - b ii - in the active programs in support of which such payments were made or awarded whether the making or awarding payments constitutes qualifying distributions made directly for the active_conduct of the foundation’s exempt_activities is to be determined on the basis of the facts and circumstances of each particular case the test applied is a qualitative rather than a strictly quantitative one therefore if the foundation maintains a significant involvement it will not fail to meet the general_rule of sec_53_4942_b_-1 solely because more of its funds are devoted to the making or awarding of payments than to the active programs which such payments support however if a foundation does no more than select screen and investigate applicants for grants or scholarships pursuant to which the recipients perform their work plr-125533-17 or studies alone or exclusively under the direction of some other organization such grants or scholarships will not be treated as qualifying distributions made directly for the active_conduct of the foundation’s exempt_activities sec_53_4942_b_-1 provides that a foundation will be considered as maintaining a significant involvement in an exempt activity in connection with which payments are made or awarded if the foundation has developed some specialized skills expertise or involvement in a particular discipline or substantive area such as social work or education it maintains a salaried staff of administrators researchers or other personnel who supervise or conduct programs or activities which support and advance the foundation’s work in its particular area_of_interest and as a part of such programs or activities the foundation makes or awards payments to individuals to encourage and further their involvement in the foundation’s particular area_of_interest and in some segment of the programs or activities carried on by the foundation such as grants to engage in social work projects which are under the general direction and supervision of the foundation foundation’s mission is to operate and support educational programs and projects serving underserved and impoverished children and families by direct involvement in the improvement and expansion of education opportunities foundation will make loans under the loan program to service providers that provide educational and other support to underserved and impoverished children and families as such loans under the loan program are considered an indirect rather than direct means of carrying out the exempt_purpose of the foundation and would not be qualifying distributions sec_53_4942_b_-1 as discussed above loans made under the foundation’s loan program were determined to qualify as a program-related_investment in general if a foundation makes other_payments including program-related investments to corporate enterprises to support active programs conducted to carry out a foundation’s charitable educational or other exempt_purpose such other_payments will be treated as qualifying distributions made directly for the active_conduct of exempt_activities only if the foundation maintains some significant involvement in the active programs in support of which other_payments were made sec_53_4942_b_-1 as discussed in sec_53_4942_b_-1 foundation does more than select screen and investigate recipients of loans under the loan program foundation will provide technical assistance to all service providers receiving loans furthermore as discussed in sec_53_4942_b_-1 foundation engages a staff of full- time salaried experts in education and related areas as well as expert consultants that specialize in key areas to assist intermediaries and service providers who will receive training knowledge sharing data collection assistance and educational materials to facilitate capacity building plr-125533-17 in addition foundation will have stringent guidelines and rules for loans to be made under the loan program to intermediaries and service providers this includes advising on how loans to service providers are to be structured and setting forth qualifications required for service providers seeking a loan from an intermediary foundation will have sole and absolute discretion to forgive of any portion of a loan foundation will require regular reports during the year from intermediaries foundation will oversee operations of partners funded with loans from the loan program by providing a primary program and financial contact from foundation’s salaried staff foundation will require service providers and intermediaries to work closely with foundation regarding major decisions such as planning substantive elements and providing financial and activity reports to foundation accordingly as foundation has specialized skills expertise and involvement in education it maintains a salaried staff of administrators researchers or other personnel who supervise activities which support and advance foundation’s mission and the loan program encourages others to further their involvement in foundation’s area_of_interest under the foundation’s general direction and supervision foundation will be considered as maintaining significant involvement in a charitable or educational exempt activity in connection with the loan payments made under the loan program as described in sec_53_4942_b_-1 and ii b rulings based solely on the facts and representations submitted by foundation we rule as follows loans made by foundation pursuant to the loan program constitute program- related investments under sec_4944 and are not investments that jeopardize the carrying out of exempt purposes loans made by foundation pursuant to the loan program constitute qualifying distributions made directly for the active_conduct of activities constituting foundation’s charitable and education purposes within the meaning of sec_4942 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 except as expressly provided herein no opinion is expressed or implied as to the federal tax consequences of the facts described above under any other provision of the irc plr-125533-17 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 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 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 james zelasko branch chief exempt_organizations branch tax exempt and government entities cc


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 ita b05 plr-125337-10 date date internal_revenue_service number release date index number ---------------------------------- -------------------------- ------------------- ----------------------- ---------------------------------- taxpayer -------------------- -------------------------------------- year ------- dear ------------- this ruling is in reference to taxpayer’s request that its form_1128 application to adopt change or retain a tax_year be considered timely filed under the authority in sec_301_9100-3 of the procedures and administration regulations taxpayer filed a late form_1128 to change its accounting_period for federal_income_tax purposes from a 53-week taxable_year ending on the last saturday in september to a 52-53-week taxable_year ending on the last saturday in december effective december year revproc_2006_45 2006_2_cb_851 as modified and clarified by revproc_2007_64 2007_2_cb_818 provides procedures for certain corporations to obtain automatic approval to change their annual_accounting_period under sec_442 of the internal_revenue_code a corporation complying with all the applicable provisions of this revenue_procedure will be deemed to have obtained the approval of the commissioner of the internal_revenue_service to change its annual_accounting_period section of revproc_2006_45 provides that a form_1128 filed pursuant to the revenue_procedure will be considered timely filed for purposes of sec_1_442-1 of the income_tax regulations only if it is filed on or before the time including extensions for filing the return for the short_period required to effect such change the information furnished indicates that taxpayer did not file its form_1128 by the due_date of the return for the short_period required to effect such change and did not request an extension of time to file its return however taxpayer filed its form_1128 under sec_301_9100-3 soon thereafter sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions such as the instant case must be made under the rules of sec_301_9100-3 request for plr-125337-10 relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that the granting of relief will not prejudice the interest of the government based on the facts and information submitted and the representations made we conclude that taxpayer has acted reasonably and in good_faith and that the granting of relief will not prejudice the interest of the government accordingly taxpayer has satisfied the requirements of the regulations for the granting of relief and taxpayer’s late-filed form_1128 requesting to change to a 52-53-week taxable_year ending in december effective december year is considered timely filed because a change in period under revproc_2006_45 is under the jurisdiction of the director internal_revenue_service center where taxpayer’s returns are filed we have forwarded the application to the director ogden utah service_center any further communication regarding this matter should be directed to the service_center this ruling is based upon facts and representations submitted by 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 however as part of an examination process the service may verify the factual information representations and other data submitted this ruling addresses the granting of sec_301_9100-3 relief only we express no opinion regarding the tax treatment of the instant transaction under the provisions of any other section of the code or the regulations that may be applicable or regarding the tax treatment of any conditions existing at the time of or effects resulting from the instant transaction specifically we express no opinion as to whether taxpayer is permitted under the code and applicable regulations to change to the tax_year requested in the form_1128 or whether the change may be effected under revproc_2006_45 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayer filing its returns electronically may satisfy this requirement by attaching a statement to its return that provides the date and control number of the letter_ruling plr-125337-10 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 enclosed is a copy of the letter_ruling showing the deletions proposed to be made when it is disclosed under sec_6110 sincerely amy j pfalzgraf senior counsel branch income_tax accounting office_of_chief_counsel


t c no united_states tax_court patricia m mora f k a patricia rasberry petitioner and lynn rasberry intervenor v commissioner of internal revenue respondent docket no filed date h invested in a tax_shelter limited_partnership that passed through substantial losses that were claimed on the joint federal_income_tax returns h and w filed for the taxable years and and disallowed by r after h and w were divorced w sought relief from joint_and_several_liability r denied w’s request for relief from joint_and_several_liability under sec_6015 and c i r c on the ground that w had knowledge of the items giving rise to the deficiencies held w is not entitled to relief from joint_and_several_liability under sec_6015 i r c w had reason to know of the understatements by reason of the size of the losses in relation to the income of h and w a reasonable person in w’s position would have made inquiries to determine the legitimacy of the losses and w failed to make any such inguiries -- - held further w is entitled to relief under sec_6015 i r c the items giving rise to the deficiencies the disallowed partnership losses are properly attributed to h’s activities and partnership_interest w did not have actual knowledge of the items giving rise to the deficiencies at the time she signed the tax returns under the standard enunciated by this court in 116_tc_198 the test for actual knowledge under sec_6015 c i r c 1s whether the requesting spouse had actual knowledge of the facts resulting in the disallowance of the losses contrary to respondent’s argument the king standard should be applied to both active and passive activities therefore petitioner is entitled to relief from joint_and_several_liability under sec_6015 i r c held further pursuant to sec_6015 b i r c w is not relieved of liability under sec_6015 i r c to the extent that she received a tax_benefit from the disallowed partnership losses claimed on the joint returns patricia m mora f k a patricia rasberry pro_se lynn rasberry pro_se thomas m rohall and kathryn k vetter for respondent beghe judge this case is before us on petitioner’s stand-alone petition under sec_6015 for relief from joint_and_several_liability following respondent’s denial of relief intervenor is petitioner’s former spouse who intervened under sec_6015 and rule intervenor and respondent ‘unless otherwise indicated all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure - - both contend that petitioner is not entitled to relief under either sec_6015 or c we sustain respondent’s determination that petitioner is not entitled to relief under sec_6015 but hold that petitioner is entitled to partial relief under sec_6015 findings_of_fact most of the facts have been stipulated and are so found the stipulation of facts and the related exhibits are incorporated by this reference petitioner and intervenor both resided in california at the time their petition and request for intervention respectively were filed with this court petitioner was born in and came to the united_states from uruguay in date before moving to the united_states petitioner obtained the equivalent of an associate’s degree in business administration from a community college in uruguay petitioner is fluent in english intervenor was born in and is not a college graduate petitioner and intervenor were married on date in and petitioner and intervenor both worked at the california state capitol petitioner worked as a clerk for an assemblywoman and intervenor worked for the california state senate petitioner and intervenor filed joint federal_income_tax returns for and - - sometime before intervenor was introduced through a coworker to an investment syndicator and tax preparation service known to him as hoyt investments walter j hoyt iii and some members of his family were in the business of creating tax_shelter limited_partnerships for their cattle breeding operations as part of their services the hoyt organization also prepared the investors’ tax returns for a description of the hoyt organization and its operation see bales v commissioner tcmemo_1989_568 see also river city ranches j v v commissioner tcmemo_1999_209 affd without published opinion __ f 3d _ 9th cir date intervenor attended a meeting organized by the hoyt organization at which he decided to participate ina tax_shelter limited_partnership and have the hoyt organization prepare his and petitioner’s joint federal_income_tax returns intervenor signed all the partnership forms gave the hoyt organization a check for dollar_figure and thereby became a limited_partner in shorthorn genetic engineering ltd shorthorn partnership according to the shorthorn partnership’s records the partnership_interest was held in the names of both petitioner and intervenor even though petitioner had not signed any of the partnership documents intervenor did not have material discussions with petitioner about his decision to invest in the shorthorn partnership tax - shelter or about his decision to allow the hoyt organization to prepare his and petitioner’s joint tax returns petitioner had little if any involvement with the hoyt organization she was new to this country had no experience with u s income_tax laws and trusted intervenor to handle their tax_return preparation however petitioner was aware that intervenor had made some financial arrangements with the hoyt organization petitioner and intervenor were both wage earners who did not itemize their deductions the tax office of w j hoyt sons management co prepared their and tax returns intervenor delivered his and petitioner’s financial information consisting of the wage information from their forms w-2 wage and tax statement to the hoyt office from that information the hoyt office prepared and mailed the final returns to petitioner and intervenor for their signatures the joint federal_income_tax return of petitioner and intervenor for showed wages of dollar_figure and shorthorn partnership losses of dollar_figure their joint_return for showed wages of dollar_figure and shorthorn partnership losses of dollar_figure on the basis of the filed returns petitioner and intervenor received income_tax refunds of dollar_figure for and dollar_figure for hoyt told intervenor to endorse and forward the refund checks when received to the hoyt office so that hoyt could calculate and deduct intervenor’s required_contribution to the shorthorn partnership intervenor delivered the endorsed refund checks to hoyt ’ intervenor had invested only dollar_figure in the shorthorn partnership at the time he and petitioner filed their joint federal_income_tax return in which they claimed dollar_figure in tax losses from the shorthorn partnership as a result of the shorthorn partnership losses petitioner and intervenor received a tax_refund for of dollar_figure intervenor signed the refund check over to the shorthorn partnership and received back less than dollar_figure the shorthorn partnership kept the balance of the income_tax refund as intervenor’s shorthorn partnership capital_contribution at the time petitioner and intervenor filed their return intervenor had invested less than dollar_figure in the shorthorn partnership yet claimed an additional dollar_figure of shorthorn partnership losses together with the losses petitioner and intervenor recognized a total of dollar_figure in it is unclear whether and if so how a general endorsement or a restrictive endorsement petitioner endorsed the refund checks according to the testimony intervenor had invested the original dollar_figure plus the dollar_figure tax_refund endorsed to the hoyt organization less approximately dollar_figure of the tax_refund that they received back from the hoyt organization - partnership losses it appears that most of petitioner and intervenor’s refund was also paid to the shorthorn partnership respondent examined the shorthorn partnership’s returns and issued notices of final_partnership_administrative_adjustment fpaa to the shorthorn partnership walter j hoyt iii as tax_matters_partner for the shorthorn partnership filed a petition with this court docket no which was consolidated with other hoyt partnership cases after the partners’ stipulations in bales v commissioner supra the tax_matters_partner for the shorthorn partnership stipulated most of the issues raised by the commissioner the tax_court issued an opinion affirming the commissioner’s calculations regarding the effect of the stipulation on each of the partnerships which is reported at shorthorn genetic engineering ltd v commissioner tcmemo_1996_515 on the basis of the stipulations and opinion a substantial portion of the shorthorn partnership losses was disallowed according to respondent the losses were disallowed because among other things the shorthorn partnership overstated both the number and value of animals owned by the partnership that formed the basis for the deductions on the basis of the stipulated and decided issues at the partnership level respondent denied a portion of the losses that --- - were passed through to intervenor from the shorthorn partnership for and the denial of the losses resulted in computational adjustments owing by petitioner and intervenor which were timely assessed as deficiencies on date on date petitioner and intervenor filed a joint petition for summary dissolution of their marriage in the their dissolution petition petitioner and intervenor stated that they had no community assets or liabilities the divorce became final in the divorce was amicable on date after respondent mailed a notice of computational adjustment to petitioner and offset two of her income_tax refunds from later year returns ’ petitioner filed with respondent a form_8857 requesting relief from joint_and_several_liability on date respondent mailed to petitioner a determination_letter denying petitioner’s request for relief from joint_and_several_liability under both sec_6015 and c the explanation accompanying the denial states your claim for innocent spouse has been disallowed under sec_6015 sec_6015 you did not meet one of the qualifying factors required under b and c lack of knowledge of the understatement according to petitioner’s testimony at trial respondent initially offset two of her income_tax refunds one of petitioner’s tax refunds was returned to her after she filed her request for relief from joint_and_several_liability respondent has retained one of her tax refunds - - on date petitioner timely mailed to this court a petition for redetermination of relief from joint_and_several_liability on a joint_return on date respondent mailed a notice to intervenor informing him that petitioner had filed a petition with this court requesting relief from joint_and_several_liability and that he had a right to intervene on date intervenor filed a notice of intervention with this court requesting that petitioner’s petition for relief from joint_and_several_liability be denied ultimate findings_of_fact a reasonably prudent taxpayer in the circumstances of petitioner would have known that the tax_liabilities stated on the returns were erroneous or that further investigation was warranted petitioner had no actual knowledge of the facts resulting in the disallowance of the shorthorn partnership losses opinion with certain exceptions a husband and wife may elect to file a joint_return based on their aggregate taxable_income see sec_6013 after making the election to file a joint_return each of the spouses is jointly and severally liable for the entire tax due sec_6013 one of the fundamental characteristics of joint_and_several_liability is that the -- - obligee may proceed against the obligors separately and may obtain separate judgments against each 44_tc_420 prior to a spouse was held strictly liable for tax deficiencies resulting from omissions and deductions attributable solely to the other spouse even if the ‘innocent spouse’ knew nothing of the erroneous items 897_f2d_441 9th cir in order to mitigate the effect of the harsh rule holding both spouses jointly and severally liable for joint_return taxes in all circumstances congress in enacted former sec_6013 to bring government tax collection practices into accord with basic principles of equity and fairness s rept pincite 1971_1_cb_606 under the original sec_6013 enacted in a requesting spouse was entitled to relief from joint_return liability only for the nonreguesting spouse’s failure to report income in former sec_6013 was amended to cover any substantial_understatement of tax whether arising from an omission_of_income or an erroneous deduction exclusion or credit in congress repealed former sec_6013 and enacted sec_6015 internal_revenue_service restructuring and reform act of publaw_105_206 112_stat_734 - sec_6015 was given retroactive effect with respect to any liability for tax remaining unpaid as of date see id sec_3201 112_stat_740 to the extent that the relief petitioner requested relates to taxes that had not been paid as of that date ’ sec_6015 is applicable sec_6015 contains three alternative grounds for relief from joint_and_several_liability first sec_6015 b provides for traditional relief from joint_and_several_liability following the model of former sec_6013 second sec_6015 provides for an allocation of liability as if the spouses had filed separate returns finally sec_6015 provides for relief on other equitable grounds but only if sec_6015 and c does not apply issue petitioner’s right to sec_6015 relief sec_6015 provides for relief from joint_and_several_liability on a joint_return if five elements are met -petitioner stated at trial i am not trying to seek relief from my income during those two years i am seeking relief for the--an investment that i had no knowledge of and i had no idea what that was i am not---like i said i am not seeking relief for the income for those two years according to petitioner’s testimony respondent has offset one of petitioner’s subsequent year tax refunds petitioner would not be entitled under sec_6015 to a refund of any amount she had previously paid sec_6015 the amount she had previously paid however should be taken into account in determining her liability under sec_6015 on a separate_return basis ‘petitioner did not request relief under sec_6015 in her petition or in any of her other filings with this court a a joint_return has been made for a taxable_year b on such return there is an understatement_of_tax attributable to erroneous items of individual filing the joint_return c the other individual filing the joint_return establishes that in signing the return he or she did not know and had no reason to know that there was such understatement d taking into account all the facts and circumstances it is inequitable to hold the other individual liable for the deficiency in tax for such taxable_year attributable to such understatement and eb the other individual elects in such form as the secretary may prescribe the benefits of this subsection not later than the date which i sec_2 years after the date the secretary has begun collection activities with respect to the individual making the election respondent’s determination states that petitioner’s request for relief from joint_and_several_liability is denied because petitioner failed to show her lack of knowledge of the understatement while respondent’s determination appears to have focused on petitioner’s actual knowledge rather than her reason to know petitioner bears the burden of proving all of the elements entitling her to relief mueller v commissioner tcmemo_2001_178 kalinowski v commissioner tcmemo_2001_ petitioner carries the burden_of_proof as to each of these elements in re french bankr n bankr n d ohio applying prior_law under former sec_6013 to determine burden_of_proof under sec_6015 petitioner therefore must show both that she lacked actual knowledge of the understatement and that she had no reason to know of the understatement because an appeal in this case would lie in the court_of_appeals for the ninth circuit we are bound by ninth circuit law see 54_tc_742 affd 445_f2d_985 10th cir the principal ninth circuit case interpreting the not know and had no reason to know requirement’ in connection with an erroneous deduction is 887_f2d_959 9th cir charles and patricia price filed a joint_return in which they deducted dollar_figure in alleged exploration and development expenses passed through to them from a colombian gold mining operation formed by charles the dollar_figure deduction was taken against total income of dollar_figure after making a cursory review of the tax_return patricia noticed the large deduction and questioned charles about the legitimacy of the deduction ‘887_f2d_959 9th cir arose under former sec_6013 rather than under current sec_6015 the same standard applies under the sec_6015 knowledge test former sec_6013 c provided the other spouse establishes that in signing the return he or she did not know and had no reason to know that there was such substantial_understatement current sec_6015 c provides the other individual filing the joint_return establishes that in signing the return he or she did not know and had no reason to know that there was such understatement the only meaningful change in the language was to eliminate the requirement that the understatement be substantial the did not know and had no reason to know language is the same in both provisions charles assured her that the deduction was proper and had been approved by the certified_public_accountant who prepared and signed the return after the commissioner disallowed the deduction and charles and patricia were divorced patricia claimed relief from joint_and_several_liability under former sec_6013 following the law in omitted income cases the tax_court denied patricia’s claim for relief from joint_and_several_liability because patricia was aware of the existence of the transaction underlying the deduction--the existence of her husband’s gold mining investment the court_of_appeals for the ninth circuit reversed and granted patricia’s request for relief from joint_and_several_liability the court_of_appeals held that in erroneous deduction cases unlike omitted income cases the requesting spouse’s mere knowledge of the existence of the transaction underlying the deduction is not enough to deny relief in order to be denied relief the requesting spouse must know or have reason to know that the deduction would give rise to a substantial_understatement id pincite while ignorance of the legal or tax consequences of an item which gives rise to a deficiency is no defense something more than mere knowledge of the transaction is required thus if a spouse knows virtually all of the facts pertaining to the transaction which underlies the -- - substantial_understatement her defense in essence is premised solely on ignorance of law id in sucha scenario regardless of whether the spouse possesses knowledge of the tax consequences of the item at issue she is considered as a matter of law to have reason to know of the substantial_understatement and thereby is effectively precluded from establishing to the contrary id pincite where the requesting spouse lacks such pervasive knowledge of the facts of the underlying transaction the court_of_appeals concluded that the trier of fact must determine whether the requesting spouse had sufficient knowledge of the facts to make denial of relief appropriate a spouse has reason to know of the substantial_understatement if a reasonably prudent taxpayer in her position at the time she signed the return could be expected to know that the return contained the substantial_understatement factors to consider in analyzing whether the alleged innocent spouse had reason to know of the substantial_understatement include the spouse’s level of education the spouse’s involvement in the family’s business and financial affairs the presence of expenditures that appear lavish or unusual when compared to the family’s past levels of income standard of living and spending patterns and the culpable spouse’s evasiveness and deceit concerning the couple’s finances id pincite citations omitted even though she had limited knowledge of the facts underlying the transaction giving rise to the deduction the court_of_appeals found on the basis of the size of the deduction in relation to the taxpayers’ joint income that patricia had sufficient knowledge such that a reasonably prudent taxpayer in her position would be led to question the legitimacy of the deduction id however because patricia gquestioned charles -- - about the deduction and obtained sufficient assurance that the deduction was appropriate she satisfied her duty_of inquiry id therefore the court_of_appeals granted patricia’s claim for relief from joint_and_several_liability the court_of_appeals specifically distinguished other cases in which the requesting spouse failed to question the legitimacy of the deduction we therefore distinguish this case from one in which the tax_court denied relief to a spouse seeking relief who simply ignored a large deduction and who refused to make inquiries id in the case at hand we are satisfied that petitioner did not have actual knowledge of the facts giving rise to the disallowance of the losses there was conflicting testimony concerning whether petitioner had any involvement in the shorthorn partnership intervenor testified that petitioner had knowledge and was involved in the decision to participate in the shorthorn partnership conversely petitioner denied that she had any involvement in or knowledge of the investment claiming that she left the matter entirely in intervenor’s hands even if we accepted intervenor’s testimony as true we would find that neither petitioner nor intervenor knew the facts that made the flowthrough losses from the partnership unallowable as deductions on their joint returns indeed neither petitioner nor intervenor understood the nature of their investment or the claimed basis for their deductions they put their trust entirely in the hoyt organization to determine the basis for propriety of and amount of their deductions moreover the documentary_evidence supports petitioner’s contention that she had no involvement with the shorthorn partnership intervenor signed all of the documents offered in evidence petitioner signed none of them intervenor asserted in his intervention papers that petitioner attended a meeting with the hoyt organization but his actual testimony on this point was uncertain a as far as i know she went with me to the one and only meeting i went to court as far as you know or as far as you recall a as far as i recall petitioner denied ever attending a meeting or knowing any of the people involved in the hoyt matter on balance we believe petitioner has met her burden of proving by a preponderance_of_the_evidence that she had no involvement with the shorthorn partnership she clearly lacked actual knowledge of the facts giving rise to the understatement however petitioner had reason to know of the understatement the partnership losses were simply too large in relation to petitioner and intervenor’s joint income for a reasonably prudent person with petitioner’s level of education to ignore petitioner and intervenor’s joint federal_income_tax - - return for showed wages of dollar_figure and shorthorn partnership losses of dollar_figure and for showed wages of dollar_figure and shorthorn partnership losses of dollar_figure a reasonably prudent taxpayer would have questioned deductions of this size in relation to their income_tax returns setting forth large deductions such as tax_shelter losses offsetting income from other sources and substantially reducing or eliminating the couple's tax_liability generally put a taxpayer on notice that there may be an understatement_of_tax liability 992_f2d_1256 2d cir affg tcmemo_1992_228 unlike the situation in 887_f2d_959 9th cir where the requesting spouse questioned the deduction and received assurances regarding the propriety of the deduction petitioner failed to make inguiries the court in price distinguished cases like the one at hand where a spouse seeking relief simply ignored a large deduction and refused to make inquiries id pincite see also 112_f3d_1258 5th cir tax returns setting forth ‘dramatic deductions’ will generally put a reasonable taxpayer on notice that further investigation is warranted a spouse who has a duty to inguire but fails to do so may be charged with constructive knowledge of the substantial_understatement and thus precluded from obtaining innocent spouse -- relief affg in part and revg in part tcmemo_1995_512 hayman v commissioner supra pincite no relief where requesting spouse failed to read return kalinowski v commissioner tcmemo_2001_21 applying price standard to sec_6015 cases levin v commissioner tcmemo_1987_67 denying relief from joint_and_several_liability where requesting spouse failed to make inquiry under the circumstances petitioner has failed to meet her burden of showing that a reasonable person in her position would not have reason to know of the understatement therefore petitioner is not entitled to relief from joint_and_several_liability under sec_6015 issue petitioner’s right to sec_6015 relief respondent has also denied petitioner’s claim for relief under sec_6015 petitioner was eligible to make an election under sec_6015 because she was no longer married to intervenor at the time she filed her request for relief from joint_and_several_liability see sec_6015 a upon the satisfaction of certain conditions sec_6015 c relieves the requesting spouse of liability for the items making up the deficiency that would have been allocable solely to the nonrequesting spouse if the spouses had filed separate tax returns for the taxable_year sec_6015 a petitioner has the burden of proving which items would not have been allocated to her if the spouses had filed separate returns - - see 116_tc_189 burden_of_proof under sec_6015 normally on the taxpayer except under sec_6015 c actual knowledge test petitioner has met her burden of establishing that the items making up the deficiency are attributable to intervenor and not to her petitioner established by a preponderance_of_the_evidence that she had no involvement in the decision to invest in the shorthorn partnership or to have the hoyt organization prepare their joint income_tax returns she signed none of the documents for the shorthorn partnership offered in evidence there was no firm credible_evidence that petitioner had any involvement with the hoyt organization intervenor admitted that he was the one who was introduced to the hoyt organization by a coworker he admitted to attending an introductory hoyt meeting and to deciding to participate in the shorthorn partnership he delivered his and petitioner’s tax information to the hoyt organization to prepare their tax returns the deduction of excessive losses from the shorthorn partnership is therefore attributable entirely to intervenor’s activities and his partnership_interest and would have been allocated entirely to him if the spouses had filed separate returns petitioner is ‘determinations made under sec_6015 are made without regard to community_property_laws sec_6015 flush language therefore petitioner’s potential interest in the shorthorn partnership as a result of the community_property_laws is ignored continued - therefore entitled to relief under sec_6015 from joint_and_several_liability for the deficiency except to the extent that one or more of the exceptions apply sec_6015 contains three exceptions under which items initially attributed to the nonrequesting spouse must also be attributed to the requesting spouse these are the actual knowledge exception in sec_6015 c the benefit exception in sec_6015 b and the fraud exception in sec_6015 there are no facts to suggest that the fraud exception applies here a the actual knowledge exception the first exception to the separate_return rule is for items initially allocable solely to the nonrequesting spouse of which the requesting spouse has actual knowledge sec_6015 c if petitioner had actual knowledge of any item giving rise to a deficiency or portion thereof at the time she signed the return that item must be allocated to her see sec_6015 c c respondent claims that no relief is available to petitioner under sec_6015 because petitioner had actual knowledge of the items giving rise to the deficiency respondent continued for the purpose of determining whether any item giving rise to the deficiency should be attributed to her under the separate_return standard - has the burden of proving by a preponderance_of_the_evidence that petitioner at the time of signing the returns had actual knowledge of the items giving rise to the deficiency that otherwise would have been allocated solely to intervenor under the separate_return rule see sec_6015 c if the secretary demonstrates actual knowledge culver v commissioner supra in 116_tc_198 this court considered the standard for actual knowledge of the item giving rise to the deficiency applicable to erroneous deductions under sec_6015 c there the taxpayer filed a joint_return with her husband curtis freeman and claimed significant losses from freeman’s cattle ranching operations the taxpayer knew that the cattle ranch was not profitable but did not know that freeman lacked a profit_motive for engaging in the activity which was the critical fact underlying the commissioner’s determination that freeman was not entitled to deduct the losses under sec_183 this court held that the taxpayer was entitled to relief under sec_6015 even though the taxpayer was aware of the activity giving rise to the erroneous deduction the cattle ranching activity because she did not know the predicate facts causing the losses to be nondeductible e her husband’s lack of a profit_motive the question in this case therefore is not whether petitioner knew the tax consequences of a not- - - for-profit activity but whether she knew or believed that her former spouse was not engaged in the activity for the primary purpose of making a profit thus in determining whether petitioner had actual knowledge of an improperly deducted item on the return more is required than petitioner’s knowledge that the deduction appears on the return or that her former spouse operated an activity at a loss whether petitioner had the requisite knowledge is an essential fact respondent was required to establish under sec_6015 c respondent failed in this regard id pincite emphasis added applying the factual standard of king to the case at hand the losses from the shorthorn partnership would be allocated to petitioner only if she knew the factual basis for the denial of the deductions according to respondent the factual basis for the disallowed deduction in the hoyt tax_shelter cases generally centers on the lack of animals to sustain the deductions taken and an overvaluation of the animals that were available respondent concedes that neither he nor mr rasberry has established that petitioner had actual knowledge of the factual circumstances giving rise to the disallowance of the partnership losses respondent argues that the principle of king v commissioner supra should not be extended to limited_partnership investments because both spouses would often be eligible for sec_6015 relief since neither would have actual knowledge of the factual basis for the disallowance of the partnership losses that is not how sec_6015 works only items that are not attributable to the requesting spouse under sec_6015 are subject_to the actual knowledge exception in sec_6015 c since the erroneous deductions here -- - the shorthorn partnership losses are attributable to intervenor’s activities and his partnership_interest he cannot avoid his liability for the deficiency by filing a request for relief under sec_6015 even if he lacked knowledge of the facts giving rise to the deduction it is appropriate to apply the king standard to limited_partnership investments made by the nonrequesting spouse in allocating liabilities based on the separate_return standard in sec_6015 the actual knowledge test in sec_6015 c is an exception to the general_rule under which items resulting in the deficiency are allocated as if the spouses had filed separate returns the statute makes no distinction between active and passive investments and we see no legal basis and no policy reason for creating a judicial distinction therefore the shorthorn partnership losses which are attributable solely to intervenor’s activities and partnership_interest should not also be attributed to petitioner under sec_6015 c merely because both petitioner and intervenor rather than just petitioner lacked actual knowledge of the facts giving rise to the disallowance of the losses b the tax_benefit exception sec_6015 b contains an exception to the general_rule that items are to be attributed to the spouses in the same manner as they would have been had the spouses filed separate - - returns under this exception items giving rise to a deficiency that are attributable to the nonrequesting spouse must also be attributed to the requesting spouse if the requesting spouse received a tax_benefit from the items on the joint_return the legislative_history explains the operation of the tax_benefit exception if the deficiency arises as a result of the denial of an item of deduction or credit the amount of the deficiency allocated to the spouse to whom the item of deduction or credit is allocated is limited to the amount of income or tax allocated to such spouse that was offset by the deduction or credit the remainder of the liability is allocated to the other spouse to reflect the fact that income or tax allocated to that spouse was originally offset by a portion of the disallowed deduction or credit h conf rept pincite 1998_3_cb_747 both the conference committee report and the proposed_regulations contain an example under which an erroneous deduction attributable to the nonrequesting spouse in excess of the nonrequesting spouse’s separate_return income reduces the requesting spouse’s hypothetical separate_return_tax_liability resulting in a tax_benefit to the requesting spouse see id sec_1_6015-3 example proposed income_tax regs fed reg date in the case at hand petitioner would have been required to pay tax on her share of the income reported on each joint_return had she filed a separate_return because of the erroneous shorthorn partnership deductions attributed to intervenor - - petitioner did not pay any taxes on her separate_return share of the income therefore she received a tax_benefit from intervenor’s erroneous deductions that must be taken into account in determining the extent to which petitioner is entitled to relief from joint_and_several_liability in order to determine the relief to which petitioner is entitled the parties must determine the proportion of the erroneous shorthorn partnership deduction that resulted in a tax_benefit to petitioner the shorthorn partnership deduction is first attributed to intervenor to the extent of intervenor’s separate_return income the balance of the deduction benefited petitioner by reducing petitioner’s separate_return income petitioner is liable for the proportion of the deficiency equal to the proportion of the total shorthorn partnership deduction which benefited her for example if petitioner benefited from percent of the shorthorn partnership deduction she would be liable for percent of the deficiency and entitled to relief from joint_and_several_liability for percent of the deficiency any amounts previously collected from petitioner and intervenor should be appropriately credited after determining petitioner’s liability for the deficiency -- p7 - to give effect to the foregoing decision will be entered in accordance with rule


internal_revenue_service number release date index number -------------------------------- ------------------------------ --------------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------- id no ------------ telephone number -------------------- refer reply to cc psi b02 plr-117907-10 date date legend x a spouse trust ------------------------------ ---------------------- --------------------- ----------------------- ----------------------- ------------------------------------------------------------------- marital trust --------------------------------------------------------------------------- ---------------------- family_trust -------------------------------------------------------------------------- ---------------------- state d1 d2 d3 d4 ----------- --------------------- ------------------ --------------------- --------------------- plr-117907-10 dear ------------- this responds to a letter dated date submitted on behalf of x by x’s authorized representative requesting inadvertent termination relief pursuant to sec_1362 of the internal_revenue_code the information submitted states that x was incorporated under the laws of state and elected to be an s_corporation effective d1 trust a_trust that was treated under subpart e of part i of subchapter_j of chapter of the code subpart e as entirely owned by a was a shareholder of x on d2 a died upon a's death trust ceased to qualify as a grantor_trust with respect to a_trust provided that following a's death the family_trust be funded with a portion of the trust assets and a marital trust be funded with the remaining assets the marital trust provided that spouse had the power to request a distribution of all the assets from the trust the family_trust and marital trust were funded on d4 with x stock x represents that family_trust was eligible to be an electing_small_business_trust esbt within the meaning of sec_1361 effective d4 however no election to be to an esbt was filed on behalf of family_trust therefore the family_trust was not a permissible shareholder and x’s s_corporation_election was terminated effective d4 x represents that the circumstances resulting in the ineffectiveness of x’s s_corporation_election and the failure_to_file an esbt election for the family_trust was inadvertent and were not motivated by tax_avoidance or retroactive tax planning additionally x represents that x has filed federal_income_tax returns consistent with having a valid s_corporation_election in effect for x beginning on d1 x and its shareholders have agreed to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for the taxable_year sec_1361 provides that the term small_business_corporation is a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate and other than a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder sec_1362 provides that a_trust which was described in sec_1361 immediately before the death of the deemed owner and which continues in existence after such death but only for the 2-year period beginning on the day of the deemed plr-117907-10 owner's death may be a shareholder sec_678 provides that a person other than the grantor shall be treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself 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 paragraph or of sec_1362 the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the event resulting in the ineffectiveness steps were taken a so that the corporation is a small_business_corporation or b to acquire the required 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 such ineffectiveness the corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the information submitted and the representations made we conclude that trust was a permissible s shareholder under sec_1361 beginning the date of a's death and ending on d3 the day before the family_trust and marital trust were funded the power granted to spouse to withdraw all assets contributed to the marital trust including the x stock results in spouse being treated as the owner of the marital trust beginning d4 the date the marital trust was funded under sec_678 accordingly marital trust is a permitted shareholder of x under sec_1361 in addition we conclude that x’s s_corporation_election was inadvertently terminated on d4 because family_trust was an ineligible shareholder therefore pursuant to the provisions of sec_1362 x will be treated as an s_corporation from d1 and thereafter provided that i the family_trust files a esbt election effective d4 pursuant to the procedures set forth in sec_1_1361-1 with the appropriate service_center within days of the date of this letter ii marital trust spouse and family_trust and its beneficiaries will file amended returns for tax years including d4 and subsequent taxable_year consistent with the treatment of the family_trust as an esbt and the marital trust as a grantor_trust entirely owned by spouse within days of the date of this letter and iii provided that x’s election to be an s_corporation was not otherwise ineffective and was not terminated under sec_1362 a copy of this letter should be attached to the esbt election except for the specific ruling above no opinion is expressed or implied concerning the federal tax consequences of the facts of this case under any other provision of the plr-117907-10 code specifically no opinion is expressed or implied regarding x's eligibility to be an s_corporation or family trust's eligibility to be an esbt this ruling is directed only to the taxpayer who requested 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 forwarded to x’s authorized representative sincerely bradford r poston acting branch chief branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes