tcmemo_2007_10 united_states tax_court raymond a heers petitioner v commissioner of internal revenue respondent docket no filed date george e harp for petitioner william f castor for respondent memorandum findings_of_fact and opinion marvel judge respondent determined a deficiency in petitioner’s federal_income_tax of dollar_figure and additions to tax under sec_6651 and of dollar_figure and dollar_figure 1unless otherwise indicated section references are to the internal_revenue_code in effect for the taxable_year in issue and rule references are to the tax_court rules_of_practice and continued respectively for respondent also determined that petitioner was liable for an addition_to_tax under sec_6651 in an amount to be determined petitioner seeks a redetermination of the deficiency and additions to tax after concessions the issues for decision are whether petitioner received unreported income in the form of nonemployee compensation and an early individual_retirement_account ira distribution whether petitioner is liable for an addition_to_tax under sec_6651 for failing to file his tax_return and continued procedure 2respondent concedes that petitioner is not liable for the addition_to_tax under sec_6651 and is liable for an addition_to_tax under sec_6654 in the reduced_amount of dollar_figure petitioner concedes that he received unreported wage income of approximately dollar_figure and that he did not file a federal_income_tax return for petitioner argued in his petition that the notice_of_deficiency did not sufficiently describe the basis of the tax_deficiency as required by sec_7522 however he did not raise this argument on brief and therefore we deem it conceded see rule e and 92_tc_661 petitioner also argued in his petition that he is not liable for self-employment_tax because he did not receive self-employment_income and that he is not liable for the additional tax under sec_72 on the early withdrawal of an individual_retirement_account ira distribution because he did not have an ira account nor did he receive an ira distribution because petitioner similarly failed to raise these issues on brief we also deem them conceded to the extent we decide petitioner had unreported income in the form of nonemployee compensation and an early ira distribution during see rule e and petzoldt v commissioner supra pincite whether petitioner is liable for an addition_to_tax under sec_6654 for failing to make estimated payments with respect to his tax_liability findings_of_fact petitioner resided in longwood florida when his petition in this case was filed during petitioner a certified registered nurse anesthetist contracted with and provided services as an independent_contractor for nationwide anesthesia services inc nationwide petitioner submitted invoices for his services which showed the date and hours worked as well as related expenses and the total amount due to him under his contract with nationwide during petitioner also worked as an employee for wellmont health system for which he was paid wages totaling dollar_figure and he requested and received an early withdrawal of dollar_figure from an employer-sponsored retirement account at the variable_annuity life_insurance_company valic from which federal_income_tax of dollar_figure was withheld petitioner did not file a federal_income_tax return or make any estimated_tax payments for on date respondent issued a notice_of_deficiency for determining that petitioner received wage income of dollar_figure nonemployee compensation of dollar_figure and an early ira distribution of dollar_figure in the notice_of_deficiency respondent also determined that petitioner was liable for self-employment_tax on the nonemployee compensation was liable for additional tax under sec_72 on the early ira distribution and was entitled to a self-employment_tax deduction respondent also determined that petitioner was liable for additions to tax under sec_6651 and and on date petitioner’s imperfect petition was filed by order dated date we ordered petitioner to file a proper amended petition and pay the filing fee on or before date no response to the court’s order was received and on date we dismissed petitioner’s case for lack of jurisdiction on date we received and filed petitioner’s motion for leave to file a motion to vacate the dismissal order out of time and lodged his motion to vacate the order of dismissal we also received petitioner’s motion for leave to file an amended petition out of time and petitioner’s amended petition by order dated date we granted petitioner’s motion for leave to file the motion to vacate directed that the motion to vacate be filed on that date granted the motion to vacate and vacated our date order of dismissal in the date 3petitioner’s motion for leave to file a motion to vacate the dismissal order was mailed to the court in an envelope bearing a postmark of date and was therefore timely filed see 127_tc_109 order we also granted petitioner’s motion for leave to file an amended petition out of time and we directed that petitioner’s amended petition be filed as of date a notice setting case for trial during the court’s oklahoma city oklahoma trial session beginning date was served on petitioner on date on date we called petitioner’s case to determine the status of the case and to set a trial date neither petitioner nor a representative appeared we scheduled trial in petitioner’s case for date when petitioner’s case was called for trial on date petitioner’s attorney appeared but petitioner did not although petitioner’s attorney offered no evidence at trial he objected to three of respondent’s exhibits after hearing argument on the objections we overruled petitioner’s objections and admitted the exhibits opinion i unreported income a burden of production sec_61 defines gross_income for purposes of calculating taxable_income as all income from whatever source derived respondent determined that petitioner received gross_income from valic and nationwide which petitioner failed to report on a federal_income_tax return for the commissioner’s deficiency determination is normally entitled to a presumption of correctness 324_f3d_1289 11th cir affg tcmemo_2001_43 and the burden of proving the determination incorrect generally rests with the taxpayer rule a however when a case involves unreported income and that case is appealable to the court_of_appeals for the eleventh circuit as this case appears to be absent a stipulation to the contrary the commissioner’s determination of unreported income is entitled to a presumption of correctness only if the determination is supported by a minimal evidentiary foundation linking the taxpayer to an income- producing activity 994_f2d_1542 11th cir affg tcmemo_1991_636 see also 54_tc_742 tax_court is bound to apply the law of the circuit to which the case is appealable affd 445_f2d_985 10th cir once the commissioner produces evidence linking the taxpayer to an income-producing activity the burden shifts to the taxpayer to rebut the presumption by establishing that the commissioner’s determination is arbitrary or erroneous blohm v commissioner supra pincite see also 428_us_433 to satisfy his initial burden of production respondent introduced into evidence form 1099-r distributions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc and other business records obtained from and certified by valic and business records obtained from and certified by nationwide including the contract for services between petitioner and nationwide and copies of petitioner’s invoices for services rendered during respondent introduced the business records through written declarations under rule sec_803 and sec_902 of the federal rules of evidence the business records that respondent introduced at trial establish that petitioner received nonemployee compensation during the business records include a contract between petitioner and nationwide in which nationwide agreed to solicit work for petitioner for a fee invoices for service that show the time expended by petitioner and petitioner’s earnings for such work and agency fee checks for petitioner’s work as an independent_contractor during the invoices support 4petitioner argued on brief that respondent had the burden_of_proof regarding the unreported income adjustments and that respondent did not satisfy that burden because the business records offered at trial were inadmissible as we discuss elsewhere in this opinion petitioner not respondent had the burden_of_proof regarding the unreported income moreover even though respondent had an initial burden of producing evidence connecting petitioner to the unreported income respondent satisfied his burden by introducing the valic and nationwide business records the business records in question were kept in the regular course of business and were properly authenticated in certifications submitted under fed r evid and therefore the records were properly admitted into evidence at trial and we do not consider petitioner’s arguments further respondent’s calculation that petitioner earned dollar_figure for his services during the business records also establish that petitioner received an early ira distribution in respondent introduced both a form_1099 and the distribution form submitted by petitioner requesting the distribution the distribution form bears signatures of petitioner and his wife and the form is notarized the notarized form contains a request for a partial account distribution of dollar_figure and federal_income_tax withholding of percent of the distribution based on the above we conclude that respondent laid the requisite foundation for the contested unreported income adjustments and that respondent’s determinations are entitled to the presumption of correctness b burden_of_proof once the commissioner has satisfied his initial burden of production with respect to the unreported income adjustments the taxpayer ordinarily has the burden of proving by a preponderance_of_the_evidence that the adjustments are erroneous or arbitrary blohm v commissioner supra pincite lundgren v commissioner tcmemo_2006_177 however the burden_of_proof may shift to the commissioner under sec_7491 if the taxpayer has produced credible_evidence relating to the tax_liability at issue and has met his substantiation requirements maintained required records and cooperated with the secretary’s reasonable requests for documents witnesses and meetings in this case petitioner did not argue that sec_7491 operates to shift the burden_of_proof regarding the unreported income adjustments to respondent and he did not introduce any evidence that he satisfied the requirements of sec_7491 in fact petitioner did not attend the trial and he did not attempt through his counsel to introduce any evidence at all we conclude therefore that petitioner has the burden_of_proof regarding the unreported income items and that he failed to carry his burden respondent’s unreported income adjustments are sustained ii addition_to_tax under sec_6651 sec_6651 authorizes the imposition of an addition_to_tax for failure_to_file a timely return unless it is shown that such a failure is due to reasonable_cause and not due to willful neglect see sec_6651 469_us_241 38_f3d_440 9th cir harris v commissioner tcmemo_1998_332 a failure_to_file a timely federal_income_tax return is due to reasonable_cause if the taxpayer exercised ordinary business care and prudence but nevertheless was unable to file the return within the prescribed time see sec_301 c proced admin regs willful neglect means a conscious intentional failure_to_file or reckless indifference toward filing see united_states v boyle supra pincite if the taxpayer assigns error to the commissioner’s determination that the taxpayer is liable for the addition_to_tax the commissioner has the burden under sec_7491 of producing evidence to show that the sec_6651 addition_to_tax applies see 118_tc_358 116_tc_438 in order to meet his burden of production the commissioner must come forward with sufficient evidence to show that it is appropriate to impose the relevant penalty or addition_to_tax higbee v commissioner supra pincite however the commissioner is not required to introduce evidence regarding reasonable_cause substantial_authority or similar defenses id petitioner concedes he did not file a federal_income_tax return or application_for extension of time to file for that concession is sufficient to satisfy respondent’s burden of producing evidence that the sec_6651 addition_to_tax applies petitioner did not introduce any evidence to prove that he had reasonable_cause for his failure_to_file his income_tax return consequently we sustain respondent’s determination 5petitioner contended in his posttrial brief but did not offer any testimony at trial to support his contention that he continued iii addition_to_tax under sec_6654 sec_6654 imposes an addition_to_tax in the case of any underpayment of estimated_tax by an individual if the taxpayer assigns error to the commissioner’s determination that the taxpayer is liable for the addition_to_tax the commissioner has the burden under sec_7491 of producing evidence to show that the addition_to_tax applies see swain v commissioner supra pincite higbee v commissioner supra pincite under sec_6654 the addition_to_tax is calculated with reference to four required_installment payments of the taxpayer’s estimated_tax liability sec_6654 each required_installment of estimated_tax is equal to percent of the required_annual_payment sec_6654 the required_annual_payment is equal to the lesser_of percent of the tax shown on the individual’s return for that year or if no return is filed percent of his or her tax for such year or if the individual filed a return for the immediately preceding continued did not file a return because after taking into account withheld tax he did not owe any unpaid tax for we have held however that a mistaken belief that no tax was due is not sufficient to establish reasonable_cause absent competent tax_advice or a good_faith effort to ascertain the filing_requirements see 38_tc_192 french v commissioner tcmemo_1991_196 taxable_year percent of the tax shown on that return sec_6654 b and c a taxpayer has an obligation to pay estimated_tax for a particular year only if he has a required_annual_payment for that year sec_6654 wheeler v commissioner t c ___ ___ slip op pincite to satisfy his burden of production respondent introduced evidence establishing that percent of petitioner’s dollar_figure income_tax_liability for was dollar_figure that petitioner had withholding_tax credits of dollar_figure for that petitioner made no estimated_tax payments for and that petitioner had filed a federal_income_tax return for showing a federal_income_tax liability of dollar_figure this evidence is sufficient to satisfy respondent’s initial burden of providing evidence that petitioner had a required_annual_payment for payable in installments under sec_6654 and that petitioner underpaid his estimated_tax liability for petitioner offered no evidence whatsoever to refute respondent’s evidence or to establish a defense to respondent’s determination that petitioner is liable for the sec_6654 addition_to_tax consequently we conclude that respondent’s determination that petitioner is liable for the sec_6654 addition_to_tax must be sustained 6if an individual’s adjusted_gross_income shown on the previous year’s return exceeds dollar_figure a higher percentage may apply see sec_6654 to reflect the foregoing decision will be entered under rule


internal_revenue_service national_office technical_advice_memorandum may number release date third party communication congressional unrelated taxpayer trade organization government agency dates of communication date date date date index uil no case-mis no tam-127670-12 director --------------------------------------------- taxpayer’s name taxpayer’s address taxpayer’s identification no year s involved date of conference --------------------------------------------------------------- ---------- --------------------------------- -------------------------------------- ----------------- ------------------------ legend issuer------------------------------------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------- developer------------------------------------------------------------------------------------------------------- ------------------------------------------- state------------------------------------------ town---------------------------------------------------------------------------- county---------------------------------------------- tam-127670-12 act---------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------- ordinance--------------------------------------------------------------- development--------------------------- bank---------------------------------------------- partnership------------------------------------------------- corporation--------------------------- department-------------------------------------------------------------------------------------------- a--------------------------------------------- b--------------------------------------------------- c------------------------------------------ bonds 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-------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- ----------------------------- date tam-127670-12 date date date date date date date date date date date date date year year year year a----------------------------- b----------------------------- c----------------------------- d--------------------------- e------------------------------------ f------------------------------------ g----------------------------- tam-127670-12 h------------------------------ i------------------------------------ j------------------------------ k----------------------------- l------------------------------- m--------------------------------- n----------------------------------- o--------------------------- p------------------------------- q--------------------------- r-------------------------------------------- s----------------------------------------- t----------------------------------------- u----------------------------------------- v----------------------------------------- w----------------------------------------- x---------------------------------------- y----------------------------------------- z----------------------------------------- aa---------------------------------------- bb-------------------------------------- issue whether the issuer was a political_subdivision within the meaning of sec_1_103-1 of the income_tax regulations during the period of date through date tam-127670-12 conclusion the issuer was not a political_subdivision within the meaning of sec_1_103-1 at any time during the period of date through date because it was not a division of a state_or_local_governmental_unit during that period because we find that the issuer was not a division we do not address the delegation of sovereign power facts the developer the developer is a state corporation incorporated in year at all times relevant to the legal issue in this case date through date the developer was directly or indirectly owned by a and his family the development in year the developer began development of a retirement community within town and an unincorporated area of county as part of that development the developer constructed owned and operated various recreation facilities postal facilities water management and control systems fire equipment and fire stations amenity facilities as the development became profitable the developer purchased additional tracts of land for development in year the developer petitioned the town to create a community development district in accordance with act and later in year town established issuer as a community development district pursuant to ordinance thereafter the developer acquired substantial amounts of additional land and successfully petitioned for the creation of a other separate community development districts eventually resulting in b community development districts the b community development districts include c districts that consist of primarily residential areas residential districts the issuer which has been solely a commercial area and d other solely commercial district the b community development districts along with certain other areas in county and town are known as the development during the relevant years the issuer’s board_of supervisors petitioned the town for four separate changes to issuer’s geographical boundaries on date the town approved the first change which reduced issuer’s acreage from e acres to f acres the removed land was used for g residential dwellings approximately h years after the boundary change on date the town approved the second change which reduced issuer’s acreage from f acres to i acres and removed j existing but then unoccupied dwellings from issuer boundaries the remainder of the land removed from the issuer’s acreage was used to construct k residential units approximately l years after the change on date the town approved a third change which corrected a boundary error and reduced issuer’s acreage from i acres to m acres and on date the town approved tam-127670-12 the fourth change increasing issuer’s acreage to o acres consisting of commercial properties lots within the development are sold subject_to deed restrictions deed restrictions requiring services to be provided by the developer including an obligation to perpetually provide the recreational facilities the deed restrictions require property owners to pay the developer a monthly fee amenities fee owners of property within the residential districts are required to pay the amenities fee even if the recreational facilities are located outside of and are not owned by their respective residential district the developer’s rights and obligations may be assigned governing body of issuer each community development district in state is governed by its own board_of supervisors under the act a majority of the board constitutes a quorum and action is taken by majority vote of the members present unless general law or a rule_of the district requires a greater number the board_of supervisors is initially elected by landowners generally based on acreage owned with a majority of votes controlling in community development districts such as issuer beginning after o years when there are p or more residents within the district eligible to vote qualified electors the election process changes and the board is thereafter elected by the qualified electors at a general election issuer is governed by a q-member board_of supervisors board because the issuer has never had p or more qualified electors landowners in the issuer have always elected the board despite the fact that the issuer has been in existence for well over years in fact issuer expressed intention was that there would never be p or more qualified electors residing within issuer the official statement for bonds issued on date states that there will be no residential development within the issuer and the offering statement for issuer’s date bond issuance confirmed that because of the non-residential nature of the development in the issuer it was unlikely that there would ever be qualified electors in the issuer during the relevant years the q-member board consisted of a members of his family directors officers or employees of the developer and the chief_executive_officer of the bank a majority of the stock of which was at all times owned by a and his family for a short_period in year the board also included an employee of an investment bank not affiliated with a the board appoints a district manager who is accountable to the board the district manager has charge and supervision of the works of issuer is responsible for preserving and maintaining any improvement or facility constructed or erected pursuant to the provisions of act for maintaining and operating equipment owned by issuer and for performing such other duties as may be prescribed by the board landowners tam-127670-12 the board always has been appointed by the landowners in issuer the developer either alone from date through date or in conjunction with the partnership has owned sufficient land to appoint the board throughout the relevant period the partnership has been controlled at all relevant times directly or indirectly by a b and c c is an immediate_family member of a and b at the time was an officer and director or the developer and served on at least some occasions as legal counsel to the developer prior to date a b and c served directly as the general partners of the partnership on date the corporation was formed to serve as the corporate sole general_partner and a b and c became the owners and directors of the corporation the partnership functioned as an employment incentive for employees of the developer and the limited partners in partnership consisted solely of a b a’s family members current or former directors officers or employees of the developer or trustees or beneficiaries of trusts established by such individuals issuer’s powers and limitations under the act the act defines a community development district as a local unit of special-purpose government limited to the performance of functions authorized by the act the governing body of which is authorized to function to deliver urban community development services and for which the operation duration accountability disclosure requirements and termination are determined by general law the stated primary purpose of community development districts is to provide for specified capital infrastructure such as that provided by the issuer the department which is a department of state is required by the act to annually monitor the status of issuer under the act the issuer must provide financial reports and audits to state and is required to use a qualified public depository the issuer must comply with bidding requirements under state law when seeking to construct or improve a public building or structure board meetings are open to the public the board must keep permanent records of all proceedings and such records are open to inspection in the same manner as government records in state issuer’s properties are exempt from execution and sale by general creditors the board approves the issuer’s annual budget after a hearing the proposed budget is then submitted to the local general purpose governmental_unit for disclosure and information purposes only the local general purpose governmental_unit may review the proposed budget and submit written comments for assistance and information purposes the issuer will remain in existence unless a it is merged with another district b all of its facilities and services are transferred to a local general-purpose government unit when there was uncertainty about how to interpret the state statutes including the act we generally used the issuer’s interpretations tam-127670-12 subject_to the underlying debts being assumed and guaranteed by such unit or c it is dissolved due to inactivity upon dissolution assets of the district would be liquidated to pay the district debts and the remainder if any would be transferred to an appropriate local_government or political_subdivision board members are subject_to general laws relating to public officers and employees including ethical standards requiring that public officials be independent and impartial and that public_office not be used for private gain other than the remuneration provided by law public officials must discharge their duties in the public interest and must act as agents of the people in holding their positions for the benefit of the public the act also provides that it shall not be a conflict of interest for a board member district manager or other employee of the district to be a stockholder officer_or_employee of a landowner the issuer is vested with limited powers issuer can exercise the power of condemnation to acquire public easements dedications to public use platted reservations for public purposes or any reservations for those purposes authorized by the act the act allows the issuer to exercise eminent_domain over any property within the state except municipal county state and federal property if the property that is the subject of the eminent_domain is outside issuer issuer must obtain the prior approval of the governing body of the jurisdiction in which the property is located the issuer may exercise eminent_domain solely for uses relating to water sewer district roads and water management any exercise of eminent_domain by the issuer is in the issuer’s name and results in title to the condemned land being transferred to the issuer the issuer is authorized to impose user charges or fees and special_assessments to finance the issuer’s activities authorized by the act the act provides that community districts generally may levy and assess ad_valorem_taxes but this power applies only when all board members are elected by qualified electors at a general election and is not available to the issuer the issuer may not exercise any police power as that term is used under the act and must obtain prior consent from the local general-purpose government agencies to provide security services within the issuer act provides that the local general purpose government within the boundaries of which issuer lies may adopt a nonemergency ordinance providing for a plan for the transfer of a specific community development service to the local general purpose government the plan must provide for the assumption and guarantee of issuer’s debt that is related to the service by the local general purpose government and must demonstrate the ability of the local general purpose government to provide such service a as efficiently as the district b at a level of quality equal to or higher than the level of quality actually delivered to the users of the service and c at a charge equal to or lower than the actual charge by issuer to the users of the service ------------------------------------------------------------------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------- tam-127670-12 outstanding bonds between date and date issuer issued bonds in the total principal_amount of dollar_figurer to acquire or refinance the acquisition of assets from developer and its affiliates along with the right to collect related amenities fees from current residents of the development the issuer asserts that interest on these bonds is exempt from tax under sec_103 we do not have information on all of these sales but in the sales for which we have information the amount of proceeds paid to the developer and its affiliates significantly exceeded the developer’s costs for the assets acquired with the remaining proceeds having been allocated to the right to collect future amenity fees from then current residents developer retained the right however to collect amenities fees from future residents of the development who purchased their property from the developer such future residents would have the right to use the amenity facilities owned by the issuer despite retention of the amenity fees by the developer the information we have indicates that on date issuer issued dollar_figures in bonds to purchase recreational and utility facilities from the developer along with related amenity fees the developer’s cost in these facilities was dollar_figuret and almost of the purchase_price was allocated to future amenity fees on date issuer issued dollar_figureu in bonds to acquire recreational facilities and amenity fees from the developer the developer’s cost in these facilities was dollar_figurev which left almost of the proceeds allocated to future amenity fees similarly on date issuer used dollar_figurew to purchase recreational facilities and future amenity fees from the developer the developer’s cost for these facilities was dollar_figurex leaving almost of the proceeds allocated to future amenity fees and on date the issuer issued dollar_figurey in bonds to purchase a utility system from a utility affiliated with developer the utility’s cost for the system was dollar_figurez leaving about of the proceeds allocated to transferred utility fees finally on date issuer issued dollar_figureaa in bonds for recreational facilities for which the developer’s cost was dollar_figurebb resulting in of the proceeds being allocated to future amenity fees the monthly amenities fees and utility fee payments assigned to the issuer are pledged to secure the bonds along with other sources of issuer revenue law and analysis sec_103 of the internal_revenue_code code provides that gross_income does not include interest on any state_or_local_bond sec_103 provides that the term state_or_local_bond means an obligation of a state or political_subdivision thereof the term political_subdivision is defined in sec_1_103-1 as any division of any state_or_local_governmental_unit which is a municipal corporation or which has been delegated the right to exercise part of the sovereign power of the unit under it appears from the submissions that current residents and their grantees and successors who pay amenities fees to the issuer received an easement to use future facilities constructed by the developer without making payments to the developer tam-127670-12 this definition issuer cannot qualify as a political_subdivision whether or not it is a municipal corporation which issuer concedes that it is not or has the right to exercise sovereign powers which issuer claims that it has unless it also can demonstrate that it is a division of a state_or_local_government see revrul_78_276 1978_2_cb_256 is issuer a division of a state_or_local_government the phrase division of a state_or_local_government must be read in the context of the purpose of sec_103 which is to provide subsidized financing for state and local_government purposes the code permits the benefit of this subsidy to be passed on to private persons under some circumstances but only if a governmental_unit determines that the issuance of such bonds is appropriate a governmental_unit is inherently accountable directly or indirectly to a general electorate in effect sec_103 relies in large part on the democratic process to ensure that subsidized bond financing is used for projects which the general electorate considers appropriate state_or_local_government purposes a process that allows a private entity to determine how the bond subsidy should be used without appropriate government safeguards cannot satisfy sec_103 for these reasons the mere delegation of sovereign power is not sufficient to create a political_subdivision if it were sufficient then a clearly private entity with powers of eminent_domain including some railroads and utilities could issue bonds without any political oversight we believe that an entity that is organized and operated in a manner intended to perpetuate private control and to avoid indefinitely responsibility to a public electorate cannot be a political_subdivision of a state cf revrul_83_131 1983_2_cb_184 concluding that certain corporations did not qualify as political subdivisions in part because they were not controlled directly or indirectly by a state_or_local_government but rather by a board_of directors independent of such authority in this case the issuer was organized and operated in manner that insured continued effective_control of the board by a rather than a general electorate or an existing governmental body the board was selected by majority vote of landowners and at all times a was in a position through entities under his control to select all members of the board during the relevant period two landowners the developer and the partnership held a clear majority of the land within the boundaries of the issuer the developer was owned and controlled by a and a’s family members the partnership was controlled by a b and c first as general partners and later as the owners and directors of the sole corporate general_partner the result was that during the relevant years the board was composed of individuals who in all but one limited case consisted of a members of his family directors officers or employees of the developer and the chief_executive_officer of bank owned and controlled by a and his family tam-127670-12 the act contemplated that a board would be elected by the qualified electorate when a district acquired a sufficient number of residents even after over years this has not happened in the issuer’s case indeed the facts indicate that issuer was intentionally structured to ensure that this never could happen bond offering documents indicate that there would be no residential development in the issuer and that it was unlikely that there ever would be qualified electors in the issuer consistent with these statements on at least two occasions the board successfully petitioned the town to change the issuer’s boundaries in such a way that land on which current or future residential development would be located would be removed from within the issuer’s boundaries throughout all relevant years the board and its district manager controlled the day-to- day operations of the issuer neither the state nor local_government participated in or had authority to overrule decisions of the board including decisions to purchase assets from the developer whose owner controlled the board although a government received the issuer’s financial reports audits and budget this was largely for informational purposes only the issuer argues that it is a political_subdivision because it is sufficiently controlled by the state and serves a public purpose although the issuer claims that the threshold is too high if it requires that the entity be motivated wholly by a public purpose see revrul_83_131 indicating entity must be motivated by a wholly public purpose the issuer argues that it was created to fulfill the public purpose of managing and financing basic community development services the issuer points out that the act placed a number of legal restrictions on it and the board in particular the issuer notes that-- issuer had financial and reporting requirements to the state issuer was subject_to bidding requirements when seeking to construct or improve a public building or structure issuer was required to use a qualified public depository issuer was subject_to open record and open meeting requirements issuer was required to submit its budget for disclosure purposes issuer was required to comply with the state administrative_procedure_act issuer’s property was exempt from sale by general creditors the local_government could adopt and submit a nonemergency plan providing for the transfer of assets or services from a district to the local general- purpose government under certain limited circumstances on dissolution all of issuer’s assets transferred to public entities under state ethics laws the board members were required to be independent and impartial public_office could not be used for private gain other than remuneration board members were required to discharge their duties in the public interest and must act as agents of the people and financial interests were required to be publicly disclosed among other requirements tam-127670-12 these restrictions however do not address the fact that the issuer was organized and operated to perpetuate private control and avoid indefinitely responsibility to a public electorate either directly or through another elected state or local governmental body that fact is not consistent with qualification as a political_subdivision we need not discuss any other requirements that a division of a state_or_local_governmental_unit might need to meet to qualify as an issuer of tax exempt bonds issuer is not a state or political_subdivision thereof for purposes of sec_103 has issuer been delegated sovereign power having concluded that the issuer is not a division of a state_or_local_government we need not examine the extent to which the issuer has been delegated sovereign powers caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


internal_revenue_service number release date index no cc psi - plr-110291-00 date trust a b date x state dear this responds to your letter dated date submitted on behalf of trust requesting a ruling under sec_1361 of the internal_revenue_code the information submitted states that trust was established on date by a grantor for the benefit of the living children of the grantor’s child b or failing such living children for the living children of grantor’s other children trust currently holds stock in x a state corporation which intends to elect to be an s_corporation trust represents that trust has not made an election to be a qualified_subchapter_s_trust trust is not exempt from tax under subtitle a of the code and each trust_beneficiary is an individual article one of trust provides that the trustees shall hold manage invest and reinvest the trust property shall collect the income therefrom and shall pay the net_income in convenient installments in such proportions and with such exclusions as the trustees shall deem advisable among the living children of b or failing such living children at any time of payment among the living children of grantor’s other children or the trustees shall have the right to and are authorized to accumulate any or all of such net_income as they shall deem advisable and add the same to the principal of the trust property any payments of net_income may be made by the trustees either directly to or indirectly in trust or otherwise for the benefit of the beneficiary concerned article one of trust further provides that in the event that any payment of income authorized under article one to any individual beneficiary shall be insufficient in the opinion of the trustees to defray the expenses of any illness accident or other emergency or to provide for the proper maintenance support and education of such beneficiary the trustees are authorized to use from time to time so much of the principal of the trust property as the trustees may deem advisable therefor article two of trust provides that trust shall continue in effect unless sooner terminated until twenty-one years after the death of the last to die of the four children of grantor and the grandchildren of grantor living at the date of the trust agreement article two of trust further provides that in the event of the death of b without children living any undistributed portion of the trust property shall be divided equally among and added to the other three trusts established by grantor on the same day trust was established failing all such takers the said undistributed portion shall be transferred delivered and paid over to such charitable_organization or organizations as the trustees shall select sec_1361 of the code provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect sec_1362 of the code provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 c have a nonresident_alien as a shareholder and d more than one class of stock under sec_1361 of the code an electing_small_business_trust is an eligible shareholder of an s_corporation sec_1361 defines electing_small_business_trust sec_1361 of the code provides that except as provided in sec_1361 the term electing_small_business_trust means any trust if - i such trust does not have as a beneficiary any person other than i an individual ii an estate or iii an organization described in paragraph or of sec_170 ii no interest in such trust was acquired by purchase and iii an election under sec_1361 applies to such trust sec_1361 of the code provides that the term electing_small_business_trust shall not include - i any qualified_subchapter_s_trust as defined in sec_1361 if an election under sec_1361 applies to any corporation the stock of which is held by such trust ii any trust exempt from tax under subtitle a of chapter and iii any charitable_remainder_annuity_trust or charitable_remainder_unitrust as defined in sec_664 sec_1361 of the code provides that for purposes of sec_1361 the term potential_current_beneficiary means with respect to any period any person who at any time during such period is entitled to or at the discretion of any person may receive a distribution from the principal or income of the trust notice_97_49 1997_2_cb_304 provides that for purposes of sec_1361 the term beneficiary does not include a distributee trust but does include those persons who have a beneficial_interest in the property held by the distributee trust furthermore the notice provides that for purposes of sec_1361 if a distributee trust becomes entitled to or at the discretion of any person may receive a distribution from principal or income of the esbt then the trust will become a potential_current_beneficiary and the s_corporation_election will terminate unless the distributee trust is a_trust described in sec_1361 accordingly based on the representations made and the information provided and the assumption that the interest of any contingent charitable_beneficiary of trust described in sec_170 is so remote as to be negligible and that such contingent charitable beneficiaries are therefore not beneficiaries of trust as described in sec_1361 we conclude that for purposes of sec_1361 the beneficiaries of trust are individuals and are qualified beneficiaries with respect to the power given to the trustees under article one to make certain distributions either directly to or indirectly in trust or otherwise for the benefit of the beneficiary concerned this is a power to make a distribution for purposes of sec_1361 however since there are currently no distributee trusts identified or currently in existence the power to distribute to these trusts will be disregarded for purposes of sec_1361 thus there is no distributee trust that is a potential_current_beneficiary if a distributee trust is identified or otherwise comes into existence in any period then the distributee trust will become a potential_current_beneficiary and the s_corporation_election will terminate unless the distributee trust is a_trust described in sec_1361 furthermore the beneficiary of any such new trust must satisfy the shareholder restrictions of sec_1361 accordingly upon trust making a valid and timely election under sec_1361 trust will satisfy the requirements of sec_1361 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code 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 in accordance with the power_of_attorney of file with this office we are forwarding a copy of this letter to trust enclosures copy of this letter copy for sec_6110 purposes sincerely yours j thomas hines acting branch chief branch office of the associate chief_counsel passthroughs and special industries


tax_exempt_and_government_entities_division u i l department of the treasury internal_revenue_service washington d c mar tep rats legend school s state a city p society j year b religion c directory c conference c plan x dear this is in response to your letters dated date date and date submitted on your behalf by your authorized representative in which you request a ruling that plan x is a church_plan described in sec_414 of the internal_revenue_code_of_1986 as amended the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested page school s is a private non-profit college preparatory school formed under the non-profit corporation law of state a school s was founded in year b in city p as a society j secondary school for young men the governing body of school s is a board_of trustees which consists of no fewer than or more than members of which no less than one-third plus one shall be members of society j which is a religious_order of men the bylaws of school s provide that the board_of trustees has the power and authority to appoint or remove the president of school s approve diplomas certificates and awards approve and adopt all major changes or renovations in the educational programs of school s review and take appropriate action as to the budget which shall be submitted to it upon recommendation of the president institute and promote major fund raising efforts of school s and authorize any changes in tuition and fees within school s the bylaws of school s provide that the board_of trustees has the authority to elect the president of school s by a two-thirds majority of the board_of trustees and by a majority of the members of society j then on the board_of trustees subject_to the approval by the provincial of the society j province in which school s is located the bylaws require a vote of a two-thirds majority of the board_of trustees and a vote of a majority of the members of the society j then on the board to approve any_action effecting a change in the essential character of school s as a religion c society j secondary school school s is listed in directory c and consequently is exempt from federal income taxes under sec_501 of the code pursuant to group rulings issued to conference c by the internal_revenue_service the irs plan x covers all employees of school s after their completion of one year of school s has maintained plan x a defined benefit pension pian since september service none of the eligible participants in plan x are or can be considered employed in connection with one or more unrelated trades_or_businesses with the meaning of sec_513 of the code all the eligible participants are employed by school s plan x does not include any employees of for-profit entities plan x was administered by school s by resolutions adopted __ the board_of trustees of school s established a benefits committee prior to may _ on may the committee the sole purpose of which is to have the exclusive authority to control and manage the operation and administration of plan x as well as any successor retirement_plan that the board may hereafter establish the resolutions provide that the board_of trustees shall appoint the members of the committee subject_to the requirement that at all times the committee must consist of not less than three members the majority of whom must be vowed members of society j the resolutions further provide that the members of the committee will serve at the pleasure of and are subject_to removal by the board_of trustees at any time with or without cause page in accordance with revproc_2011_44 notice to employees with reference to plan x was provided on october this notice explained to participants of plan x the consequences of church pian status you represent that school s has not made an election under code sec_410 to be subject_to the provisions of the code relating to vesting funding participation and other standards applicable to other retirement plans based on your submission and the above facts and representations you request a ruling that pian x is a church_plan within the meaning of sec_414 of the code retroactively effective for all prior years that the plan has been in effect sec_414 was added to the code by sec_1015 of erisa sec_1017 of erisa provided that sec_414 applied as of the date of erisa’s enactment however sec_414 was subsequently amended by sec_407 of the multiemployer pension_plan amendments act of pub law to provide that sec_414 was effective as of date sec_414 of the code generally defines a church_plan as a plan established and maintained for its employees or their beneficiaries by a church or by a convention or association of churches which is exempt from taxation under sec_501 of the code sec_414 of the code provides in part that the term church_plan does not include a pian that is established and maintained primarily for the benefit of employees or their beneficiaries of such church_or_convention_or_association_of_churches who are employed in connection with one or more unrelated trades_or_businesses within the meaning of sec_513 of the code or if less than substantially_all of the individuals included in the pian are individuals described in sec_414 of the code or sec_414 of the code or their beneficiaries sec_414 of the code provides that a plan established and maintained for its employees or their beneficiaries by a church or by a convention or association of churches includes a plan maintained by an organization whether a civil law corporation or otherwise the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits or both for the employees of a church or a convention or association of churches if such organization is controlled by or associated with a church or a convention or association of churches controlled by or associated with a church or a convention or association of churches sec_414 of the code defines employee of a church or a convention or association of churches to include a duly ordained commissioned or licensed minister of a church in the exercise of his or her ministry regardless of the source of his or her compensation and an employee of an organization whether a civil law corporation or otherwise which is exempt from tax under sec_501 of the code and which is page sec_414 of the code provides that a church or a convention or association of churches which is exempt from tax under sec_501 of the code shall be deemed the employer of any individual included as an employee under subparagraph b sec_414 of the code provides that an organization whether a civil law corporation or otherwise is associated with a church or a convention or association of churches if the organization shares common religious bonds and convictions with that church_or_convention_or_association_of_churches revproc_2011_44 2011_39_irb_446 supplements the procedures for requesting a letter_ruling under sec_414 of the code relating to church plans the revenue_procedure requires that plan participants and other interested persons receive a notice in connection with a letter_ruling request under sec_414 of the code for a qualified_plan requires that a copy of the notice be submitted to the irs as part of the ruling_request and provides procedures for the irs to receive and consider comments relating to the ruling_request from interested persons in order for an organization that is not itself a church or a convention or association of churches to have a qualified church pian it must establish that its employees are employees or deemed employees of a church_or_convention_or_association_of_churches under sec_414 of the code by virtue of the organization's control by or affiliation with a church_or_convention_or_association_of_churches employees of any organization maintaining a plan are considered to be church employees if the organization is exempt from tax under sec_501 of the code and is controlled by or associated with a church_or_convention_or_association_of_churches in addition in order to be a church pian the administration or funding or both of the plan must be by an organization described in sec_414 of the code to be described in sec_414 of the code an organization must have as its principal purpose the administration or funding of the plan and must also be controlled by or associated with a church_or_convention_or_association_of_churches in view of the common religious bonds between school s and society j the inclusion of school s in directory c and the indirect control of school s by society j through the board_of trustees we conclude that school s is associated with a church_or_convention_or_association_of_churches within the meaning of sec_414 of the code that the employees of school s meet the definition of employee under sec_414 of the code and that they are deemed to be employees of a church or a convention or association of churches by virtue of being employees of an organization which is exempt from tax under sec_501 of the code and which is controlled by or associated with a church or a convention or association of churches the administrative control of plan x is vested in the committee the committee is controlled by and shares common religious bonds with society j through its control by the board_of trustees and the common religious bonds of the members of the committee with society j the sole purpose of the committee is to have exclusive authority to control and manage the operation and administration of plan x as well as page any successor retirement_plan that the board_of trustees may hereafter establish thus the administration of plan x satisfies the requirements regarding church_plan administration under sec_414 of the code accordingly in regard to your ruling_request we conclude that plan x is a church_plan as defined in sec_414 of the code and has been a church_plan since date this letter expresses no opinion as to whether plan x satisfies the requirements for qualification under sec_401 of code 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 by others as precedent no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto ‘pursuant to a power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representative if you have any questions regarding this letter please contact please address all correspondence to se t ep ra t3 sincerely yours laura b warshawsky manager employee_plans technical group deleted copy of ruling letter notice of intention to disclose pw bb tsshuw -- enclosures b


t c memo united_states tax_court david stevan and karen ann brandriet petitioners v commissioner of internal revenue respondent docket no filed date david stevan brandriet and karen ann brandriet pro sese melissa j hedtke for respondent memorandum findings_of_fact and opinion parr judge respondent determined a dollar_figure deficiency in petitioners' federal_income_tax for the taxable_year after concessions ’ the issues for decision are ‘respondent concedes that the compensatory damage award of dollar_figure that petitioners received in is excluded from petitioners' gross_income pursuant to sec_104 respondent also concedes that petitioners' business malligan's continued - - whether a punitive damage award of dollar_figure that petitioners received in is includable in their gross_income we hold it is whether petitioners are entitled to deduct interest on a consumer_loan in an amount greater than that allowed by respondent we hold they are not all section references are to the internal_revenue_code in effect for the taxable_year in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated references to petitioner are to david ' continued car cleaning had gross_receipts of dollar_figure in petitioners concede that the dollar_figure of interest they received in pursuant to a judgment order is includable in their gross_income in the notice_of_deficiency respondent determined that petitioners were not entitled to claim deductions of dollar_figure for vehicle expenses and dollar_figure for utility expenses because of lack of substantiation and because petitioners did not establish an ordinary and necessary business_purpose for the expenditures as we read the petition in this case we do not construe it as containing any reference to respondent's determinations disallowing petitioners' vehicle and utility expense deductions see rule b furthermore petitioners did not address these determinations at trial or on brief and did not proffer any evidence to substantiate these claimed deductions accordingly we consider petitioners to have conceded these amounts respondent determined that for the year at issue certain computational adjustments should be made which would reduce petitioners deduction for exemptions reduce petitioners' itemized_deductions and preclude petitioners from claiming the earned_income_credit in their petition petitioners raised the issue of whether the punitive damage award is includable in their gross_income and on the basis of that issue disputed respondent's computational adjustments our decision of the punitive damage award issue will resolve the dispute of respondent's computational adjustments stevan brandriet findings_of_fact some of the facts have been stipulated and are so found the stipulated facts and the accompanying exhibits are incorporated into our findings by this reference at the time the petition in this case was filed petitioners resided in watertown south dakota on date petitioners filed suit against norwest bank s d n a norwest for rejection of petitioners' application_for a veterans' administration home mortgage loan the original complaint alleged fraudulent misrepresentation negligent misrepresentation and negligent processing of the application the pleadings were later amended to include claims of intentional infliction of emotional distress and punitive_damages after an 8-day trial the jury returned a verdict holding norwest liable for negligent processing fraudulent misrepresentation and negligent misrepresentation however norwest was found not liable for intentional infliction of emotional distress petitioners were awarded dollar_figure in compensatory_damages and dollar_figure in punitive_damages the verdict was affirmed on appeal see brandriet v norwest bank s d n a n w 2d s d petitioners received the punitive_damages in however they did not report any of this amount on their federal_income_tax return opinion issue l whether the punitive_damages are includable in petitioners' gross_income respondent determined that the punitive_damages received by petitioners are taxable petitioners contend that the punitive_damages portion of their award is excludable from gross_income pursuant to sec_104 because their lawsuit was based upon tort or tort type rights and the jury awarded damages it believed would compensate their civil injuries not compensatory sec_104 provides that gross_income does not include the amount of any damages received on account of personal injuries or sickness an award of punitive_damages is not paid on account of a personal injury to the extent that the damages are noncompensatory see 519_us_79 whether damages are noncompensatory rests upon applicable state law see 105_tc_396 affd 121_f3d_393 8th cir the present case involves south dakota law see brandriet v norwest bank s d n a supra pincite in hulstein v meilman food indus inc n w 2d s d the south dakota supreme court stated that while the sole object of compensatory_damages is to make the injured party whole the purpose of awarding punitive_damages is to punish - - the wrongdoer see also s d codified laws sec michie supp the jury in addition to the actual damage may give punitive_damages for the sake of example and by way of punishing the defendant veeder v kennedy n w 2d s d punitive_damages may properly be imposed to further state's legitimate interests in not only punishing unlawful conduct but also in deterring its repetition contrary to petitioners' assertion we conclude that the punitive_damages were not compensatory no physical injury or physical sickness the omnibus budget reconciliation act of obra publaw_101_239 103_stat_2106 amended sec_104 by adding the sentence paragraph shall not apply to any punitive_damages in connection with a case not involving physical injury or physical sickness obra sec_7641 b provided that the amendment is applicable to amounts received pursuant to suit filed after date because petitioners filed suit more than months after this date the amendment is applicable to the instant case the complaint in petitioners' suit was based upon several claims although petitioners claimed to have suffered emotional injuries on account of the defendant's actions the complaint did not mention any physical injury or physical sickness resulting from those actions the fact that a taxpayer suffers -- - personal injury from a defendant's conduct is insufficient to satisfy the physical injury or physical sickness requirement kightlinger v commissioner tcmemo_1998_357 the jury found norwest liable for fraudulent misrepresentation negligent misrepresentation and negligent processing of a loan application petitioners did not obtain redress for any physical injury or physical sickness having considered the allegations in the complaint and the jury's verdict we find that petitioners did not receive the punitive_damages in connection with a case involving physical injury or physical sickness we hold that petitioners’ punitive_damages are includable in their gross_income issue whether petitioners are entitled to a greater interest_expense_deduction petitioners claimed a dollar_figure deduction for interest_paid on a consumer_loan respondent determined that petitioners are entitled to deduct dollar_figure of the claimed interest_expense as a business_expense and disallowed the balance respondent's determinations of fact are presumptively correct and petitioners bear the burden of proving otherwise see rule a 290_us_111 taxpayers do not have an inherent right to take tax deductions deductions are a matter of legislative grace and a taxpayer 7petitioners raised this issue at trial we consider it tried by consent see rule b - bears the burden of proving entitlement to any deduction claimed see 308_us_488 292_us_435 moreover a taxpayer is reguired to maintain records that are sufficient to substantiate his deductions see sec_6001 at trial petitioner proffered a photocopy of a cashier's check dated date made payable to first federal savings bank in the amount of dollar_figure as evidence of petitioners' payment of interest however petitioners provided no evidence other than petitioner's vague and uncertain testimony of the amount of the interest and principal portions of the payment or of the purpose of the loan accordingly petitioners have not met their burden of proving entitlement to deduct any expense for interest in an amount greater than that allowed by respondent to reflect the foregoing decision will be entered under rule


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 2-plr-153651-01 date date legend decedent sister primary beneficiary trust trust trustee trustee proposed trustee proposed trustee state x plr-153651-01 dear this is in response to your date letter in which you requested a ruling on the income gift estate and generation-skipping_transfer_tax consequences of a proposed transfer of trust corpus to a newly created trust trust pursuant to b of the new york estate powers and trust law decedent died testate in article eight paragraph ii of decedent’s will established a_trust for each of sister’s descendants per stirpes living at decedent’s death only the trust established for primary beneficiary and his descendants trust is the subject of this ruling article nine of decedent’s will limits the number of trustees for trust to four the current trustees of trust are primary beneficiary trustee primary beneficiary’s sibling and trustee primary beneficiary’s child trustee as a sibling of primary beneficiary does not have an interest in trust under applicable new york law a trustee who is also a beneficiary is precluded from participating in any decision to distribute trust income or corpus to himself or herself nyeptl mckinney trustee represents that no actual or constructive additions to trust have been made since decedent’s death since its creation in trust has been administered under the laws of new york it has periodically petitioned new york courts to replace trustees and to add new trustees from its creation until trust had at least one trustee who was a resident of the state of new york from to the present no trustee and no current beneficiary has been a resident of new york primary beneficiary is a resident of state x and has eight living descendants three children and five minor grandchildren pursuant to new york est powers trusts law b trustee proposes to transfer the corpus of trust to a new trust trust trust will be situated in state x and will contain substantially identical provisions as those of trust new york est powers trusts law b mckinney provides that unless the terms of the instrument expressly provide otherwise a trustee who has the absolute discretion under the terms of a testamentary instrument to invade the principal of a_trust for the benefit of one or more proper objects of the exercise of the power may exercise such discretion by appointing all or part of the principal of the trust in favor of a trustee of a_trust under an instrument other than that under which the power to invade is created provided however that the exercise of such discretion a does not reduce any fixed income plr-153651-01 interest of any income_beneficiary of the trust b is in favor of the proper objects of the exercise of the power and c does not violate the limitations of which prohibits waivers of liability trust 1's provisions are found in article eight of decedent’s will under article eight paragraph ii a net_income is to be paid to primary beneficiary for life except that the trustees other than primary beneficiary may i pay all or part of the income to one or more of primary beneficiary’s descendants or ii accumulate the income and add it to principal under paragraph ii f of article eight the trustees other than the current income_beneficiary may pay to the current income_beneficiary part or all of trust principal as the trustees other than the current income_beneficiary deem advisable in their absolute discretion for any reason whatsoever the term current income_beneficiary means the person to whom the current income of any trust is distributable whether pursuant to an express provision or pursuant to the exercise of any discretionary power granted to the trustees under paragraph ii b of article eight at primary beneficiary’s death the remaining trust principal is to be distributed to or for_the_use_of those appointees outright or in further trust as primary beneficiary designates by will however he may not appoint the property to himself or his estate or his creditors or the creditors of his estate under paragraph ii c of article eight to the extent primary beneficiary does not exercise the power_of_appointment the remaining trust principal will be divided into equal shares per stirpes among primary beneficiary’s descendants living at his death each share will be held as a separate trust for the benefit of the individual descendant the secondary beneficiary for whom the share is so set_aside the separate trust will terminate on the first to occur of i years after the death of the survivor of all of sister’s descendants who survived decedent or ii the death of the secondary beneficiary under paragraph ii c of article eight until the termination the net_income is to be paid to the secondary beneficiary however the trustees other than the secondary beneficiary may i pay all or part of the income to one or more of the secondary beneficiary’s descendants or ii accumulate the income and add it to principal under paragraph ii f of article eight the trustees other than the current income_beneficiary may pay to the current income_beneficiary part or all of the principal as the trustees other than the current income_beneficiary deem advisable in their absolute discretion for any reason whatsoever under paragraph ii c of article eight if the trust terminates as a result of the secondary beneficiary’s death the remaining principal is to be distributed to or for_the_use_of such appointees outright or in further trust as the secondary beneficiary may appoint by will however the secondary beneficiary may not exercise the power_of_appointment in favor of himself or his estate or his creditors or the creditors of his plr-153651-01 estate under paragraph ii c of article eight to the extent the secondary beneficiary fails to exercise the power the remaining principal is to be distributed in equal shares per stirpes to the secondary beneficiary’s descendants living at the time of the secondary beneficiary’s death under paragraph ii c of article eight if the trust terminates as a result of the expiration of years after the death of the survivor of all of sister’s descendants living at decedent’s death the trust principal is to be distributed to the secondary beneficiary trustee represents that the only substantive differences in the provisions of trust and trust are as follows trust will provide that it is to be administered and interpreted under the laws of state x however no provision of trust or the trust laws of state x shall be interpreted or applied in any manner that would cause the beneficial_interest held by any person to differ from the beneficial_interest held by that person under article eight of trust trust will provide that notwithstanding any other provision no exercise of a power_of_appointment granted in the trust shall result in a termination_date for a_trust or a share thereunder or created pursuant to a power_of_appointment granted thereunder which is later than the date twenty-one years after the death of the survivor of all of sister’s descendants living at decedent’s death trust will provide that no person acting as trustee shall participate in a decision to make a discretionary distribution to himself or herself his or her estate his or her creditors the creditors of his or her estate or to a person to whom he or she has a legal_obligation primary beneficiary trustee trustee proposed trustee primary beneficiary’s child and proposed trustee primary beneficiary’s child will be designated as the trustees trust will provide that there shall not be more the five trustees in office at any time at any time that a current income_beneficiary is serving as trustee there shall be at least one trustee who is neither a current income_beneficiary nor a person with a legal_obligation to a current income_beneficiary the individual trustees at any time in office other than a trustee who has a legal_obligation to a current income_beneficiary are authorized to appoint an individual or a bank or a_trust company to act as a trustee in succession to any appointed trustee no person or persons has the power to remove a trustee trust will provide that a trustee shall cease to act and be removed upon written certification by two physicians that the trustee is incompetent or incapacitated by reason of age illness or injury if a trustee vacancy plr-153651-01 exists which cannot be filled under the authority granted primary beneficiary if living or the secondary beneficiary will appoint a successor trustee paragraph fourth e of trust will provide that wherever used in the instrument the term current income_beneficiary is defined to mean any person to whom the current income of any trust is distributable whether pursuant to an express provision in the instrument or pursuant to the exercise of any discretionary power granted to the trustee thereunder trust will provide that the trustees may transfer the trust property or any portion thereof or the situs of trust administration or both at any time and from time to time from one jurisdiction to another and regardless of any other designation of applicable law elect in writing that the law of such other jurisdiction shall thereafter govern to the extent as may be necessary and appropriate however notwithstanding any other provision the trustees shall not exercise any power under the trust in any manner that would cause the beneficial_interest held by any person to differ from the beneficial_interest held by that person under article eight of trust requested rulings trustee has asked us to rule that the transfer of assets from trust to trust will not subject distributions from trust to the generation-skipping_transfer_tax imposed under chapter of the internal_revenue_code assets transferred to trust will not be included in the gross_estate of primary beneficiary any other trust_beneficiary or any trustee of either trust or trust the transfer of assets from trust to trust will not constitute a gift to trust or to any beneficiary of trust for purposes of sec_2501 of the internal_revenue_code by the trustee making the transfer no person including the trustee of trust who establishes trust and who directs the transfer of assets thereto will be treated as the owner of any portion of trust for federal_income_tax purposes under the provisions of sec_671 through of the internal_revenue_code no gain_or_loss under sec_1001 of the internal_revenue_code will be recognized on any trust assets as a result of their transfer to trust plr-153651-01 ruling sec_2601 of the internal_revenue_code imposes a tax on every generation-skipping_transfer gst which is defined under sec_2611 as a taxable_distribution a taxable_termination or a direct_skip under of the tax_reform_act_of_1986 the act the generation-skipping_transfer gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer under a_trust that was irrevocable on date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax under sec_26_2601-1 will not cause the trust to lose its exempt status these rules are applicable only for purposes of determining whether an exempt trust retains exempt status for generation-skipping_transfer_tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that the distribution of trust principal from an exempt trust to a new trust or retention of trust principal in a continuing trust will not cause the new or continuing trust to be subject_to the provisions of chapter if - either- i the terms of the governing instrument of the exempt trust authorize distributions to the new trust or the retention of trust principal in a continuing trust without the consent or approval of any beneficiary or court or ii at the time the exempt trust became irrevocable state law authorized distributions to the new trust or retention of principal in the continuing trust without the consent or approval of any beneficiary or court and the terms of the governing instrument of the new or continuing trust do not extend the time for vesting of any beneficial_interest in the trust in a manner that may postpone or suspend the vesting absolute ownership or power of alienation of an interest in property for a period measured from the date the original trust became irrevocable extending beyond any life in being at the date the original trust became irrevocable plus a period of years plus if necessary a reasonable period of gestation plr-153651-01 sec_26_2601-1 provides that a modification will not cause an exempt trust to be subject_to the gst tax if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in a beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a generation-skipping_transfer or the creation of a new generation-skipping_transfer sec_26_2601-1 example considers a situation where in grantor established an irrevocable_trust trust for the benefit of grantor’s child a a’s spouse and a’s issue at the time trust was established a had two children b and c a corporate fiduciary was designated as trustee under the terms of trust the trustee has the discretion to distribute all or part of the trust income or principal to one or more of the group consisting of a a’s spouse or a’s issue trust will terminate on the death of a at which time the trust principal will be distributed to a’s issue per stirpes under a state statute enacted after that is applicable to trust a trustee who has the absolute discretion under the terms of a testamentary instrument or irrevocable inter_vivos_trust agreement to invade the principal of a_trust for the benefit of the income beneficiaries of the trust may exercise the discretion by appointing so much or all of the principal of the trust in favor of a trustee of a_trust under an instrument other than that under which the power to invade is created or under the same instrument the trustee may take the action either with consent of all the persons interested in the trust but without prior court approval or with court approval upon notice to all of the parties the exercise of the discretion however must not reduce any fixed income_interest of any income_beneficiary of the trust and must be in favor of the beneficiaries of the trust under state law prior to the enactment of the state statute the trustee did not have the authority to make distributions in trust in the trustee distributes one-half of trust’s principal to a new trust that provides for the payment of trust income to a for life and further provides that at a’s death one-half of the trust remainder will pass to b or b’s issue and one-half of the trust will pass to c or c’s issue because the state statute was enacted after trust was created and requires the consent of all of the parties the transaction constitutes a modification of trust however the modification does not shift any beneficial_interest in trust to a beneficiary or beneficiaries who occupy a lower generation than the person or persons who held the beneficial_interest prior to the modification in addition the modification does not extend the time for vesting of any beneficial_interest in trust beyond the period provided for in the original trust the new trust will terminate at the same date provided under trust the example concludes that neither trust nor the new trust will be subject_to the provisions of chapter sec_26_2601-1 example considers a situation where in grantor who was domiciled in state x executed an irrevocable_trust for the benefit of grantor's issue under the terms of the trust the trust is to terminate in all events no later than years after the death of the last to die of certain designated individuals plr-153651-01 living at the time the trust was executed the provisions of the trust do not specify that any particular state law is to govern the administration and construction of the trust in state x the common_law rule_against_perpetuities applies to trusts in the situs of the trust changes to state y and the laws of state y govern the administration and construction of the trust state y law contains no rule_against_perpetuities however in view of the terms of the trust instrument the trust will terminate at the same time before and after the change in situs accordingly the change in situs does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the transfer furthermore the change in situs does not extend the time for vesting of any beneficial_interest in the trust beyond that provided for in the original trust therefore the change in situs does not cause the trust to lose exempt status for gst purposes the example concludes that if as a result of the change in situs state y law governed such that the time for vesting was extended beyond the period prescribed under the terms of the original trust instrument the trust would not retain exempt status in this case trust established for primary beneficiary and his descendants was created and became irrevocable before date and it is represented that no additions have been made to trust since date therefore trust is exempt from gst tax trust must terminate no later than years after the death of the last survivor of sister’s descendants living at decedent’s death the date trust was created trustee proposes to distribute the assets of trust to trust pursuant to a state statute similar to that described in sec_26_2601-1 example the dispositive terms of trust will be identical to those of trust further trust must terminate in all events no later than years after the death of the last survivor of sister’s descendants living at decedent’s death as is the case with trust thus the distribution to trust will not shift any beneficial_interest in trust to a beneficiary or beneficiaries who occupy a lower generation than the person or persons who held the beneficial_interest prior to the modification in addition the distribution will not extend the time for vesting of any beneficial_interest in trust beyond the period provided for in trust in addition notwithstanding the change in trust situs under the terms of trust the trust will terminate at the same time before and after the change in situs further the terms of trust expressly prohibit the trustees from exercising any power or discretion provided under state x law that would enlarge diminish or be inconsistent with the powers and discretions of the trustees under trust and expressly prohibit the application of the laws of state x in a manner that would cause the beneficial_interest held by any person to differ from the beneficial_interest held under trust accordingly we conclude that the distribution of trust corpus to trust will not cause trust or trust to be subject_to the provisions of chapter section plr-153651-01 b i e example further the change in situs of trust will not cause the trust to lose exempt status for gst purposes sec_26 b i e example ruling sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of death a general_power_of_appointment or with respect to which the decedent has at any time exercised or released such a power_of_appointment by a disposition which is of a nature that if it were a transfer of property owned by the decedent the property would be includible in the decedent's gross_estate under sec_2035 to inclusive sec_2041 provides that the term general_power_of_appointment means a power exercisable in favor of the individual possessing the power the individual’s estate the individual’s creditors or the creditors of the individual’s estate sec_20_2041-1 of the estate_tax regulations provides that a power_of_appointment is not a general power if by its terms it is either a exercisable only in favor of one or more designated persons or classes other than the decedent or the decedent’s creditors or the decedent's_estate or the creditors of the decedent’s estate or b expressly not exercisable in favor of the decedent or the decedent’s creditors or the decedent's_estate or the creditors of the decedent’s estate in this case both trust and trust provide that a current income_beneficiary any person to whom current income is distributable under an express provision or pursuant to the exercise of a trustee’s discretionary power cannot participate in a decision to i accumulate income or pay it to a descendant or ii distribute trust principal in addition trust and trust provide primary beneficiary with a testamentary power to appoint the remaining principal to anyone other than himself his estate his creditors or the creditors of his estate thus primary beneficiary does not possess a general_power_of_appointment within the meaning of sec_2041 under trust and trust if primary beneficiary does not exercise his power_of_appointment the principal remaining at his death will be divided into equal shares for his descendants then living each share will be held for a respective secondary beneficiary and his or her descendants under income and principal provisions identical to those of trust wherein a current income_beneficiary may not participate in any decision to i accumulate income or pay it to a descendant or ii distribute trust principal in addition under trust and trust a secondary beneficiary will possess a testamentary power to appoint the principal remaining at his or her death to anyone other than himself or herself his or her estate his or her creditors or the creditors of his or her estate in these circumstances a secondary beneficiary or other beneficiary will plr-153651-01 not possess a general_power_of_appointment over the trust property consequently the principal transferred from trust to trust will not be includible in primary beneficiary’s gross_estate or the gross_estate of any beneficiary of trust or trust ruling sec_2501 imposes a tax on the transfer of property by gift by any individual sec_2511 provides that the gift_tax 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_25_2511-1 of the gift_tax regulations provides that the gift_tax also applies to gifts indirectly made thus any transaction in which an interest in property is gratuitously passed or conferred upon another regardless of the means or device employed constitutes a gift subject_to tax in this case the dispositive and beneficial interests in trust will be identical to those of trust therefore no interest in trust will be gratuitously transferred accordingly the distribution of trust principal to trust will not be subject_to gift_tax under sec_2501 ruling sec_671 of the code provides that where it is specified in subpart e of part i of subchapter_j of chapter that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter in computing taxable_income or credits against the tax of an individual any remaining portion of the trust shall be subject_to subparts a through d sec_673 through specify the circumstances under which the grantor is regarded as the owner of a portion of a_trust sec_1_671-2 of the income_tax regulations provides that for purposes of subchapter_j a grantor includes any person to the extent such person either creates a_trust or directly or indirectly makes a gratuitous transfer of property to a_trust in this case decedent the original grantor has died and thus can no longer be treated as the deemed owner of trust if the corpus of trust became the property of someone other than in trust at any time during this transaction then that person is the grantor of plr-153651-01 part or all of trust depending on the extent of that person’s property rights in the corpus 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 or such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would within the principles of sec_671 to inclusive subject a grantor of a_trust to treatment as the owner thereof based on our analysis of the trust documents and the factual representations submitted we conclude that the proposed transactions will not cause trust or trust to be considered grantor trusts nor will any trustee or beneficiary of trust or trust be considered the owner of any portion of trust or trust under sec_671 through of the code ruling sec_61 of the internal_revenue_code provides that gross_income includes all income from whatever source derived sec_61 specifically includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss is the excess of the adjusted_basis provided in sec_1011 over the amount_realized sec_1001 provides that except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale or other exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides as a general_rule that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained for purposes of sec_1001 in an exchange of property each party to the exchange gives up a property interest in return for a new or additional interest such an exchange is a disposition under sec_1001 an exchange of property results in the realization of gain only if the properties exchanged materially differ 499_us_554 a material difference exists when the exchanged properties embody legal entitlements different in_kind or extent or if they confer different rights and powers id pincite in the present case the information submitted and the representations made in plr-153651-01 the ruling_request establish that trust and the principal thereof will be relocated essentially for administrative convenience under the terms of trust the primary beneficiary as well as subsequent beneficiaries will possess the same income and remainder interests before and after the establishment of trust consequently since the interests of the beneficiaries under trust will not materially differ from interests under trust no gain_or_loss will be realized under sec_61 and sec_1001 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 pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to trustee sincerely yours j thomas hines chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes