internal_revenue_service number release date index number ------------------------------------------------------------ --------------------------------------- ------------------------------------------------------------ ------------------------------------------------------------ --------------------------------------------------- -------------------------------- ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b07 plr-140015-06 date date legend trust --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ---------------------- trust --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ----------------------- -------- ------------------------------------------------ state grantor --------------------- date -------------------------- court child -------------------------- date ----------------------- child --------------------------------- date ------------------ date ----------------------- date --------------------------- statute ------------------------------------------------------------------------------------ dear ----- correspondence requesting income gift and generation-skipping_transfer gst tax rulings with respect to the proposed conversion of trust to a total_return_trust under state law this letter responds to your letter dated date and subsequent date and date are before date no additions actual or the facts and representations are as follows grantor created two irrevocable under the terms of each of the original trust agreements and the date court plr-140015-06 trusts on date at the request of the trustees court divided the irrevocable_trust into four separate trusts on date trust and trust are two of the eight trusts created by the date court order and each is held for the benefit of child and his descendants the dispositive provisions of trust and trust are identical constructive have been made to trust or trust since date each trust is governed by state law order after child 1’s death child may direct the payment of up to one-third of the net_income in his last will and testament to his surviving_spouse the balance of the net_income or all of the net_income if none becomes payable to a surviving_spouse shall be paid to child 1’s issue from time to time surviving per stirpes child may by will change the proportion in which his issue shall share in the net_income by exercise of a limited_power_of_appointment if child dies without issue before the termination of the trust the trust assets shall be added to the shares of the remaining children in the same proportion that such shares bear to each other order each trust shall continue until twenty years after the death of the last surviving of eight named individuals child was the last surviving named individual child died on date upon termination of a_trust the trust estate shall be paid to the person s then in receipt of the income if a spouse is currently receiving income a share of the trust necessary to produce such income shall continue to be held in trust during the spouse’s life but the person s who would have received the income shall immediately have a vested interest in the principal withheld the trustees may choose to purchase an annuity for the spouse and make immediate distribution of the entire trust estate child exercised his rights under each trust to change the percentage of net_income paid to his issue but did not direct payment of any net_income to a surviving_spouse income from each trust is currently distributed in accordance with the percentages set out in child 1’s will state statute permits a court to convert a_trust to a total_return_trust or unitrust if the court determines that the conversion will enable the trustee to better carry out the purposes of the trust and that the conversion is in the best interests of the beneficiaries statute provides that following conversion of a_trust to a total_return_trust income in the governing instrument means an annual amount equal to a percentage of the net fair_market_value of the total trust assets averaged over a three-year period finally statute under the terms of each of the original trust agreements and the date court child died on date under article three of his will executed on date the trustees have requested rulings that the proposed conversions of trust plr-140015-06 provides that a court has the power to determine the percentage of the total value of the trust assets to be distributed from a total_return_trust the trustees of each trust have filed a complaint in court requesting that the court convert trust and trust to a total return trusts under statute and that court approve a distribution percentage from each trust after the conversion the complaint further requests the court declare that on termination the assets from each trust will be distributed to the persons then in receipt of a portion of the unitrust_amount in the same proportions as the unitrust_amount is then being paid the trustees further propose to consolidate trust and trust after the conversion and merger the unitrust_amount will be divided among the beneficiaries as directed in child 1’s will and trust to a total return trusts and subsequent merger will not cause either trust to lose its status as exempt from the gst tax will not cause any beneficiary to have made a gift_for gift_tax purposes will not cause either trust or any beneficiary to realize capital_gain from an exchange of a_trust interest for income_tax purposes and will not change the basis or holding periods of the assets of either trust ruling sec_1 and property by gift by an individual transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible the date of the gift shall be considered the amount_of_the_gift distribution a taxable_termination and a direct_skip under b a of the tax_reform_act_of_1986 and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the generation-skipping_transfer_tax provisions do not apply to any generation-skipping_transfer under a_trust as defined in sec_2652 that was irrevocable on date however this exemption does not apply if additions actual or constructive are made to the trust after date sec_2512 provides that if a gift is made in property the value thereof at sec_2611 defines the term generation-skipping_transfer as a taxable sec_2501 of the internal_revenue_code imposes a tax on the transfer of sec_2511 provides that the tax imposed by sec_2501 applies whether the sec_2601 imposes a tax on every generation-skipping_transfer sec_26_2601-1 of the generation-skipping_transfer_tax sec_26_2601-1 provides rules for determining when a modification sec_26_2601-1 provides that a modification of the governing plr-140015-06 regulations provides that any trust in existence on date will be considered an irrevocable_trust except as provided in sec_26_2601-1 or c which relate to property includible in a grantor’s gross_estate under sec_2038 and sec_2042 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 or hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status in general unless specifically provided otherwise the rules contained in sec_26_2601-1 are applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes unless specifically noted 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 gain for purposes of sec_1001 instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy sec_26_2601-1 b or c by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter 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 modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a 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 modification a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust in addition administration of a_trust in conformance with applicable local law that defines the term income as a unitrust_amount or permits a right to income to be satisfied by such an amount or that permits the sec_26_2601-1 provides that for purposes of this section a sec_26_2601-1 example considers a situation where a_trust the trustees represent that trust and trust were irrevocable on september plr-140015-06 trustee to adjust between principal and income to fulfill the trustee’s duty_of impartiality between income and principal beneficiaries will not be considered to shift a beneficial_interest in the trust if applicable local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust and meets the requirements of sec_1_643_b_-1 of the income_tax regulations that is otherwise exempt from the gst tax because it was irrevocable prior to date provides that trust income is payable to a for life and upon a’s death the remainder is to pass to a’s issue per stirpes state x the situs of the trust then amends its income and principal statute to define income as a unitrust_amount of of the fair_market_value of the trust assets valued annually the example concludes that the administration of the trust in accordance with the state statute defining income to be a unitrust_amount will not be considered to shift a beneficial_interest in the trust therefore the trust will not be subject_to the provisions of chapter further under the facts of the example no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes and that there were no additions to either trust after date b i e which provides that the conversion of an income_interest to a unitrust_interest pursuant to state statute will not be considered to shift a beneficial_interest in a_trust for gst purposes example further concludes that no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes provided the proposed conversion meets the requirements of state statute and an order from state court approving the conversion is obtained we conclude that the conversion of the income interests in trust and trust to unitrust interests and the subsequent merger will not be considered to shift any beneficial_interest in either trust and therefore will not cause either trust to lose its status as exempt from the gst tax we further conclude that the proposed modifications will not result in any beneficiary being treated as having made a taxable gift_for federal gift_tax purposes ruling whatever source derived including gains derived from dealings in property and income from an interest in an estate_or_trust the facts in this case are similar to those set forth in example of sec_26 sec_61 and provides that gross_income means all income from sec_1001 provides that the amount_realized from the sale or other under sec_1001 of the code gain from the sale_or_other_disposition of property sec_1_1001-1 provides that a loss is not ordinarily sustained prior to the plr-140015-06 shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in such section for determining loss over the amount_realized under sec_1_1001-1 of the income_tax regulations the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially in_kind or in extent is treated as income or loss sustained disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sale_or_other_disposition of the property for the reason that until such sale_or_other_disposition occurs there remains the possibility that the taxpayer may recover or recoup some of the adjusted_basis of the property until some identifiable_event fixes the actual sustaining of a loss and the amount thereof the loss is not taken into account an exchange of property results in the realization of gain_or_loss under sec_1001 if the properties are materially different 499_us_554 properties exchanged are materially different if the properties embody legal entitlements different in_kind or extent or if the properties confer different rights and powers id pincite in cottage savings the supreme court held that mortgage loans made to different obligors and secured_by different homes embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans id in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent id pincite sec_1_643_b_-1 provides a comprehensive definition of income as that term applies to trusts_and_estates it provides in part that items such as dividends interest and rents are generally allocated to income and proceeds from the sale_or_exchange of trust assets are generally allocated to principal however an allocation of amounts between income and principal pursuant to applicable local law will be respected if local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust for the year including ordinary and tax- exempt_income capital_gains and appreciation for example a state statute providing that income is a unitrust_amount of no less than and no more than of the fair_market_value of the trust assets whether determined annually or averaged on a multiple year basis is a reasonable apportionment of the total return of the trust sec_1_643_b_-1 further provides that a switch between methods of determining trust in the present case the preliminary question is whether the trustees and plr-140015-06 income authorized by state statute will not constitute a recognition event for purposes of sec_1001 beneficiaries of the trust and trust will have the same property interests and legal entitlements as a result of the proposed conversion under state statute a conversion to a total_return_trust may be made upon the court's determination that the conversion will enable the trustee to better carry out the purposes of the trust in addition and under the facts presented there is to be no material_change in property interests or legal entitlements for trust trust the trustees or the beneficiaries if the conversion of the trusts to total return trusts does not result in a material_change in property interest or legal entitlements there is no occasion for realizing taxable gain_or_loss under sec_1001 the same analysis applies in determining the tax consequences of the merger of the two trusts in this case the interests of all taxpayers before and after the proposed merger of trust and trust remain the same because each trust has the same beneficiaries and identical terms the exchanged properties are not materially different because they do not involve legal entitlements that are different in_kind or confer different rights and powers neither the consolidation of trust and trust nor a deemed_distribution of the assets of both to the resulting trust result in gain_or_loss realization to any taxpayer in this case ruling sec_1015 provides that if property is acquired by a transfer in trust other than a transfer in trust by a gift bequest or devise the basis shall be the same as it would be in the hands of the grantor increased by the amount of gain or decreased by the amount of loss recognized to the grantor on such transfer date by transfer in trust other than by transfer in trust by gift bequest or devise the basis_of_property so acquired is the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on the transfer under the law applicable to the year in which the transfer was made if the taxpayer acquired the property by transfer in trust this basis applies whether the property be in the hands of the trustee or the beneficiary and whether acquired prior to termination of the trust and distribution of the property or thereafter sec_1223 provides that in determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person if under chapter of subtitle a such property has for the purpose of determining gain_or_loss from a sale_or_exchange the same sec_1_1015-2 provides that in the case of property acquired after except as expressly provided herein no opinion is expressed or implied based on the information submitted and the representations made we conclude plr-140015-06 basis in whole or in part in his hands as it would have in the hands of such other person see also sec_1_1223-1 that because sec_1001 does not apply to the conversion and merger of the trust and trust assets under sec_1015 the basis of the assets received by the resulting trust will be the same after the conversion and merger as the basis of those assets before furthermore pursuant to sec_1223 the holding_period of each assets in the resulting trust will include the holding_period of that asset in the hands of each original trust concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination provides that it may not be used or cited as precedent being sent to the taxpayer’s representatives pursuant to the power_of_attorney on file with this office a copy of this letter is this ruling is directed only to the taxpayer s requesting it sec_6110 the rulings contained in this letter are based upon information and sincerely melissa c liquerman melissa c liquerman senior technician reveiwer branch passthroughs special industries enclosure copy for sec_6110 purposes


tax_exempt_and_government_entities_division legend org organization name release date org address department of the treasury internal_revenue_service commerce street dallas tx date november address address uil xx date person to contact badge number contact telephone number contact address last date for filing petition february 20xx certified mail and return receipt dear this is a final notice of adverse determination that your exempt status under sec_501 of the internal_revenue_code is revoked recognition of your exemption under internal_revenue_code sec_501 is retroactively revoked to january 20xx for the following reason s you have not been operated exclusively for an exempt_purpose as required by internal_revenue_code sec_501 you have not demonstrated that you primarily engage in activities which accomplish one or more of such exempt purposes specified in sec_501 as required by sec_1_501_c_3_-1 contributions to your organization are no longer deductible effective january 20xx since your exempt status has been revoked you are required to file form_1120 u s_corporation income_tax return for all years beginning on or after january 20xx the forms for the years ended december 20xx december 20xx and december 20xx must be filed with this office within days of the date of this letter unless a request for an extension of time is granted send these returns to the following address income_tax returns for subsequent years are to be filed with the appropriate service_center identified in the instructions for those returns it is further determined that your failure_to_file a written appeal constitutes a failure to exhaust your available administrative remedies however if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claims_court or the district_court of the united_states for the district of columbia before the ninety-first 91st day after the date that this determination was mailed to you contact the clerk of the appropriate court for rules for initiating suits for declaratory_judgment to secure a petition form write to the following address please understand that filing a petition for a declaratory_judgment under sec_7428 will not delay the processing of subsequent income_tax returns and assessment of any taxes due the last day for filing a petition for declaratory_judgment is february 20xx you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access you tax information and can help you get answers you can call and ask for the taxpayer_advocate assistance or you can contact the advocate from the site where this issue was determined by writing to taxpayer_advocate assistance cannot be used as substitute for established rs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determination nor extend the time fixed by law that you have to file a petition in court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling this letter should be kept within your permanent records if you have any questions please contact the person whose name and telephone number are shown above sincerely marsha a ramirez director eo examinations enclosures publication form 886a department of the ‘treasury - internal_revenue_service name of taxpayer explanation of items org legend schedule no or exhibit year petiod ended org organization name address company referral referral referral address city city referral referral company xx date xyz state motto motto referral referral founder founder company referral referral referral tax years ending december 20xx issues presented whether org is operated exclusively for exempt purposes described within internal_revenue_code sec_501 a whether org is engaged primarily in activities that accomplish an exempt_purpose b whether more than an insubstantial part of org activities are in furtherance of a non-exempt purpose whether org was operated for the purpose of serving a private benefit rather than public interests c d whether any part of the net_earnings of org inured to the benefit of any private_shareholder_or_individual facts background org was incorporated under the laws of the state of xyz pursuant to the xyz nonprofit corporation act on january 20xx ina determination_letter dated march 20xxk org was determined to be exempt from federal_income_tax as an organization described in sec_501 org is located at address city xyz in its articles of incorporation org stated its purpose is to create develop and foster consumer motto to targets low to moderate-income individuals throughout the united_states of america to provide technical support for targeted communities that strengthen the social economic and financial stability and development of families and individuals at tisk of losing their good credit becoming unemployed bankrupt or in the process of rebuilding their credit or reentering the job market to increase economic service delivery from existing community service providers to the intended recipients and to generate funding that will support technical services for the creation development expansion and maintenance of viable economic development strategies for credit preservation to generate receive and maintain a fund or funds and to apply the income and principle thereof for charitable religious educational or scientific purposes within the united_states of america to formulate structure and implement programs directed toward the moral form 886-a crev department of the treasury - internal_revenue_service page -1- tata 886a department of the ‘treasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit year period ended legend g org organization name address address city city company referral referral referral company referral referral xx date referral referral founder founder xyz state motto motto co company referral referral referral ethical cultural civic educational and economic regeneration development and redevelopment of individuals families and the community at large according to the form_1023 application_for recognition of exemption the specific activities for org include motto and training presented through workshops seminars one on one counseling and distribution of educational literature videos and various training mediums training also incorporates the used of technology such as computer literacy on-line education and improving or developing reading and writing skills the use of an academic enhancement and enrichment strategy proves effective tools in establishing good credit habits for the target participants to provide these disciplines educational training after-school tutoring computer training and life skills training is made available by professional volunteers educators and local businesses the activities of org are supported by faith-based institutions finance institutions such as the banking industry and low income housin g providers these activities comprise percent of org allocated time the remaining percent of org is distributed equally between assisting other service providers in development strategies for their intended recipients and developing manuals that can be replicated to target groups and individuals ninety percent of the activities are housed at local schools community centers low-income_housing neighborhoods or churches the remaining ten percent of time devoted to org is spent in the office or in the office of the agency or institution being assisted all activities are scheduled monday through thursday to hours per session and may be held during business hours or after hours depending on the needs o f the participants motto assistance is implemented by professionals and volunteers and monitored by the program’s executive director org also provides referral services to clients that have bad credit as a direct result of destructive lifestyles and chemical abuse prevention education to protect credit is offered to hi gh-risk and at-risk youth and supported by various educational institutions these targeted youth are identified through juvenile delinquency teachers parents and faith-based organizations community forums are provided quarterly by org to foster community education and address contemporary issues affecting local residents each forum is sponsored by housing agencies serving low income residents and is hosted by a local low-income_housing neighborhood or community center and coordinated by the local site manager topics of discussion and issues include and issues include citizen’s education family preservation budgeting classes motto and career planning org utilize counselors that have been certified through org training to facilitate counseling education for program participants activity description form 886-a rev department of the treasury - internal_revenue_service page -2- 2900r0r0 form 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org legend schedule novér exhibit year period ended org organization name address address city city company referral referral referral referral referral company xx date xyz state motto motto founder founder referral referral referral referral co company referrai the primary activity engaged in by org during the year 20xx is the president and founder of the organization do the most of the activities for the organization she does credit restoration for clients that have bad credit or credit discrepancies on their credit report the clients are referred from referral referral referral and other for profit and non-profit organizations she conducts seminars at colleges such as college and xyz university the seminars helps prepare the students to handle their finances after graduation college has several programs through the year and founder presents the workshop and gives out material on budgeting and debt reduction as well as credit counseling she also conducts seminars for organizations that are for-profit she does not get paid for these seminars founder does not attend classes for continuing education for credit counseling she basically concentrate on credit restoration which allows clients with low credit scores to evaluate their credit report and explain to them how to raise their score at first appt client meet founder and talks about the situation their in they discuss the budget money issues assets income and expenses and let them know the cost of the service founder will then evaluate the issues and make a section as to what option is best for that client she run credit report and explain to client how to read it and what they needs to provide to her to increase their credit score on the second appointment the client have to bring proof of pay off papers for the accounts that have been paid off they also have to provide proof of revised budget she runs the credit report again to see if the scores are higher once the scores are high enough then she will refer them to referral which is the mortgage company that provides office space for the organization’s activities she also provides services for co which was a very small part of her activities she will set with client and ask them what is going on with their credit she compiles the info on the budget work history etc she evaluated the information and gave tips on how to have a better budget if they need restoration she will charge a fee and try to help them restore their credit she helps manage their credit for about months she calls to follow up on client progress co does all of the negotiations receiving funds for the consolidations and disbursements to creditors the clients are referrals from different organizations and businesses around city xyz such as referral referral referral and referral these organizations and businesses have a personal_interest in the services provided by org when the client comes in to the organization to request services by the org they pay a fee to founder to discuss their credit history and what is needed to repair the credit report in order for the credit score to be high enough to purchase a home or whatever other reasons the client has for repairing his credit she retrieve a copy of their credit report for a small fee and discuss the report with the client the client may have to pay off a delinquent account dispute an account that has already been paid off or make arrangement with the creditors to pay off an account in order to raise their credit score once they have completed form 886-a rev department of the treasury - internal_revenue_service page -3- el 886a name of taxpayer department of the ‘hreasury - internal_revenue_service explanation of items org legend schedule no or exhibit year period ended org organization name address address city city company referral referral referral referral company referral xx date xyz state motto motto referral founder tounder referral co a company referral referral referral 4‘ the tasks that are recommended by founder they will retum to the organization and have another credit report retrieved founder will again go over the report with the client to make sure the information is correct once the credit score is hi gh enough she will then refer them to referral to apply for a mortgage for a home or if the client is recommended by referral they will go back to referral to continue with the purchase of the house not all of the clients purchase homes when their credit is repaired they may be doing this for other reasons org is not related to co by board members org has only board members which are not board member for co org the non-profit only has one active employee founder she was once the owner of an organization called company a for-profit the for-profit organization was dissolved in 19xx and the non-profit was established she basically performed the same activities when the for- profit was in existence she was informed that in order for her to provide services to co the organization had to become a non profit the services provided which is described in the paragraph above is not considered exempt_activities according to the sec_501 of the code she performed a service and was paid for the services she performed by co which also is a non-profit organization the organization does very minimal amount of service for co the majority of income received by the organization is fees from clients for credit repair services this activity is also not considered an exempt activity according to sec_501 of the code org has only one person controlling the finances founder receives the funds and deposits them in the organization’s account she uses a debit card for purchases the purchases are for business and personal_use there is no control_over the funds by the board members to assure the funds are used for the exempt purposes of the organization the funds received from co is deposited in founder’s personal account and she transfers the funds to the organization’s account law sec_501 of the internal_revenue_code provides that an organization described in sec_501 is exempt from income_tax sec_501 of the code exempts from federal_income_tax corporations organized and operated exclusively for charitable educational and other purposes provided that no part of the net_earnings inure to the benefit of any private_shareholder_or_individual the term charitable includes relief of the poor and distressed sec_1 c -1 d income_tax regulations form 886-a rev department of the treasury - internal_revenue_service page -4- oer 886a department of the ‘treasury - internal_revenue_service name of taxpayer explanation of items org legend schedule no or exhibit year period ended address city city org organization name address company referral referral referral bs company referral referral xx date xyz state motto motto founder founder referral referral referral referral co company referral the term educational includes a instruction or training of the individual for the purpose of improving or developing his capabilities and b instruction of the public on subjects useful to the individual and beneficial to the community sec_1_501_c_3_-1 in other words the two components of education are public education and individual training sec_1_501_c_3_-1 of the regulations provides that in order to be exempt as an organization described in sec_501 c an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose the existence of a substantial nonexempt purpose regardless of the number or importance of exempt purposes will cause failure of the operational_test 326_us_279 sec_1_501_c_3_-1 educational_purposes include instruction or training of the individual for the purpose of improving or developing his capabilities and instruction of the public on useful and beneficial subjects in 326_us_279 the supreme court held that the presence of a single non-exempt purposes if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes the court found that the trade_association had an underlying commercial motive that distinguished its educational program from that carried out by a university in 302_f2d_934 ct_cl the court considered the status of an organization that provided analyses of securities and industries and of the economic climate in general the organization sold subscriptions to various periodicals and services providing advice for purchases of individual securities although the court noted that education is a broad concept and assumed for the sake of argument that the organization had an educational purpose it held that the organization had a significant non- exempt commercial purpose that was not incidental to the educational purpose and was not entitled to be regarded as exempt fotm 886-a rrev department of the treasury - internal_revenue_service page -5- oyna 886a department of the ureasury - internal_revenue_service name of taxpayer explanation of items org legend schedule no fi exhibit year period ended org organization name address address city city company referral referral referral referral 5' referral company xx date founder founder co company xyz state motto motto referral referral referral referral referral an organization must establish that it serves a public rather than a private interest and that it is not organized or operated for the benefit of private interests such as desi gnated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 ii prohibited private interests include those of unrelated third parties as well as insiders 70_tc_1037 92_tc_1053 private benefits include an advantage profit fruit privilege gain or interest 78_tc_280 an organization formed to educate people in hawaii in the theory and practice of est was determined by the tax_court to a part of a franchise system which is operated for private benefit and therefore should not be recognized as exempt under sec_501 of the code 71_tc_1067 although the organization was not formally controlled by the same individuals who controlled the for-profit entity that owned the license to the est body of knowledge publications and methods the for-profit entity exerted considerable control_over the applicant’s activities by setting pricing the number and frequency of different kinds of seminars and training and providing the trainers and management personnel who are responsible to it in addition to setting price for the training the court stated that the fact that the organization’s rights were dependent upon its tax-exempt status showed the likelihood that the for-profit entities were trading on that status the question for the court was not whether the payments made to the for-profit were excessive but whether the for-profit entity benefited substantially from the operation of the organization the court determined that there was a substantial private benefit because the organization was simply the instrument to subsidize the for-profit corporations and not vice versa and had no life independent of those corporations the service has issued two rulings holding credit counscling organizations to be tax exempt revrul_65_299 1965_2_cb_165 granted exemption to a c organization whose purpose was to assist families and individuals with financial problems and to help reduce the incidence of personal bankruptcy its primary activity appears to have been meeting with people in financial difficulties to analyze the specific problems involved and counsel on the payment of their debts the organization also advised applicants on proration and payment of debts negotiated with creditors and set up debt repayment plans it did not restrict its services to the needy it made no charge for the counseling services indicating they were separate from the debt repayment arrangements it made a nominal charge for monthly prorating services to cover form 886-a rev department of the treasury - internal_revenue_service page -6- form 886a name of taxpayer department of the uctasury - internal_revenue_service explanation of items org legend schedule no or exhibit year period ended org organization name address address city city company referral referral referral reterral referral company xx date founder founder co company ayz state motto motto referral referral referral referral referral postage and supplies for financial support it relied upon voluntary contributions from local businesses lending agencies and labor unions revrul_69_441 1969_2_cb_115 granted c status to an organization with two functions it educated the public on personal money management using films speakers and publications and provided individual counseling to low-income individuals and families as part of its counseling it established budget plans ie debt management plans for some of its clients the debt management services were provided without charge the organization was supported by contributions primarily from creditors by virtue of aiding low income people without charge as well as providing education to the public the organization qualified for sec_501 status in the case of consumer credit counseling service of xyz inc v u s a f t r 2d d d c the district_court for the district of columbia held that a credit_counseling_organization qualified as charitable and educational under sec_501 it fulfilled charitable purposes by educating the public on subjects useful to the individual and beneficial to the community sec_1_501_c_3_-1 for this it charged no fee the court found that the counseling programs were also educational and charitable the debt management and creditor intercession activities were an integral part of the agencies’ counseling function and thus were charitable and educational even if this were not the case the court viewed the debt management and creditor intercession activities as incidental to the agencies’ principal functions as only approximately percent of the counselors’ time was applied to debt management programs and the charge for the service was nominal the court also considered the facts that the agency was publicly supported and that it had a board dominated by members of the general_public as factors indicating a charitable operation see also credit counseling centers of oklahoma inc v united_states u s t c d d c in which the facts and legal analysis were virtually identical to those in consumer credit counseling centers of xyz inc v united_states discussed immediately above the organizations included in the above decision waived the monthly fees when the payments would work a financial hardship the professional counselors employed by the organizations spent about percent of their time in activities such as information dissemination and counseling assistance rather than those connected with the debt management programs the primary sources of revenue for these organizations were provided by government and private_foundation grants contributions and assistance from labor agencies and united way form 886-acrev department of the treasury - internal_revenue_service page -7- een 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org legend schedule no or exhibit year period ended org organization name address address city city company referral referral referral referral company referral xx date founder founder co company xyz state motto motto referral referral referral referral referral outside the context of credit counseling individual counseling has in a number of instances been held to be a tax-exempt charitable activity revrul_78_99 1978_1_cb_152 free individual and group counseling of widows revrul_76_205 1976_1_cb_154 free counseling and english instruction for immigrants revrul_73_569 1973_2_cb_179 free counseling to pregnant women revrul_70_590 1970_2_cb_116 clinic to help users of mind-altering drugs revrul_70_640 1970_2_cb_117 free marriage counseling revrul_68_71 c b career planning education through free vocational counseling and publications sold at a nominal charge overwhelmingly the counseling activities described in these rulings were provided free and the organizations were supported by contributions from the public the words private_shareholder_or_individual in sec_501 to refer to persons internal_revenue_code sec_501 specifies that an exempt_organization described therein is one in which no part of the net of earnings inures to the benefit of any private_shareholder_or_individual having a personal and private interest in the activities of the organization sec_1_501_a_-1 the inurement prohibition provision is designed to prevent the siphoning of charitable receipts to insiders of the charity 165_f3d_1173 cir 19xx 276_f2d_476 cir reasonable_compensation does not constitute inurement where an organization provided a source of credit to companies of which a private shareholder was either an employee or an owner the court found that a portion of the organization’s net_earnings inured to the benefit of that private shareholder easter house v united_states cl_ct private shareholder had a source of loan credit in the organization that such loans were made showed that the companies controlled by the the credit repair organizations act croa u s c et seq effective april 19xx imposes restrictions on credit repair organizations including forbidding the making of untrue or misleading statements and forbidding advance_payment before services are fully performed u s c 1679b significantly sec_501 organizations are excluded from regulation under the croa the croa defines a credit repair organization as a any person who uses any instrumentality of interstate commerce or the mails to sell provide or perform or represent that such person can or will sell provide or form 886-a rev department of the treasury - internal_revenue_service page -8- apna 886a department of the ‘treasury - internal_revenue_service explanation of items name of taxpayer org legend schedule no or exhibit year period ended org organization name address address city city company referral referral referral company referral 5' referral xx date xyz state motto motto founder founder referral reterral referral 3' referral co company referral perform any service in return for the payment of money or other valuable consideration for the express or implied purpose of- i improving any consumer’s credit record credit history or credit rating or ii providing advice or assistance to any consumer with regard to any activity or service described in clause i u s c 1679a the courts have interpreted this definition broadly to apply to credit counseling agencies the federal trade commission’s policy is that if an entity communicates with consumers in any way about the consumers’ credit situation it is providing a service covered by the croa 21_fsupp2d_424 n d n j 19xx businesses are prohibited from cold-calling consumers who have put their phone numbers on the national do-not-call registry which is maintained by the federal trade commission c f_r b iii b c f_r sec_64 c sec_501 organizations are not subject_to this rule against cold-calling because c organizations are exempt from regulation under the croa and the cold-calling restrictions organizations that are involved in credit repair have added incentives to be recognized as sec_501 organizations even if they do not intend to operate primarily for exempt purposes exempt organization’s position the outcome of the case was discussed with f ounder the president and founder of the organization she agrees with the findings and stated she will sign the form_6018 agreement and agree with the revocation government position the activities that org engaged in is not considered exempt_activities according to sec_501 of the code the organization only has one person performing the majority of the activities the income received by the organization is fees from clients and from co for services provided by org according to the form_1023 application_for recognition of exemption the source of financial support for the organization will be donations grants fundraising events private sponsors form 886-a rev department of the treasury - internal_revenue_service page -9- i 886a name of taxpayer department of the ‘l'reasury - internal_revenue_service explanation of items org legend schedule no or exhibit year period ended zvuurusu org organization name address company referral referral referral addr company referral referral city city xx date founder referral referral xyz state motto motto founder ca company referral referral referral org to this day has not received funding from either of these sources the only funding received is fees from clients for services performed according to the articles of incorporation no part of the net_earnings of the corporation shall inure to the benefit of any director officer of the corporation or any private individual except that reasonable_compensation may be paid for services rendered to or for the corporation and no officer of the corporation or any private individual shall be entitled to share in the distribution of any of the corporate assets on dissolution of the corporation org does not have control_over the funds to ensure they are being used for the exempt_purpose of the organization the organization has one account and only one person f ounder the president and founder of the organization controls the funds in that account she uses the funds for business and personal expenditures there is no documentation signed by the board_of directors that shows the amount of salary that founder is to receive for her services this is considered inurement under sec_501 of the code conclusion in summary org was not operated exclusively for exempt purposes because it did not engage primarily in activities that accomplish an exempt_purpose more than an insubstantial part of org activities are in furtherance of a non-exempt purpose org was operated for the purpose of serving a private benefit rather than public interests and a part of the net_earnings of org inured to the benefit of a private_shareholder_or_individual accordingly it is determined that org is not an organization described in sec_501 and is not exempt from income_tax under sec_501 effective j anuary 20xx form 886-a rev department of the treasury - internal_revenue_service page -10- tax_exempt_and_government_entities_division org address department of the treasury internal_revenue_service commerce st m c 4900-dal dallas texas taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation enclosures publication publication report of examination sincerely marsha a ramirez director eo examinations letter catalog number 34809f


department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------------- id no -------------- ----------------- telephone number ---------------------- refer reply to cc psi b04 plr-103187-16 date date internal_revenue_service number release date index number ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- re ------------------------------- legend decedent spouse date date ------------------------ ---------------------- ------------------------ ------------------------ dear --------------- this letter responds to your personal representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code portability election to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations are as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is nine months after decedent’s date of death or the last day of the period covered by an extension decedent’s form_706 was due on date but the estate did not file a form_706 to make the portability election the estate discovered its failure to elect portability after the due_date for making the election plr-103187-16 it is represented that the value of decedent’s gross_estate is less than the basic exclusion amount in the year of decedent’s death including any taxable_gifts made during her lifetime you request an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return plr-103187-16 sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 sec_20_2010-2t a of the estate_tax regulations as in effect on date provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely-filed form_706 under sec_20_2010-2t a the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted under sec_20_2010-2t a the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute a request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election the due_date for the portability election is prescribed by statute in the case of an estate required to file an estate_tax_return under sec_6018 see sec_2010 sec_6075 and sec_6018 in the case of an estate that is not required to file an estate_tax_return under sec_6018 the due_date is prescribed by regulation see sec_20_2010-2t a see also sec_20_2010-2 and revproc_2014_18 2014_7_irb_513 sec_2 plr-103187-16 accordingly in the latter case a taxpayer may seek an extension of time to elect portability under the provisions of sec_301_9100-3 sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date it is represented that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly-prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-103187-16 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely associate chief_counsel passthroughs special industries by lorraine e gardner lorraine e gardner senior counsel branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index no --------------------------------- --------------------- ------------------------------------------ -------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 plr-130691-04 date june re -------------------------------------------------- legend settlor trust date date child year dollar_figurex dollar_figurey dollar_figurez - - - - - - - - - ------------------------ -------------------------------------------------- ------------------------------------------------------------- ----------------------- ------------------------- ---------------------------- ------- ---------------------- --------------------- --------------- dear ------------ this is in response to a letter dated date submitted by your authorized representative requesting a ruling under sec_2601 of the internal_revenue_code settlor created and funded an irrevocable_trust on date for the primary benefit of settlor’s child child under the terms of trust after child reaches age income is to be paid to child at the discretion of the trustee and any income not distributed is to be accumulated and added to principal on child’s death the corpus is to be distributed pursuant to child’s limited power to appoint the corpus among child’s issue under article third of trust child has the right to withdraw one-sixth of the principal balance determined as of the date child attains age one-fifth at age and one-fourth at age the trust also provides that in calculating the principal subject_to withdrawal there shall be subtracted from the then principal balance on plr-130691-04 the stated valuation dates any principal already subject_to the right of withdrawal which has not yet been withdrawn the withdrawal right is cumulative and does not lapse child reached age on date at which time the value of the trust was dollar_figurex accordingly the amount that child could withdraw on that date is dollar_figurey to date child has withdrawn dollar_figurez of that amount leaving approximately dollar_figurey-z that child can withdraw at any time when child attains age in year an additional_amount of corpus of the trust corpus less withdrawals not exercised will be subject_to child’s withdrawal power however after that date the maximum amount child can withdraw will be frozen at a specified sum the trustee has asked for a ruling that the failure of child to exercise the withdrawal right does not constitute a constructive_addition to the trust sec_2601 imposes a tax on every generation-skipping_transfer gst a generation-skipping_transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip under ' b a of the tax_reform_act_of_1986 and ' b i of the generation-skipping_transfer_tax regulations the gst tax provisions do not apply to any generation-skipping_transfer under a_trust that was irrevocable on date however this exemption does not apply to gst transfers allocable to additions that are made to the trust after date in addition the exemption does not apply to property transferred from a pre-date trust pursuant to the exercise release or lapse of a general_power_of_appointment created under the terms of the trust that is treated as a taxable transfer for estate or gift_tax purposes sec_2041 provides for the inclusion in the gross_estate of any property over which the decedent possesses at the time of his death a general_power_of_appointment created after date sec_2041 provides that the term general_power_of_appointment means a power that is exercisable in favor of the decedent the decedent's_estate the decedent's creditors or the creditors of the decedent's_estate except that a power to consume property for the benefit of the decedent that is limited by an ascertainable_standard relating to health education support or maintenance of the decedent is not deemed a general_power_of_appointment sec_26_2601-1 discusses certain constructive additions that are treated as post-date additions to the trust sec_26 b v a provides that where any portion of trust remains in the trust after the post- date release exercise or lapse of a general_power_of_appointment over that portion of the trust that is treated a taxable transfer for estate or gift_tax purposes is treated as an addition to the trust in general the release etc is treated as if that portion had been withdrawn and immediately retransferred to the trust at the time of the release exercise or lapse to the extent that the release exercise or lapse of the plr-130691-04 power is treated as a taxable transfer under chapter or chapter the rules under ' apply for determining the identity of the transferor_of_property for purposes of chapter sec_26_2601-1 provides that except to the extent of paragraphs b iv additions to irrevocable trusts and v constructive additions of this section post-1985 appreciation in the value of a grandfathered trust and post-1985 undistributed_income of a grandfathered trust are not considered additions to the principal of a_trust in this case child as a lifetime power to withdraw an amount from trust and this power constitutes a general_power_of_appointment with respect to trust currently child can withdraw dollar_figurey-z on child’s death child’s lifetime power will lapse and any amount subject_to the child’s withdrawal power at the time of death will be included in child’s gross_estate under ' and child will become the transferor of this amount for gst purposes see ' b v d example accordingly we conclude that child has not made a constructive_addition to trust because child’s failure to exercise the withdrawal right does not constitute a constructive_addition to the trust except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code authorized representative pursuant to a power_of_attorney on file a copy of this letter is being sent to your this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely lorraine e gardner senior counsel branch passthroughs and special industries copy for sec_6110 purposes copy of this letter enclosures cc


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-108146-03 date date a b p1 p2 p3 p4 p5 p6 dear this responds to a letter dated date and subsequent correspondence submitted on behalf of p5 requesting rulings concerning the federal_income_tax consequences of the transactions described below facts plr-108146-03 according to the information submitted for various business reasons six partnerships p1 p2 p3 p4 p5 and p6 will consolidate into a single limited_liability_company that will be treated as partnership for federal_income_tax purposes by undertaking the following transactions first p1 p2 p3 p4 p5 and p6 will each contribute all of their assets and liabilities to a newly formed limited_liability_company llc in exchange for an interest in llc each partnership will receive a capital interest in llc equal to the fair_market_value net of liabilities of the property contributed by that partnership following its contribution of assets and liabilities to llc each partnership will liquidate and distribute its membership interests in llc to its partners each of the partnerships holds commercial real_estate p1 p3 p4 and p5 hold depreciable assets with a remaining basis the assets of p1 and p6 have been fully depreciated and have an adjusted_basis of zero the assets of each partnership include certain depreciable_property that was placed_in_service before a b and related_persons own of the six partnerships a and b directly own more than of p1 p2 p3 p4 and p5 a and b represent that p3 will contribute the assets having the greatest fair_market_value net of liabilities to llc law and analysis sec_708 of the internal_revenue_code provides that in the case of a merger or consolidation of two or more partnerships the resulting_partnership shall for purposes of sec_708 be considered the continuation of any merging or consolidating partnership whose members own an interest of more than percent in the capital and profits of the resulting_partnership under sec_1_708-1 if the resulting_partnership can be considered a continuation of more than one of the merging or consolidating partnerships it shall unless the commissioner permits otherwise be considered the continuation solely of that partnership which is credited with the contribution of assets having the greatest fair_market_value net of liabilities to the resulting_partnership any other merging or consolidating partnerships shall be considered as terminated sec_1_708-1 provides that when two or more partnerships merge or consolidate into one partnership under the applicable jurisdictional law without undertaking a form for the merger or consolidation or undertake a form that is not described in sec_1_708-1 any merged or consolidated partnership that is considered terminated under sec_1_708-1 is treated as undertaking the assets-over form for federal_income_tax purposes under the assets-over form each merged or consolidated partnership that is considered terminated under sec_1_708-1 contributes all of its assets and liabilities to the resulting_partnership in exchange for an interest in the resulting_partnership and immediately thereafter the terminated partnership distributes interests in the resulting_partnership to its partners in liquidation of the terminated partnership because the members of more than one of the partnerships including p3 will own an interest of more than percent in the capital and profits of llc and because p3 is credited with the contribution of assets to llc having the greatest fair_market_value net of liabilities llc will be considered the continuation of p3 accordingly the plr-108146-03 transfer of assets from p3 to llc will be disregarded and llc will be treated as the historic owner of those assets p1 p2 p4 p5 and p6 will be considered as having contributed all of their assets and liabilities to llc in exchange for an interest in llc thereafter p1 p2 p4 p5 and p6 will be considered terminated and the partners in p1 p2 p4 p5 and p6 will be considered to have received interests in llc in liquidation of these partnerships generally sec_168 applies to depreciable tangible_property placed_in_service after date sec_168 provides that sec_168 does not apply to property described in sec_168 as in effect before the amendments made by the tax_reform_act_of_1986 sec_168 provides that in the case of any property to which sec_168 would apply but for sec_168 the depreciation deduction under sec_167 is determined by the provisions of sec_168 as in effect before the amendments made by of the tax_reform_act_of_1986 sec_168 prior to the amendments made by the tax_reform_act_of_1986 provided in part that the term recovery_property does not include property placed_in_service by the transferor or distributor before date that is acquired by the taxpayer after date in a transaction described in sec_721 among other code sections to the extent that the basis of the property is determined by reference to the basis of the property in the hands of the transferor or distributor in the case of property to which sec_168 applies rules similar to the rules described in sec_381 shall apply sec_381 provides that the acquiring_corporation is treated as the distributor or transferor_corporation for purposes of computing the depreciation allowance under sec_167 and sec_168 on property acquired in a distribution or transfer with respect to so much of the basis in the hands of the acquiring_corporation as does not exceed the adjusted_basis in the hands of the distributor or transferor_corporation sec_721 provides that no gain_or_loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership sec_723 provides that the basis_of_property contributed to a partnership by a partner shall be the adjusted_basis of such property to the contributing_partner at the time of the contribution increased by the amount if any of gain recognized under sec_721 conclusions because llc is considered to be the continuation of p3 under sec_1_708-1 the depreciation methods and useful lives of the property that was placed_in_service plr-108146-03 before date by p3 and that will be transferred to llc by p3 will be unaffected by the consolidation under sec_723 llc will take a carryover_basis in the properties contributed to llc from p1 p2 p4 p5 and p6 therefore the properties that were placed_in_service by these partnerships before date and that will be transferred to llc by these partnerships will be properties described in former sec_168 under sec_168 the provisions of former sec_168 will apply accordingly the depreciation deduction under sec_167 applicable to the properties transferred to llc by p2 p4 and p5 will be determined in accordance with the rules of sec_381 consequently the depreciation methods and useful lives of the property that was placed_in_service before date by these partnerships will be unaffected by the consolidation except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provision of the code this ruling letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to p5 sincerely yours matthew lay senior technician reviewer branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court tommy l and patricia a hobson petitioners v commissioner of internal revenue respondent docket no filed date tommy l and patricia a hobson pro_se george w bezold for respondent memorandum findings_of_fact and opinion wright judge respondent determined a deficiency in petitioners’ federal_income_tax for taxable_year in the amount of dollar_figure an addition_to_tax under sec_6651 in the amount of dollar_figure and an accuracy-related_penalty under sec_6662 in the amount of dollar_figure 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and continued after concessions by the parties the issues for our decision for the taxable_year are whether petitioners received a taxable_distribution from mrs hobson’s retirement_plan and if so whether petitioners are liable for the additional tax under sec_72 for an early distribution from such plan we hold that the distribution was taxable and petitioners are subject_to the additional tax under sec_72 whether petitioners are liable for an addition_to_tax under sec_6651 for failure to timely file their income_tax return we hold that they are not whether petitioners are liable for an accuracy-related_penalty under sec_6662 due to a substantial_understatement_of_income_tax we hold that they are findings_of_fact some of the facts have been stipulated and are found accordingly the stipulation of facts and attached exhibits are incorporated herein petitioners resided in milwaukee wisconsin at the time the petition was filed petitioners filed a joint federal_income_tax return for taxable_year on date all references to petitioner in the singular refer to patricia a hobson continued procedure petitioner was employed by the oster division of sunbeam corporation oster until it went out of business in it is unclear from the record the exact dates of petitioner’s employment at some time during petitioner received a lump-sum_distribution in the amount of dollar_figure from the oster division sunbeam employees profit sharing plan plan in the plan was qualified within the meaning of sec_401 petitioner had not attained the age of in the distribution was not rolled over into an individual_retirement_account or other qualified_retirement_plan and was not reported on petitioners' income_tax return for the taxable_year petitioners have four children one child has multiple sclerosis and is confined to a wheelchair petitioners care for mrs hobson's father who suffered a stroke and has had both legs amputated petitioner's father lives with petitioners mr hobson is employed in a minimum security prison for women due to the location of mr hobson's job petitioners lived separately for sometime during issue plan distribution opinion the first issue for our decision is whether a distribution from petitioner's profit sharing plan in is includable in income and if so whether petitioners are liable for the percent tax on an early distribution from petitioner's plan under sec_72 sec_402 provides the general_rule that unless otherwise provided any amount_paid or distributed from an employee's trust described in sec_401 is includable in the recipient's gross_income for the year of receipt in the manner provided under sec_72 these statutes apply to petitioner's distribution sec_72 provides imposition of additional tax --if any taxpayer receives any amount from a qualified_retirement_plan the taxpayer's tax for the taxable_year in which such amount is received shall be increased by an amount equal to percent of the portion of such amount which is includible in gross_income sec_72 provides for certain exceptions to the general_rule contained in paragraph petitioner however provided no evidence to suggest that she fit within any of these enumerated exceptions the legislative_history suggests that one of the reasons for enacting sec_72 was to deter the use of retirement savings for nonretirement use h rept 1986_3_cb_1 s rept 1986_3_cb_1 petitioner received an early distribution from her profit sharing plan in taxable_year and petitioners' having failed to show that any of the exceptions found in sec_72 apply we find that petitioners are liable for the 10-percent additional tax pursuant to sec_72 as determined by respondent see 98_tc_283 issue sec_6651 addition_to_tax for delinquency the next issue for our decision is whether petitioners are liable for the addition_to_tax under sec_6651 for failure to timely file their joint federal_income_tax return sec_6651 imposes an addition_to_tax in an amount equal to percent of the amount_required_to_be_shown_as_tax on a return for each month or fraction thereof for which a return is delinquent not to exceed percent in the aggregate the addition_to_tax under this section does not apply if the taxpayer establishes that the failure to timely file was due to reasonable_cause and not due to willful neglect the burden_of_proof is on petitioners to show the failure is due to reasonable_cause and not willful neglect rule a based upon review of the record in the instant case we find that petitioners have met their burden of showing that their failure to timely file their return for was due to reasonable_cause and not due to willful neglect petitioners testified that in addition to caring for a sick child and invalid parent they lived apart during due to mr hobson's job which separation caused a great deal of marital problems petitioners argue that as a result of their difficulties during the taxable_year at issue their failure to timely file their return was due to reasonable_cause we agree accordingly petitioners are not liable for the addition_to_tax under sec_6651 for taxable_year as determined by respondent issue sec_6662 substantial_understatement respondent determined that petitioners are liable for the sec_6662 penalty for sec_6662 imposes an accuracy-related_penalty in an amount equal to percent of the underpayment_of_tax attributable to one or more of the items set forth in sec_6662 in the notice_of_deficiency respondent based the determination of the sec_6662 penalty on petitioners' underpayment being due to a substantial_understatement see sec_6662 a substantial_understatement occurs when an understatement exceeds the greater of dollar_figure or percent of the amount of tax required to be shown on a return sec_6662 an understatement means the excess of the amount of the tax required to be shown on a return over the amount of tax imposed which is shown on the return reduced by any rebate within the meaning of sec_6211 sec_6662 the accuracy-related_penalty under sec_6662 does not apply with respect to any portion of an underpayment if it is shown that there was reasonable_cause for such portion and that petitioners acted in good_faith with respect to such portion sec_6664 the determination of whether petitioners acted with reasonable_cause and in good_faith depends upon the pertinent facts and circumstances sec_1_6664-4 income_tax regs the most important factor is the extent of the taxpayers' effort to assess their proper tax_liability for the taxable_year id although we found that petitioners' failure to timely file their return was due to reasonable_cause we find that the record fails to establish that petitioners acted with reasonable_cause and in good_faith in assessing whether petitioner's distribution from her profit sharing plan was taxable petitioners offered no evidence that they made a good_faith effort to assess their proper tax_liability based on this record we conclude that petitioners are liable for the sec_6662 accuracy-related_penalty as determined by respondent to reflect the foregoing decision will be entered under rule