internal_revenue_service number release date index number ------------------------------ -------------------------------- ------------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------ id no ----------------- telephone number ------------------- refer reply to cc psi plr-132312-09 date date --------------------------------------------------- legend ------------------------- ------------------------ -------------------------------------------------------------------- ----------------------------- trustor spouse trust corporate trustee individual co-trustees ------------------------------------------------------------- son gc1 gc2 gc3 gc4 ggc1 ggc2 ggc3 ggc4 ggc5 ggc6 ggc7 ggc8 ggc9 a court ------------------------------- ------------------------------- --------------------------- --------------------- ----------------------- ------------------- ------------------- ---------------------------- ---------------------------- ---------------------- ------------------------- --------------------------- -------------------------- ------------------------------- ------------------------ ------------------------------------------------------------------------------- ----------------- settlement agreement ---------------------------------------------------------- state dollar_figureo ------------- ------------- plr-132312-09 dollar_figurep dollar_figureq dollar_figurer dollar_figures date date date date court order court order court order cite cite cite dear -------------- ------------- ------------- ------------- ----------- ------------------ ----------------------- ----------------------- ------------------------- ------------------------------------------------------------------------------- --------------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- --------------- ------------------------------------------------------------------------------- ------------------------------------------------------------ --------------------------------------------------------------------------- ----------------------------------------------------------------------------- ------------------------------------------------------------------------------ this responds to your letter dated date requesting rulings on the estate gift and generation-skipping_transfer gst tax consequences of proposed modifications to a_trust under a court-approved settlement agreement the facts submitted and the representations made are as follows on date trustor and spouse created a revocable_trust on date trustor died and trust was divided into a marital trust and a residuary_trust spouse died on date the assets of marital trust passed to the residuary_trust trust which remains in existence and is the subject of this ruling date sec_1 and occurred prior to date since its inception the situs of trust has been state article fourth paragraph g of trust provides that after spouse’s death son and his non-adopted issue of whatever degree will be the beneficiaries of trust until it terminates article fourth paragraph g provides the trustee with the authority to pay or apply for the benefit of any beneficiary as much of the net_income as the trustee deems necessary in the trustee’s discretion for the reasonable care support maintenance education and recreation of the beneficiary article sixth paragraph e provides the trustee with the discretionary authority to distribute to or for the benefit of a beneficiary part or all of the principal of the trust as often as the trustee deems necessary plr-132312-09 article first paragraph d provides that the corporate trustee shall have the authority to make discretionary distributions of income under article fourth paragraph g and discretionary distributions of principal under article sixth paragraph e article fourth paragraph g provides that trust will terminate upon the death of son and when there is no child of son who is under the age of years paragraph g also provides son with power to appoint the trust principal that remains undisposed upon termination the power may only be exercised in such a manner as to distribute the trust estate outright furthermore the power may be exercised only in favor of any one or more of the group consisting of the issue of the trustor son’s issue and the issue of trustor’s deceased brother if son fails to exercise the power_of_appointment the assets will be distributed to the living issue of son upon the principle of representation if son dies leaving no living issue the assets will be distributed to trustor’s brother’s living issue upon the principle of representation if no issue of trustor’s brother is living when trust terminates the assets pass to trustor’s legal heirs under the state intestacy law article fourth paragraph g provides that unless trust terminates at an earlier date under paragraph g it will terminate on the date that is twenty-one years after the death of the last to die of the beneficiaries in being at the time trust became irrevocable at the current time corporate trustee son and a serve as trustees of trust son ha sec_4 children who are the grandchildren of trustor gc1 gc2 gc3 and gc4 and grandchildren who are the great grandchildren of trustor ggc1 ggc2 ggc3 ggc4 ggc5 ggc6 ggc7 ggc8 and ggc9 the trustees became aware that son’s power to appoint the trust assets to the trustor’s issue provides son with a general_power_of_appointment over the assets of trust corporate trustee petitioned court for a judicial reformation of article fourth paragraph g the trustees submitted documentation indicating that trustor intended to provide son with only a limited_power_of_appointment court subsequently issued court order ruling that trustor intended to grant son a limited_power_of_appointment over the trust assets court order judicially construed and reformed the governing provision to add the following parenthetical so that the seventh sentence of article fourth paragraph g reads the power may be exercised only in favor of any one or more of the group consisting of the issue of trustor except that such power may not be exercised in favor of son the issue of son and the issue of the trustor’s deceased brother the judicial construction and reformation with respect to son’s power_of_appointment relates back to the creation of trust plr-132312-09 corporate trustee has consistently exercised its discretion to make annual distributions of income and occasionally principal to son gc1 gc2 gc3 and gc4 corporate trustee distributed larger amounts to son and smaller equal amounts to gc1 gc2 gc3 and gc4 in recent years ggc1 and ggc2 requested discretionary distributions from corporate trustee son and gc1 disputed ggc1’s and ggc2’s status as beneficiaries of trust corporate trustee filed a petition for construction requesting that the court determine the current beneficiaries of trust court appointed a guardian ad litem to represent ggc3 ggc4 ggc5 ggc6 ggc7 ggc8 ggc9 and unborn issue beneficiaries from each level were represented and participated in the litigation during the litigation other matters related to trust administration were disputed the court set the petition for construction and related issues for trial allowing discovery and mediation to take place after lengthy negotiations including two mediations the parties executed settlement agreement pursuant to paragraph b of settlement agreement the parties agreed that the beneficiaries of the trust are the non-adopted issue of son living during the existence of trust paragraph c of settlement agreement replaces the discretionary distribution standard under article fourth paragraph g and article sixth paragraph e with fixed annual distributions of dollar_figureo to son and dollar_figurep to each of gc1 gc2 gc3 and gc4 for the year s following the execution of settlement agreement but preceding the issuance of a favorable ruling from the service the corporate trustee will distribute dollar_figureq to son and dollar_figurer to each of gc1 gc2 gc3 and gc4 paragraph c also provides that ggc1 ggc2 ggc3 ggc4 ggc5 ggc6 ggc7 ggc8 ggc9 and any additional beneficiaries at this generation level or lower are entitled to an annual sum of up to dollar_figures for four years for certain educational expenses such lower level beneficiaries may also request discretionary disbursements for collegiate and post graduate educational_assistance under paragraph e corporate trustee may make discretionary distributions to assist any beneficiary with a medical emergency that is considered to be major and catastrophic and is not covered by insurance paragraph c of settlement agreement provides that upon termination the trust corpus will be distributed as directed in the written power_of_appointment son executed on date if son revokes such power prior to his death son will be considered to have waived the right to further exercise the power to appoint trust assets and the corpus will be distributed pursuant to the governing terms of the instrument paragraph d of settlement agreement requires that the individual co-trustees and the corporate trustee annually agree on the portfolio management decisions in court order sec_2 and the court approved the terms of settlement agreement and construed the beneficiaries of trust as those determined in paragraph b conditioned upon a favorable ruling by the service that settlement agreement will not subject trust to the gst tax plr-132312-09 trust was irrevocable on date and corporate trustee represents that there have been no additions to the trust after date rulings requested under court order son does not possess and has never possessed a general_power_of_appointment with respect to trust that would cause the corpus to be includible in his gross_estate for federal estate_tax purposes son will not be treated as having released a general_power_of_appointment for federal tax purposes under sec_2514 or sec_2041 and neither trust nor distributions therefrom will be subject_to the provisions of chapter of the internal_revenue_code_of_1986 code court order sec_2 and and paragraph b of settlement agreement construing and interpreting the terms of trust to define the beneficiaries of trust to include each of the non-adopted issue of son who are living during the existence of trust will not cause trust or the resulting distributions made from trust to become subject_to the provisions of chapter of the code the modification of the distributive terms of the governing instrument as enumerated in the settlement agreement in paragraph sec_2 c and e will not cause trust or the resulting distributions made from trust to become subject_to the provisions of chapter of the code paragraph c of the settlement agreement which modifies the terms of the governing instrument related to the distribution of trust assets on termination and the power_of_appointment exercisable by son will not cause trust or the resulting distributions made from trust on termination to become subject_to the provisions of chapter of the code ruling sec_2001 provides that a tax is imposed on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2041 provides that the value of the gross_estate includes the value of 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 the power_of_appointment by a disposition which is of the nature that if it were a transfer of property owned by the decedent the property would be includible in the decedent’s estate under sec_2035 to inclusive sec_2041 provides that the term general_power_of_appointment means a power exercisable in favor of the decedent the decedent’s estate the decedent’s creditors or the creditors of the decedent’s estate plr-132312-09 sec_2041 provides that the lapse of a general_power_of_appointment during the life of the individual possessing the power shall be considered a release of the power sec_2501 imposes a tax on the transfer of property by gift sec_2511 provides that the gift_tax shall apply 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_2514 provides that the exercise or release of a general_power_of_appointment shall be deemed a transfer of property by the individual possessing the power sec_2514 provides that the lapse of a general_power_of_appointment during the life of the individual possessing the power shall be considered a release of the power sec_2514 provides that the term general_power_of_appointment means a power that is exercisable in favor of the individual possessing the power his estate his creditors or the creditors of his estate sec_2601 imposes a tax on every gst a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2612 defines the term taxable_termination as the termination by death lapse of time release of power or otherwise of an interest in property held in a_trust unless - a immediately after the termination a non-skip_person has an interest in the property or b at no time after the termination may a distribution including distributions on termination be made from the trust to a skip_person sec_2612 defines the term taxable_distribution as any distribution from a_trust to a skip_person other than a taxable_termination or a direct_skip sec_2612 defines the term direct_skip as a transfer subject_to the federal estate and gift_tax of an interest in property to a skip_person sec_2613 provides that the term skip_person means a natural_person assigned to a generation which i sec_2 or more generations below the generation assignment of the transferor or a_trust in which all interests are held by skip persons or a_trust where no trust distributions including those upon termination may be made to a non-skip_person sec_26_2601-1 of the generation-skipping_transfer_tax regulations provides that except as otherwise provided in sec_26_2601-1 the provisions of chapter of the code apply to any generation-skipping_transfer made after date under b a of the tax_reform_act_of_1986 and sec_26_2601-1 the gst tax provisions do not apply to any gst_trust as defined in sec_2652 that was irrevocable on date but only to the extent that the transfer is not made plr-132312-09 out of corpus added to the trust after date or out of income attributable to corpus so added sec_26_2601-1 provides that if an addition is made after date to an irrevocable_trust which is excluded from chapter by sec_26_2601-1 a pro_rata portion of subsequent distributions from and terminations of interests in property held in the trust is subject_to the provisions of chapter 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 b or b will not cause the trust to lose its exempt status the rules of 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 they 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 of the code sec_26_2601-1 provides that a judicial construction of a governing instrument to resolve an ambiguity in the terms of the instrument or to correct a scrivener’s error will not cause an exempt trust to be subject_to the gst provisions if the judicial action involves a bona_fide issue and the construction is consistent with applicable state law that would be applied by the highest court of the state in 387_us_456 the court considered whether a state trial court’s characterization of property rights conclusively binds a federal court or agency in a federal estate_tax controversy the court concluded that the decision of a state trial_court as to an underlying issue of state law should not be controlling when applied to a federal statute rather the highest court of the state is the best authority on the underlying substantive rule_of state law to be applied in the federal matter if there is no decision by that court then the federal authority must apply what it finds to be state law after giving proper regard to the state trial court’s determination and to relevant rulings of other courts of the state in this respect the federal_agency may be said in effect to be sitting as a state court state law provides that the courts are vested with the authority to reform a_trust instrument and that to the extent a word or phrase of importance is omitted by mistake it may be added in through the judicial power of reformation if the instrument contains the means of doing so with certainty cite cite judicial reformation of a_trust to conform to the intent of the settlor at the time of execution will relate back to the date that the instrument was executed cite in this case the documents submitted indicate that trustor intended to provide son with only a limited_power_of_appointment in article fourth paragraph g based on the plr-132312-09 facts submitted and the representations made we conclude that the judicial action involves a bona_fide issue court order reformed article fourth paragraph g to correct a scrivener’s error the order is consistent with applicable state law that would be applied by the highest court of state accordingly we conclude that son’s power_of_appointment as judicially modified is not a general_power_of_appointment for purposes of sec_2041 the judicial modification of son’s power_of_appointment is not an exercise or release of a general_power_of_appointment that would result in a taxable gift under sec_2514 or would result in inclusion in his gross_estate under sec_2041 and the reformation will not cause trust to lose its exempt status for purposes of the gst tax under sec_2601 ruling sec_2 - sec_26_2601-1 provides that a court-approved settlement of a bona_fide controversy regarding the administration of the trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject_to the provisions of chapter if - the settlement is the product of arm’s length negotiations and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement the regulations further provide that a settlement that results in a compromise between the positions of the litigating parties and reflects the parties’ assessments of the relative strengths of their positions is a settlement within the range of reasonable outcomes 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 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 sec_26_2601-1 example considers a situation where in grantor established an irrevocable_trust for the benefit of grantor’s children a and b and their issue the trust is to terminate on the death of the last to die of a and b at which time the principal is to be distributed to their issue however the provision governing the termination of the trust is ambiguous regarding whether the trust principal is to be distributed per stirpes only to the children of a and b or per capita among the children grandchildren and more remote issue of a and b in the trustee filed a plr-132312-09 construction suit with the appropriate local court to resolve the ambiguity the court issues an order construing the instrument to provide for per capita distributions to the children grandchildren and more remote issue of a and b living at the time the trust terminates the court’s construction resolves a bona_fide issue regarding the proper interpretation of the instrument and is consistent with applicable state law as it would be interpreted by the highest court of the state therefore the trust will not be subject_to the gst tax in this case trust was irrevocable on date and the trustees have represented that there have been no additions to the trust after date son and gc1 disagreed that ggc1 and ggc2 were beneficiaries of trust corporate trustee petitioned court to determine the beneficiaries of trust court set the case for trial and ordered mediation during which the beneficiaries disputed other trust administration issues to avoid litigation the parties executed settlement agreement determining the beneficiaries of the trust and resolving the other trust administration issues discussed during mediation in court order sec_2 and court construed the beneficiaries of trust as those determined under settlement agreement approved all of the terms of settlement agreement and instructed the trustees to administer trust in accordance with the terms of settlement agreement the trust document identified the beneficiaries as son’s non-adopted living issue of whatever degree which settlement agreement construed as son’s non-adopted issue furthermore under the terms of the trust instrument corporate trustee had authority to make discretionary distributions of income and principal under settlement agreement corporate trustee and the beneficiaries have agreed on the amount of distributions that will be made each year finally under the trust instrument son has a limited_power_of_appointment over the trust assets upon termination under settlement agreement upon termination of trust corporate trustee will distribute the assets pursuant to the power_of_appointment son executed on date provided however if son revokes such power prior to his death son will be considered to have waived the right to further exercise the limited_power_of_appointment and corporate trustee will distribute the assets according to the terms of the trust instrument based on the facts presented and the representations made we conclude that settlement agreement including all terms and modifications thereunder is the product of arm’s length negotiation further all of the terms of settlement agreement as described above present a compromise that reflects the parties’ assessment of the relative strengths of their positions therefore the agreement is within the range of reasonable outcomes under sec_26_2601-1 moreover the modifications to trust under settlement agreement will not shift a beneficial_interest in trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person who held the beneficial_interest prior to the modification and they will not extend the time for vesting of any beneficial_interest in the plr-132312-09 trust beyond the period of years after the death of the last to die of the beneficiaries in being at the time the trust became irrevocable accordingly we rule as follows paragraph b of settlement agreement which concludes that the beneficiaries of trust are defined as the non-adopted issue of son who are living during the existence of trust will not cause trust or its distributions to become subject_to gst tax under sec_2601 the modification of the distributive terms of trust as enumerated in paragraph sec_2 c and e of settlement agreement will not cause trust or distributions from trust to be subject_to gst tax under sec_2601 modifications to the terms of trust contained in paragraph c of settlement agreement which relate to the distribution of assets on termination and son’s power_of_appointment will not cause trust or distributions from trust to be subject_to gst tax under sec_2601 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayers and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely james f hogan senior technician reviewer branch passthroughs special industries cc


number release date id office uilc cca-210240-12 ---------------------------- from ------------------- sent friday date pm to ------------ cc ---------------------------- subject lewis v reynolds hi ------ - looking at this again i either misread or misunderstood your original facts i didn't realize payments were made within the ased period thus i stated below that your question does not involve a payment of the underpaid excise_tax made within the assessment_period so revrul_85_67 is inapplicable if tp did pay the tax before the ased went then it would seem that would apply the payment would not be considered an overpayment for purposes of sec_6401 and sec_6514 would not prohibit the credit as such a would apply to permit offset of an overpaid excise_tax of one type against a liability for another excise_tax type where the taxpayer paid the liability within the ased even if we never assessed that liability the analysis in my second paragraph below is incorrect as it is based upon the assumption that there was no payment made within the assessment_period i apologize for the confusion


internal_revenue_service number info release date index no genin-129756-02 cc psi b8 date dear this replies to your date letter wherein you submit some additional questions in regard to this office’s response to senator inquiry on your behalf regarding your agency’s contracts with private companies to provide aircraft for addressed smokejumpers and their cargo our date letter to senator the application of certain federal excise_taxes to the use of chartered aircraft when used to provide aerial firefighting protection or for the transportation of smokejumpers specifically you would like to know whether charges for any of the following invoiced items are subject_to excise_tax exclusive daily availability of the aircraft flight time billed on an hourly basis overnight expenses for the crew away from home base crew standby beyond the ordinary duty day you also inquire whether a domestic_segment fee is applicable to amounts paid for the transportation of smokejumpers where as in this case a taxpayer requests a written response regarding the application of tax law to its specific set of facts a request to this office for a letter_ruling is appropriate if you would like a letter_ruling in this matter please follow the instructions in revproc_2002_1 2002_1_irb_1 copy enclosed in the meantime we hope the following general information will be useful to you as indicated in our letter to senator federal excise_taxes are imposed on amounts paid for the taxable_transportation of persons by air sec_4261 of the internal_revenue_code and for amounts paid to a person engaged in the business of the taxable_transportation of property by air for hire sec_4271 revrul_72_156 1972_2_cb_331 provides that where an air tanker company contracts with a government agency to provide aerial firefighting protection specifically the dispersal of fire retardant neither of the above taxes is applicable the tax on the transportation of property does not apply inasmuch as the aerial service is similar to a nontaxable cropdusting service wherein the air service provider does not transport property for the customer furthermore since the pilots are company personnel and no persons are transported to fight the fire the tax on the transportation of persons is also not applicable however where a government agency contracts with an aircraft service provider for the transportation of persons including smokejumpers or property other than the fire retardant either or both of the air transportation taxes are applicable in a situation where both taxes would be applicable revrul_72_585 1972_2_cb_578 provides that if a single amount is paid for air transportation of a mixed load of persons and property_tax must be paid under sec_4261 on that part of the payment that represents the amount charged for transportation of persons and tax must also be paid under sec_4271 on that part of the charge that represents a payment for transportation of property an allocation of the single charge must be made on a fair and reasonable basis and must be supportable by adequate_records pursuant to sec_4261 if tax is imposed on the transportation of persons by air a separate domestic_segment tax of dollar_figure per segment defined as one takeoff and one landing is also imposed the segment tax is not imposed on any domestic_segment beginning or ending at an airport that is a rural_airport see revproc_98_18 1998_1_cb_435 for a listing of rural airports for purposes of the segment tax revrul_2002_34 2002_24_irb_1150 holds that if an aircraft is chartered and one or more persons are transported on that aircraft for each segment the tax under sec_4261 is calculated by multiplying the amount of tax by the number of passengers transported on the aircraft sec_4281 provides that the taxes imposed by sec_4261 and sec_4271 do not apply to transportation by an aircraft having a maximum_certificated_takeoff_weight of big_number pounds or less except when the aircraft is operated on an established line sec_4262 provides that for purposes of the tax on the transportation of persons by air the term transportation includes layover or waiting time and movement in deadhead service a similar provision is provided under sec_4272 for the transportation of property revrul_76_556 holds that hourly and flat rates which include charges for layover time and movement of aircraft in deadhead service as well as for actual flight time charged by an aircraft rental company for piloted aircraft having maximum certificated takeoff weights in excess of big_number pounds to a company for the transportation of employees to and from their jobsites are subject_to the tax imposed under sec_4261 revrul_72_565 1972_2_cb_578 holds that charges in connection with layover time of chartered aircraft consisting of an hourly rate plus the expenses of the pilot and crew for salaries lodging ground transportation food and entertainment are charges subject_to both air transportation taxes revrul_75_535 1975_2_cb_438 considers whether amounts paid to a nonprofit organization are subject_to tax in holding that there is no exemption for air transportation provided on a nonprofit basis the ruling also holds that amounts paid for air flight and standby time furnished by the organization in connection with its unscheduled u s air ambulance service using aircraft having maximum certificated weights in excess of big_number pounds are subject_to the sec_4261 tax amounts paid for daily availability of aircraft are considered to be amounts paid for standby time and subject_to tax it has been a longstanding position of the internal_revenue_service that amounts paid for the right to air transportation service are taxable regardless of whether the actual service is used if you have any questions about this please contact the person whose name appears above enclosure by sincerely associate chief_counsel passthroughs and special industries richard a kocak chief branch


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 b03 plr-133048-11 date date company ------------------------------------------------------------------------------------------------- ----------------------- legend state date date date ---------- ---------------------- ---------------------- ------------------- trust ------------------------------------------------------------- trust ---------------------------------------------------------------- trust ------------------------------------------------------------ trust ------------------------------------------------------------ trust ------------------------------------------------------- dear ------------------- this letter responds to a letter dated date submitted on behalf of company by company’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code plr-133048-11 facts company incorporated in state on date and elected to be an s_corporation effective date shares of company stock were transferred to trust trust trust trust and trust together the trusts on date company represents that the trusts qualify to be qualified subchapter_s trusts qssts under sec_1361 except that the beneficiary of each respective trust failed to make the election under sec_1361 therefore these trusts were not eligible s_corporation shareholders and company’s s_corporation_election terminated on date company represents that company and company’s shareholders have filed tax returns consistent with company being an s_corporation company further represents that the circumstances resulting in the termination of company’s s_corporation_election were inadvertent and were not motivated by tax_avoidance or retroactive tax planning company and its shareholders agree to make any adjustments consistent with the treatment of company as an s_corporation as may be required by the secretary with respect to the period specified by sec_1362 law and analysis sec_1361 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 for such year sec_1361 provides that for purposes of subchapter_s the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for the purposes of sec_1362 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be an s_corporation shareholder sec_1361 provides that in the case of a qsst with respect to which a beneficiary makes an election under sec_1361 a such trust will be treated as a_trust described in sec_1361 and b for purposes of sec_678 the beneficiary of such trust shall be treated as the owner of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1361 provides that a beneficiary of a qsst or his legal_representative may elect to have sec_1361 apply plr-133048-11 sec_1361 provides that for purposes of sec_1361 the term qualified_subchapter_s_trust means a_trust a the terms of which require that i during the life of the current income_beneficiary there shall be only income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary's death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to such beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to individual who is a citizen or resident_of_the_united_states a substantially separate and independent share of a_trust within the meaning of sec_663 shall be treated as a separate trust for purposes of sec_1361 and sec_1361 sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that if an election under sec_1362 by any corporation was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or was terminated under sec_1362 or the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken so that the corporation for which the election was made or the termination occurred is a small_business_corporation or to acquire the required shareholder consents and the corporation for which the election was made or the termination occurred and each person who was a shareholder in such corporation at any time during the period specified pursuant to f agrees to make such adjustments consistent with the treatment of such corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination such corporation shall be treated as an s_corporation during the period specified by the secretary sec_1_1362-4 of the income_tax regulations provides that for purposes of sec_1_1362-4 the determination of whether a termination or invalid election was inadvertent is made by the commissioner the corporation has the burden of establishing that under the relevant facts and circumstances the commissioner should determine that the termination or invalid election was inadvertent the fact that the terminating event or invalidity of the election was not reasonably within the control of the corporation and in the case of a termination was not part of a plan to terminate the election or the fact that the terminating event or circumstance took place without the plr-133048-11 knowledge of the corporation notwithstanding its due diligence to safeguard itself against such an event or circumstance tends to establish that the termination or invalidity of the election was inadvertent conclusion based solely on the facts submitted and the representations made we conclude that company's s_corporation_election terminated on date when stock in company was transferred to impermissible shareholders we further conclude that the termination was inadvertent within the meaning of sec_1362 pursuant to the provisions of sec_1362 company will be treated as continuing to be an s_corporation on and after date unless company’s s_corporation_election is otherwise terminated under sec_1362 provided that the respective income beneficiaries for trust trust trust trust and trust file a qsst election with the appropriate service_center within days following the date of this letter to be effective date a copy of this letter should be attached to each of the qsst elections except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied regarding company’s eligibility to be treated as an s_corporation or the trusts’ eligibility to be qssts this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to company’s authorized representative the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely james a quinn senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court nicholas p ruggiero and annette m ruggiero petitioners v commissioner of internal revenue respondent docket no filed date nicholas p ruggiero and annette m ruggiero pro sese timothy s sinnott for respondent memorandum findings_of_fact and opinion dean special_trial_judge respondent determined additions to petitioners' federal_income_tax for under sec_6653 in the amount of dollar_figure and under sec_6653 a in the amount of percent of the interest due on the portion of ‘a111 section references are to the internal_revenue_code in effect for the taxable_year in issue - - the underpayment_of_tax attributable to negligence the additions to tax are affected items in that they were determined by respondent with reference to a deficiency owing from petitioners as a result of adjustments to partnership items appearing on a partnership return the issues for decision are whether the statute_of_limitations prohibits the assessment of the additions to tax and if it does not whether part of petitioners' underpayment_of_tax was due to negligence or intentional disregard of rules or regulations some of the facts have been stipulated and are so found the exhibits received into evidence are incorporated herein by reference at the time the petition in this case was filed petitioners were residing in lanoka harbor new jersey findings_of_fact nicholas ruggiero petitioner a licensed mortgage banker and realtor is a high school graduate who attended college for a year his college courses included one course in accounting for one year investment advice sometime in petitioners went to a mr dan desmond desmond an insurance agent to purchase some small like life_insurance for petitioner annette ruggiero desmond also showed petitioners some documents indicating that he was a certified financial planner desmond discussed petitioners' insurance needs gave some general financial advice and then recommended that petitioners invest in a jojoba research_and_development limited_partnership he showed petitioner some pamphlets and some cosmetic products desmond initially offered petitioners an investment in an entity called new jersey agri new jersey agri whose stated intent was to grow jojoba for use as a renewable source of oils pharmaceuticals and cosmetics petitioner does not remember receiving a private_placement memorandum desmond did provide him with certain documents to show him that this investment was valid he was shown copies of bills from congress articles of dollar_figure million investment into jojoba u s department of agriculture after petitioner received some newsletters from people with ph d 's petitioner introduced into evidence copies of the items of literature he said were given to him by desmond in all are dated or later from talking with desmond petitioner believes that the actual land for the jojoba cultivation was in blythe arizona although he did not receive any documentation with respect to his proposed investment in new jersey agri he was told that the farming research_and_development to make jojoba plants grow better was going to be done by an entity called u s agri headed by a mr pace he was advised that he would only be at risk for his cash investment of dollar_figure q4e- petitioner did not pay a fee to desmond for his financial advice he assumed that as with the sale of insurance desmond would get a commission from the sale of the jojoba partnership_interest petitioner knows nothing about jojoba although it was their first involvement with desmond petitioners based their investment decision solely on what desmond told them and showed them preparation of the tax_return when petitioners received the partnership schedule_k-1 form_1065 partner's share of income credits deductions etc for it was for the partnership arid land research partners arid land the schedule_k-1 indicates that petitioners have a percent profits share interest and that their share of the partnership loss for the year is dollar_figure petitioners never received a schedule_k-1 for an entity named new jersey agri with reference to their jojoba investment petitioners gave their return preparer only the arid land schedule_k-1 for preparation of their joint federal_income_tax return the return preparer told petitioners to file a tax_return in accordance with what is on the k-1 petitioners deducted a partnership loss from arid land research ptnr's of dollar_figure on schedule e supplemental income schedule of their joint tax_return - examination of the arid land partnership petitioners received schedules k-1 for the arid land partnership for tax years subsequent to displaying the tax identification_number tin in the years and following petitioners received schedules k-1 for the blythe jojoba plantation l p partnership on date the internal_revenue_service irs sent to petitioners by certified mail a notice of final_partnership_administrative_adjustment fpaa at paddock ct lanoka harbor nj petitioners lived pincite paddock court lanoka harbor new jersey from through the time of trial the fpaa states that the irs has determined adjustments to the partnership return of arid land research partners tin upon respondent's motion at trial we take judicial notice’ that on date a petition in the name of arid land research partners robert e cole tax_matters_partner was filed with the court at docket no the parties in the arid land case filed on date a stipulation to be bound by 2see fed r evid 640_f2d_614 8th cir court may take judicial_notice of its own records of prior litigation closely related to the case before it 887_f2d_1236 4th cir st louis bapti605_f2d_1169 10th cir -- - the result in the utah jojoba i research case at docket no the court issued an opinion in utah jojoba i research v commissioner tcmemo_1998_6 on date holding that the partnership was not entitled to research and experimental expense deductions the court found that the partnership was not directly or indirectly engaged in research or experimentation was not engaged in a trade_or_business and lacked a realistic prospect of entering a trade_or_business on date the court entered a decision in the arid land case that upheld respondent's diallowance of the partnership losses reported by arid land in and on date respondent sent to petitioners the statutory notice in this case containing respondent's determination of their liability for the negligence additions to tax as a result of the decision upholding the adjustments to the partnership return of arid land petitioners were assessed on date additional tax of dollar_figure petitioners paid the assessment on date opinion petitioners argue that they are not subject_to the additions to tax for negligence because the statute_of_limitations prohibits assessment of the additions to tax and they reasonably relied on the advice of their financial adviser in making the investment in arid land treatment of partnership items the tax treatment of any partnership_item generally is determined at the partnership level pursuant to the unified_audit and litigation procedures set forth in sec_6221 through tax equity and fiscal responsibility act of tefra publaw_97_248 96_stat_648 the tefra procedures apply with respect to all taxable years of a partnership beginning after date 87_tc_1279 87_tc_783 n partnership items include each partner's proportionate share of the partnership's aggregate items of income gain loss deduction or credit sec_6231 sec_301 a -1 a proced admin regs affected items are defined under sec_6231 as any item to the extent such item is affected by a partnership_item 95_tc_209 certain affected items require a partner level determination n c f energy partners v commissio89_tc_741 section a a provides that the normal deficiency procedures apply to those affected items which reguire partner level determinations for the years at issue the additions to tax for negligence are affected items requiring factual determinations at - the individual partner level id pincite the taxpayer_relief_act_of_1997 publaw_105_34 111_stat_1026 amended sec_6221 sec_6226 and to provide that the partnership-- level proceeding is now to include the determination of the applicability of any penalty or addition_to_tax relating to an adjustment to a partnership_item for partnership tax years ending after date statute_of_limitations the notice_of_deficiency relating to the affected items here was timely issued section d provides that the mailing of an fpaa suspends the running of the 3-year limitations_period for assessing a partnership_item or affected_item for the period during which an action may be brought for judicial review of an fpaa and if an action is brought until the decision of the court has become final and for year thereafter a petition for review of the arid land fpaa was filed and the decision was entered by this court on date under section d the running of the 3-year period of limitations for assessing a deficiency attributable to a arid land partnership_item or affected_item was suspended for spetitioner testified that he never received a copy of the fpaa respondent introduced evidence that a copy was sent by certified mail to petitioners' last_known_address the validity of a properly mailed fpaa is not contingent on receipt by a notice_partner sec_6223 102_tc_683 - year after the date the decision entered on date became final since no appeal was filed the decision became final days after it was entered sec_7481 the limitations_period for in this case expired in september of therefore respondent's notice_of_deficiency mailed to petitioners on date was timely additions to tax for negligence sec_6653 imposes an addition_to_tax equal to percent of the underpayment_of_tax if any part of the underpayment is attributable to negligence or intentional disregard of rules or regulations sec_6653 provides for a further addition_to_tax equal to percent of the interest due on the portion of the underpayment attributable to negligence or intentional disregard of rules or regulations negligence includes any failure to reasonably attempt to comply with the tax code including the lack of due care or the failure to do what a reasonable or ordinarily prudent person would do under the circumstances 66_f3d_729 5th cir affg in part and revg in part tcmemo_1994_228 generally courts look both to the underlying investment and to the taxpayer's position taken on the return in evaluating whether a taxpayer was negligent see 82_f3d_918 9th cir affg tcmemo_1994_217 -- - under some circumstances however a taxpayer may avoid liability for the additions to tax for negligence under sec_6653 if reasonable reliance on a competent professional adviser is shown 414_f2d_749 4th cir affg tcmemo_1968_98 89_tc_849 affd 904_f2d_1011 5th cir affd 501_us_868 such reliance is not an absolute defense to negligence but is merely a factor to be considered freytag v commissioner supra for reliance on professional advice to excuse a taxpayer from the negligence additions to tax the taxpayer must show that the professional adviser had the expertise and knowledge of the pertinent facts to provide informed advice on the subject matter leonhart v commissioner supra freytag v commissioner supra stone v commissioner tcmemo_1996_230 reimann v commissioner tcmemo_1996_84 reliance on a professional adviser can be inadequate when the taxpayer and his adviser knew nothing about the nontax business aspects of the venture 85_tc_557 80_tc_914 in order for reliance on professional advice to excuse a taxpayer from the negligence additions to tax the reliance must be reasonable in good_faith and based upon full disclosure 118_f3d_184 4th cir affg tcmemo_1996_167 freytag v commissioner supra pincite the court's review of the evidence in this case leads to the conclusion that petitioners did not place reasonable reliance in good_faith on a competent professional adviser in making their investment in the arid land partnership according to petitioner's testimony after a perfunctory discussion with what he thought was an inssurance agent the agent recommended that he invest in a jojoba research_and_experimentation limited_partnership petitioner implied that the switch in investment focus from life_insurance to jojoba research was not remarkable to him even though this was his first involvement with desmond petitioners did not receive and apparently did not request a private_placement letter prospectus or any other document describing their investment petitioner testified that desmond provided a copy of a bill passed by congress encouraging jojoba cultivation and some newspaper articles on the subject that convinced him of the validity of the investment petitioner presented as exhibits items similar to those described in his testimony but they all postdate his investment in arid land petitioner also seemed relatively unconcerned by being solicited to invest in an entity called new jersey agri and being placed in one called arid land research partners -- petitioners demonstrate little if any idea of how their investment was supposed to work they knew nothing about jojoba research they did know that their maximum amount_at_risk was the dollar_figure they paid in cash and yet they had the potential to deduct more than twice that amount as a loss on their federal_income_tax return for they relied in making their investment entirely on whatever they were told by desmond they did not share that information with the court they relied on desmond even though this was their first contact with him and they assumed he would receive a commission from and thus had an monetary interest in making the sale the court finds that petitioners failed to reasonably attempt to comply with the tax code and regulations their actions evidence a lack of due care or the failure to do what a reasonable or ordinarily prudent person would do under the circumstances chamberlain v commissioner supra petitioners are liable for the additions to tax under sec_6653 and for the year to reflect the foregoing decision will be entered for respondent


internal_revenue_service number release date index number ------------------------------------------------------ -------------------------- -------------------- ------------------------------------------ - department of the treasury washington dc person to contact ----------------------- id no telephone number --------------------- refer reply to cc psi - plr-144888-05 date date ------------------------------------------------------------ ------------------------------------------------------------------ ------------------------------ legend x --------------------------------------------------- ---------------------- a --------------------------------------------------- trust -------------------------------------------------- trust -------------------------------------------------- accounting firm ------------------------------------- d1 d2 d3 d4 dear ------------ -------------------------- ---------------------- ---------------------- ---------------------- this responds to a letter dated ---------------------- and subsequent correspondence submitted on behalf of x by its authorized representative requesting inadvertent termination relief under sec_1362 of the internal_revenue_code plr-144888-05 the information submitted states that x elected to be an s_corporation effective d1 a the majority shareholder of x created trusts intended to meet the requirements of qualified subchapter_s trusts qssts to facilitate gifts of x stock to two of their grandchildren on d2 a contributed x stock to trust on d3 a contributed x stock to trust however no qsst election was timely filed on behalf of trust or trust therefore x's s election terminated on d2 the respective beneficiaries of trust and trust reported their allocable share of x's income consistent with the treatment of trust and trust as qssts accounting firm discovered the failure to timely make the qsst elections after it was hired to provide audit and tax services for x’s tax_year ending on d4 x represents that the circumstances resulting in the termination of x's s_corporation_election were inadvertent and were not motivated by tax_avoidance or retroactive tax planning x and its shareholders have agreed to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary sec_1361 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 for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder sec_1361 provides that in the case of a qsst with respect to which a beneficiary makes an election under sec_1361 - a such trust shall be treated as a_trust described in sec_1361 and b for purposes of sec_678 the beneficiary of such trust shall be treated as the owner of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1361 provides that a beneficiary of a qsst or his legal_representative may elect to have sec_1361 apply sec_1361 provides that an election under sec_1361 shall be effective up to days and months before the date of the election plr-144888-05 sec_1_1361-1 of the income_tax regulations provides that the current income_beneficiary of the trust must make the election under sec_1361 by signing and filing with the service_center with which the corporation files its income_tax return the applicable form or a statement including the information listed in sec_1_1361-1 sec_1362 provides that an election under sec_1362 will be terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that the termination shall be effective on and after the date of cessation sec_1362 provides that if- an election under sec_1362 by any corporation- a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken- a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder in the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination such corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the representations made and the information submitted we conclude that x's s_corporation_election terminated on d2 under sec_1362 because the of the failure of the beneficiaries of trust to file a qsst election and that this termination of x's s election was an inadvertent termination within the meaning of sec_1362 accordingly pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d2 through d3 and thereafter provided x's s_corporation_election was valid and was not otherwise terminated under sec_1362 x’s shareholders must include their pro_rata share of the separately and nonseparately computed items of x as provided in sec_1366 make any adjustments to stock basis as provided in sec_1367 and take into account any distributions made by x to its shareholders as provided in sec_1368 these rulings are conditioned upon the trust and trust filing qsst elections effective d2 and d3 respectively with the appropriate service_center within days of the date of this letter a copy of this letter should be attached to the qsst elections if x or x’s shareholders fail to treat x as described above this ruling will be null and void plr-144888-05 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 specifically no opinion is expressed concerning whether x was or is a small_business_corporation or whether the trust and trust are otherwise eligible to be qssts this ruling letter is directed only to the taxpayer who requested it sec_6110 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 x and x’s other authorized representative sincerely bradford r poston senior counsel branch associate chief_counsel passthroughs and special industries copy of this letter copy for sec_6110 purposes enclosures cc


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc corp plr-138726-01 date date distributing controlled sub llc llc business a business b distributing business a stock distributing business b stock financial advisers date a date b state c a this letter responds to your date request for rulings regarding certain federal_income_tax consequences of a proposed transaction the information submitted in that request and in later correspondence is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials plr-138726-01 submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process summary of facts publicly traded distributing is the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return distributing conducts business a and business b through corporate subsidiaries and limited_liability companies each of the latter an llc distributing has two classes of voting common_stock outstanding distributing business a stock and distributing business b stock which are intended to reflect the performance of business a and business b respectively distributing has a single class of preferred_stock outstanding the preferred_stock distributing wholly owns the stock of sub which is engaged directly and indirectly in business a sub owns an a percent interest in llc which is treated as a partnership for federal_income_tax purposes under sec_301_7701-3 of the procedure and administrative regulations distributing wholly owns llc which is engaged in business b and which is a disregarded_entity and treated as a division of distributing for federal_income_tax purposes under sec_301_7701-3 of the procedure and administrative regulations financial information has been received indicating that business a and business b each have had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years financial advisers have advised distributing that the coexistence of business a and business b within the distributing affiliated_group is responsible for substantial management systemic and other problems that will be alleviated by the separation of business b from the distributing affiliated_group among the difficulties that distributing has experienced are i competition among business units for limited resources and for business opportunities ii the inappropriateness of its current capital structure and iii the general inability of the management of each of business a and business b to focus exclusively on the business needs of its business proposed transaction to accomplish the separation of business b from the distributing group that will allow distributing and controlled to address the business needs and concerns just described distributing has partially completed and proposed the following transaction i on date a distributing and its subsidiaries completed an internal restructuring to better align its assets and liabilities with their respective businesses ii on date b llc will be converted under state c law the llc conversion into a corporation controlled as a result distributing will be treated as plr-138726-01 contributing all of the assets that constitute business b to newly formed controlled in exchange for all of the controlled stock and the assumption by controlled of related liabilities the contribution iii distributing will distribute all of the controlled stock to holders of distributing business b stock in exchange for all of the distributing business b stock the distribution distributing will redeem any distributing preferred_stock outstanding iv in connection with the transaction distributing controlled and llc will have entered into a series of intercompany agreements the intercompany agreements including a tax_sharing_agreement v in connection with the transaction a portion of distributing debt will be allocated to controlled through a combination of new debt issuances and exchange offers for distributing debt and an assumption of distributing debt by controlled in an amount necessary to establish appropriate capital structures for distributing and controlled representations the taxpayer has made the following representations concerning the contribution and distribution a the internal restructuring completed on date a qualified as a tax-free reorganization under sec_368 b the fair_market_value of the controlled stock received by each distributing business b stock shareholder will approximately equal the fair_market_value of the distributing business b stock surrendered by the shareholder in exchange therefor c no part of the consideration distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a distributing shareholder d the five years of financial information submitted on behalf of distributing regarding business a and controlled regarding business b as conducted by distributing before the contribution represents the present operation of each business and with regard to each business there have been no substantial operational changes since the date of the last financial statements submitted e following the distribution distributing and controlled each will continue independently and with its separate employees the active_conduct of business a and business b f the distribution is being carried out to alleviate management systemic and other problems that arise from or are exacerbated by the coexistence of business a and business b as separate divisions within the distributing affiliated_group the plr-138726-01 distribution is motivated in whole or substantial part by this corporate business purposes g there is no plan or intention by any shareholder who own sec_5 percent or more of the stock of distributing and the management of distributing to its best knowledge is not aware of any plan or intention on the part of any particular remaining shareholder or security holder of distributing to sell exchange transfer by gift or otherwise dispose_of any stock in or securities of distributing or controlled after the distribution h there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the distribution other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 1996_1_cb_696 i there is no plan or intention to liquidate either distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the distribution j the total adjusted_basis and the fair_market_value of the assets transferred to controlled by distributing in the contribution will in each instance equal or exceed the liabilities assumed as determined under sec_357 by controlled k the liabilities assumed as determined under sec_357 in the contribution were incurred in the ordinary course of business and are associated with the assets being transferred or are being assumed to establish the appropriate liquidity and capital structure for each of distributing and controlled l except with respect to the assumption_of_liabilities and in connection with continuing transactions under the intercompany agreements no intercorporate debt will exist between distributing and controlled at the time of or after the distribution any debt owed by controlled to distributing after the distribution will not constitute stock_or_securities m immediately after the distribution at least percent of the fair_market_value of the gross assets of distributing will consist of the stock and securities of a controlled_corporation sub which is engaged in the active_conduct_of_a_trade_or_business as defined in sec_355 n immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 of the income_tax regulations as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d further any excess_loss_account distributing may have in the controlled stock or any direct or indirect controlled subsidiary will be included in income immediately before the distribution to the extent required by applicable regulations see sec_1_1502-19 plr-138726-01 o except for payments under certain post-distribution agreements payments made in connection with any continuing transactions between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length p no two parties to the transaction are investment companies as defined in sec_368 and iv q the distributing business a stock and distributing business b stock each is stock of distributing for federal_income_tax purposes r for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution s for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution or ii attributable to distributions on distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution t the distribution is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock of either controlled or distributing entitled to vote or stock possessing percent or more of the total value of all classes of stock of either controlled or distributing rulings based solely on the information submitted and the representations set forth above we rule as follows the contribution followed by the distribution will be a reorganization under sec_368 distributing and controlled each will be a_party_to_a_reorganization under sec_368 no gain_or_loss will be recognized by distributing on the contribution sec_361 sec_357 sec_361 and sec_361 plr-138726-01 no gain_or_loss will be recognized by controlled on the contribution sec_1032 the basis of each asset received by controlled in the contribution will equal the basis of that asset in the hands of distributing immediately before the transfer sec_362 the holding_period of each asset received by controlled in the contribution will include the period during which distributing held that asset sec_1223 no gain_or_loss will be recognized by distributing on the distribution sec_355 and sec_361 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of the holders of distributing business b stock on the receipt of controlled stock in exchange for distributing business b stock sec_355 a shareholder who receives controlled stock in the distribution will have an aggregate adjusted_basis in the controlled stock immediately after the distribution equal to the aggregate adjusted_basis of the distributing business b stock surrendered in the distribution sec_358 the holding_period of the controlled stock received by a shareholder in the distribution will include the holding_period of the distributing business b stock surrendered in exchange therefor provided the distributing business b stock is held as a capital_asset on the date of the distribution sec_1223 earnings_and_profits will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 any payments made between distributing controlled or their respective subsidiaries under the tax_sharing_agreement regarding tax_liabilities that i relate to a taxable_period ending on or before the distribution or to a taxable_period beginning before and ending after the distribution and ii do not become fixed and ascertainable until after the distribution will be treated as occurring immediately before the distribution caveats no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings in particular no opinion is expressed on i the internal restructuring described in step i above ii the treatment of non-arm’s length payments described in representation o and plr-138726-01 iii whether the distributing business a stock or distributing business b stock is stock of distributing for federal_income_tax purposes procedural statements this ruling letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent each taxpayer involved in this transaction should attach a copy of this ruling letter to the taxpayer’s federal_income_tax return for the taxable_year in which the transaction covered by this letter is completed under a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representative sincerely lewis k brickates acting chief branch office of the associate chief_counsel corporate


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 4-plr-158587-02 date september in re legend husband wife trust will state dear this responds to a letter dated date and subsequent correspondence requesting rulings regarding the federal estate and gift_tax consequences of the proposed creation of a_trust facts the facts submitted and representations made are as follows husband will execute trust and fund it with his own assets under the terms of trust article provides that husband reserves personal rights including the right to amend or revoke trust and to withdraw income or principal husband’s personal rights will be suspended while husband is absent for reasons specified in trust or while he is incompetent as determined under procedures specified in trust plr-158587-02 if these personal rights are suspended the trustees are authorized to make gifts from trust to wife and descendants or to trusts primarily for their benefit but not in excess of the exclusion amounts under sec_2503 of the internal_revenue_code if an individual eligible to receive gifts is acting as trustee the aggregate gifts to that individual in any calendar_year cannot exceed the greater of dollar_figure or of the aggregate value of the trust estate during husband’s life the trustees will pay to husband any income or principal they deem necessary or advisable for his best interests if husband’s personal rights are suspended the trustees will also pay any income or principal the trustees deem necessary or advisable for the health education support and maintenance of husband’s descendants and of wife article provides at my wife’s death if i am still living i give to my wife a testamentary general_power_of_appointment exercisable alone and in all events to appoint part of the assets of the trust estate having a value equal to i the amount of my wife’s remaining applicable_exclusion_amount less ii the value of my wife’s taxable_estate determined by excluding the amount of those assets subject_to this power free of trust to my deceased wife’s estate or to or for the benefit of one or more persons or entities in such proportions outright in trust or otherwise as my wife may direct in her will the trust assets distributed in satisfaction of wife’s exercise of this power will be selected by the trustee and valued as of wife’s date of death trust further provides that at husband’s death if wife survives husband after the payment of taxes administration_expenses and other costs the trustees will distribute to wife as the marital gift a fraction determined under a formula of the residue of trust the balance of the residue will be held as husband’s family_trust any portion of the marital gift that wife disclaims will be held as part of husband’s family_trust if wife does not survive husband the entire residue will be held as husband’s family_trust during wife’s life wife will receive any of the income and principal of husband’s family_trust that the trustees in their discretion deem necessary or advisable for her health education support and maintenance the trustees may also pay any income and principal they deem necessary or advisable for the health education support and maintenance of husband’s descendants if husband’s family_trust holds husband’s residence wife will have the exclusive use of that residence for life or until the trustees determine that the residence is no longer needed for such purpose no rent or other costs will be charged to wife and the trustees will pay all of the expenses of maintaining the residence the trustees may not sell the residence without wife’s consent unless she is disabled if the residence is sold the trustees may purchase or build a replacement residence which will be subject_to the provisions applicable to the plr-158587-02 residence that was sold wife is granted a testamentary special power to appoint the assets of husband’s family_trust remaining at wife’s death to any of husband’s descendants upon the death of the survivor of wife and husband any assets of husband’s family_trust that wife does not appoint will be distributed to husband’s then living descendants per stirpes or one-half to wife’s heirs and one-half to husband’s heirs determined under state law as if wife and husband had each died on that date as residents of state husband is named as the trustee of all trusts to be established under trust until his death or disability with two individuals named as successors wife plans to execute will article of will makes gifts of wife’s tangible personality article of will provides i exercise in favor of my estate the power_of_appointment given to me by sec_4 of the trust created by husband dated __ and direct that assets having a value equal to i the amount of my remaining applicable_exclusion_amount less ii the value of my taxable_estate determined by excluding the amount of those assets subject_to this power be distributed to my estate as soon after my death as possible article of will provides that if husband survives wife husband will receive a fraction of wife’s residuary_estate after the payment of estate_taxes debts and expenses determined as follows the numerator of the fraction will be the smallest pecuniary amount that if given outright to husband would eliminate or reduce to the lowest possible sum the state and federal estate_tax liability of wife’s estate this amount will be calculated by taking into account wife’s applicable_exclusion_amount and all other tax_credits deductions and other preferences allowed to wife’s estate the balance of the residuary_estate will be held as a separate trust wife’s family_trust if husband does not survive wife the entire residuary_estate will be held as the family_trust under article of will any part of the gift to husband that he disclaims will become part of wife’s family_trust article of will provides that during husband’s life husband will receive any of the income and principal of wife’s family_trust that the trustees deem necessary or advisable for his health education support and maintenance the trustees may also pay any income and principal they deem necessary or advisable for the health education support and maintenance of husband’s descendants if wife’s family_trust holds wife’s residence husband will have the exclusive use of that residence for life or until the trustees determine that the residence is no longer needed for such purpose plr-158587-02 no rent or other costs will be charged to husband and the trustees will pay all of the expenses of maintaining the residence the trustees may not sell the residence without husband’s consent unless he is disabled if the residence is sold the trustees may purchase or build a replacement residence to which the provisions of article will apply under article d husband is granted a testamentary special power to appoint the assets of wife’s family_trust remaining at his death to any of his descendants under article upon the death of the survivor of wife and husband any assets of wife’s family_trust that husband does not appoint will be distributed to wife’s then living descendants per stirpes or one-half to wife’s heirs and one-half to husband’s heirs determined under state law as if wife and husband had each died on that date as residents of state husband is named as the trustee of all trusts to be established under will with two individuals named as successors you have requested the following rulings on the death of wife during husband’s lifetime if wife exercises the power_of_appointment granted her under article of trust husband will be treated as making a gift that qualifies for the federal gift_tax_marital_deduction to wife with respect to that portion of trust appointed by wife if wife predeceases husband of the assets in trust the value of trust assets over which wife holds a power_of_appointment under article of trust will be included in wife’s gross_estate any assets that originated in trust and that pass to or from wife’s family_trust established under will will not constitute a gift from husband to the other beneficiaries of wife’s family_trust any assets that originated in trust and that pass to wife’s family_trust established under will will not be included in husband’s gross_estate law and analysis sec_2001 of the internal_revenue_code imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2033 provides that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death under sec_2036 the value of the gross_estate includes the value of all property to the extent of any interest in the property which the decedent has transferred plr-158587-02 without receiving adequate_and_full_consideration in money_or_money's_worth by trust or otherwise retaining for life either the possession or enjoyment of or the right to income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2038 provides that the value of the gross_estate includes the value of all property of which the decedent has at any time made a transfer except where there has been a bona_fide sale for adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of death to any change through the exercise of a power by the decedent to alter amend revoke or terminate the interest in the property or where the decedent relinquished this power within the three-year period ending on the date of the decedent's death 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_20_2041-1 of the estate_tax regulations provides that the term power_of_appointment does not include powers reserved by the decedent to himself within the concepts of sec_2036 to sec_20_2041-1 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 his creditors or the decedent's_estate or the creditors of his estate or b expressly not exercisable in favor of the decedent or his creditors or the decedent's_estate or the creditors of his estate sec_2501 imposes a tax for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident sec_25_2511-2 of the gift_tax regulations provides that as to any property or part therein of which the donor has so parted with dominion and control as to leave in him no power to change its disposition whether for his own benefit or for the benefit of another the gift is complete sec_25_2511-2 provides that a gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title to the property to himself or herself sec_2523 provides that where a donor transfers during the calendar_year by gift an interest in property to a donee who at the time of the gift is the donor's spouse plr-158587-02 there shall be allowed as a deduction in computing taxable_gifts for the calendar_year an amount with respect to such interest equal to its value rulings and husband proposes to execute trust and transfer to it property held in husband’s separate name husband will retain the power to amend or revoke trust and to withdraw assets from trust unless these powers are suspended due to husband’s incapacity or absence under limited circumstances until his death thus under sec_25_2511-1 husband’s initial contribution of assets to trust will not be a completed_gift because he will retain the right to withdraw assets and to revoke his transfer and revest title in himself under article of trust if wife predeceases husband at her death wife will possess a testamentary general power to appoint to wife’s estate or to or for the benefit of one or more persons or entities trust assets equal in value to wife’s remaining applicable_exclusion_amount less the value of wife’s taxable_estate determined as if she did not possess this power accordingly we conclude that if wife predeceases husband the value of trust assets over which wife holds a power_of_appointment under article of trust will be included in wife’s gross_estate further on the death of wife during husband’s lifetime if wife exercises that power_of_appointment husband is treated as relinquishing his dominion and control_over the property subject_to that power_of_appointment accordingly on the death of wife during husband’s lifetime if wife exercises the power_of_appointment granted her under article of trust husband will make a completed_gift under sec_2501 husband’s gift will qualify for the federal gift_tax_marital_deduction under sec_2523 rulings and wife plans to execute will in which if she predeceases husband she will exercise to the fullest extent the power granted under article of trust under the terms of will if husband survives wife he will receive an outright payment of a fractional share of her residuary_estate the balance of the residuary_estate will be held in wife’s family_trust the trustee will pay to husband and to husband’s descendants any amount of income and principal of wife’s family_trust that the trustees deem necessary or advisable for the health education support and maintenance of husband and his descendants further if the trust holds wife’s residence during his life husband will have the exclusive use of that residence and wife’s family_trust will pay all costs associated with that use husband is named as the initial trustee of wife’s family_trust husband will have a testamentary special power to appoint the assets of wife’s family_trust among his then living descendants any assets that he fails to appoint will be distributed to wife’s then living descendants per stirpes or one-half to wife’s heirs and one-half to husband’s heirs determined under state law as if wife and husband had each died on that date as residents of state husband will be treated as making a completed_gift to wife of that portion of plr-158587-02 trust appointed by wife if wife predeceases husband thus at her death wife will be treated as the owner of the trust assets she appoints under article of will the trust assets wife appoints will be distributed to wife’s estate and will pass under will under the terms of will those assets may be among the assets in wife’s residuary_estate used to fund wife’s family_trust accordingly we conclude that any assets that originated in trust and that pass to or from wife’s family_trust established under will will not constitute a gift from husband to the other beneficiaries of wife’s family_trust under the terms of wife’s family_trust in his role as either a beneficiary or a trustee husband will not have a general power under sec_2041 because distributions of income and principal from wife’s family_trust are subject_to an ascertainable_standard further any interest husband might have under wife’s family_trust in a residence in which he may have had an ownership_interest would not cause that residence to be includible in his gross_estate under sec_2036 accordingly we conclude that any assets that originated in trust and that pass to wife’s family_trust established under will will not be included in husband’s gross_estate except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code the rulings contained in this letter are based upon information and representations submitted by the trustee 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 this ruling is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours _______________________ lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs and special industries enclosure copy for sec_611 purposes