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 ita b01 plr-127617-18 date date legend ------------------------------------------------------------------- ----------------- ------------------------------------------------ taxpayer state a business holding_company principal business activity ----------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------- transaction transaction transaction year year date a date b date c date d date e ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- ------------ -------- ----------- -------------------------------------------- -------------------------------------------- ----------------------- --------------------------- ------------------- ----------------- --------------------------- dear ----------------------------- this is in response to a letter sent on behalf of taxpayer dated date a requesting permission to attach an election statement to taxpayer’s originally filed plr-127617-18 federal tax_return for year and year the election statement was not included with taxpayer’s originally filed tax_return for year nor year although it was required in order for taxpayer to elect the safe_harbor under section dollar_figure of revproc_2011_29 the request is made under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations facts the taxpayer represents the following facts the taxpayer is a state a registered corporation that was formed on date b and is a business holding_company the taxpayer is the common parent of a u s consolidated_return group and it is engaged in the principal business activity taxpayer incurred transaction costs including success-based fees paid upon the consummation of transaction on date c taxpayer incurred transaction costs including success-based fees paid upon the consummation of transaction on date d taxpayer incurred transaction costs including success-based fees paid upon the consummation of transaction on date e the taxpayer capitalized the transaction costs in accordance with sec_263 of the internal_revenue_code and sec_1_263_a_-2 and sec_1_263_a_-5 of the income_tax regulations taxpayer capitalized percent of the success-based fees and deducted the remaining percent on its timely filed year and year federal_income_tax returns consistent with the safe_harbor election provided in revproc_2011_29 however taxpayer failed to attach the statement required by revproc_2011_29 to elect to use the safe_harbor method of allocating success-based fees this oversight was uncovered by the internal_revenue_service service and the disallowance of certain transaction costs related to transaction was raised as an issue for year law and analysis sec_263 and sec_1_263_a_-2 provide that no deduction shall be allowed for any amount_paid out for property having a useful_life substantially beyond the taxable_year in the case of an acquisition or reorganization of a business_entity costs that are incurred in the process of acquisition and that produce significant long-term benefits must be capitalized 503_us_79 397_us_572 under sec_1_263_a_-5 a taxpayer must capitalize an amount_paid to facilitate a business acquisition or reorganization transaction described in sec_1_263_a_-5 an amount is paid to facilitate a transaction described in sec_1_263_a_-5 if the amount is paid in the process of investigating or otherwise pursuing the transaction plr-127617-18 sec_1_263_a_-5 provides that an amount that is contingent on the successful closing of a transaction described in sec_1_263_a_-5 success-based_fee is presumed to facilitate the transaction and thus must be capitalized a taxpayer may rebut the presumption by maintaining sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction and thus may be deductible a taxpayer's method for determining the portion of a success-based_fee that facilitates a transaction and the portion that does not facilitate the transaction is a method_of_accounting under sec_446 because the treatment of success-based fees was a continuing subject of controversy between taxpayers and the service the service published revproc_2011_29 revproc_2011_29 provides a safe_harbor method_of_accounting for allocating success-based fees paid in business_acquisitions or reorganizations described in regulations sec_1_263_a_-5 in lieu of maintaining the documentation required by sec_1_263_a_-5 this safe_harbor permits electing taxpayers to treat percent of the success-based_fee as an amount that does not facilitate the transaction ie amounts that can be deducted the remaining portion of the fee must be capitalized as an amount that facilitates the transaction section dollar_figure of revproc_2011_29 allows the taxpayer to make a safe_harbor election with respect to success-based fees section dollar_figure provides that the service will not challenge the taxpayer's allocation of success-based fees between activities that facilitate a transaction described in sec_1_263_a_-5 costs that must be capitalized and activities that do not facilitate the transaction costs that may be deductible if the taxpayer does three things first the taxpayer must treat percent of the amount of the success-based_fee as an amount that does not facilitate the transaction and thus may be deductible second the taxpayer must capitalize the remaining amount of the success-based_fee as an amount which does facilitate the transaction finally the taxpayer must attach a statement to its original federal_income_tax return for the taxable_year the success-based_fee is paid_or_incurred stating that the taxpayer is electing the safe_harbor identifying the transaction and stating the success- based fee amounts that are deducted treated as not facilitating the transaction and capitalized treated as facilitating the transaction it is this last requirement that taxpayer requests permission to accomplish with this ruling_request taxpayer requests permission with this ruling_request to attach the statement required by section dollar_figure of revproc_2011_29 to its year and years returns by amending its original filed returns and superseding it with returns with the proper election statement completed and attached sec_301_9100-1 provides that the commissioner of internal revenue in exercising his discretion may grant a reasonable extension of time under the rules set plr-127617-18 forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i the term regulatory election is defined in sec_301_9100-1 as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government under sec_301_9100-3 except as provided in sec_301_9100-3 i through iii a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer i requested relief under this section before the failure to make the regulatory election was discovered by the internal_revenue_service ii failed to make the election because of intervening events beyond the taxpayer’s control iii failed to make the election because after exercising reasonable diligence taking into account the taxpayer’s experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the internal_revenue_service or v reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election paragraphs b i through iii of sec_301_9100-3 provide that a taxpayer is deemed not to have acted reasonably and in good_faith if the taxpayer i seeks to alter a return position for which an accuracy-related_penalty could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the due_date for making the election that make the election advantageous to a taxpayer the service will not ordinarily grant relief in such a case the service plr-127617-18 will grant relief only when the taxpayer provides strong_proof that the taxpayer’s decision to seek relief did not involve hindsight sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer’s receipt of a ruling granting relief under this section sec_301_9100-3 provides special rules for accounting_method regulatory elections sec_301_9100-3 provides that the interests of the government are deemed prejudiced except in unusual or compelling circumstances if the accounting_method regulatory election for which relief is requested is subject_to the advance consent procedures for method changes requires a a adjustment would permit a change from an impermissible method_of_accounting that is an issue under consideration by examination or in any other setting or provides a more favorable method_of_accounting if the election is made by a certain date or taxable_year taxpayer’s election is a regulatory election as defined under sec_301_9100-1 because the due_date of the election is prescribed by revproc_2011_29 in the present situation the requirements of sec_301_9100-1 and sec_301_9100-3 of the regulations have been satisfied the information and representations made by taxpayer and the attached affidavits establish that the taxpayer acted reasonably and in good_faith the taxpayer reasonably relied on qualified_tax professionals for the filing of taxpayer’s return the tax professionals prepared the return consistent with an election under revproc_2011_29 but failed to attach the statement required by the safe_harbor election the information and representations presented establish that taxpayer is not seeking to alter a return position for which an accuracy-related_penalty had been or could be imposed under sec_6662 at the time relief was requested taxpayer was not informed in all material respects of the required election and its related tax consequences furthermore taxpayer is not using hindsight in requesting relief and no facts have changed since the time of the original filing deadline finally granting an extension will not prejudice the interests of the government it is represented that taxpayer will not have a lower tax_liability in the aggregate for all taxable years affected by the election if given permission to make the election in the appropriate amount at this time than taxpayer would have had if the election were made in the appropriate amount by the original deadline for making the election moreover the taxable_year in which the regulatory election should have been made plr-127617-18 and any taxable years that would have been affected by the election had it been timely made are not closed by the period of limitations on assessment conclusion based solely on the facts submitted and the representations made we conclude that taxpayer acted reasonably and in good_faith and that granting the request will not prejudice the interests of the government accordingly the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied taxpayer is granted an extension of days from the date of this ruling to file its mandatory statement as required by section dollar_figure of revproc_2011_29 stating that it is electing the safe_harbor for success-based fees identifying the transaction and stating the success-based_fee amounts that are deducted and capitalized 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 in particular no opinion is expressed regarding taxpayer’s classification of success-based fees in accordance with the provisions of the power_of_attorney currently on file with this office a copy of this letter is being sent to your authorized representatives we are also sending a copy of this letter to the appropriate operating division director enclosed is a copy of the letter_ruling showing the deletions proposed to be made in the letter when it is disclosed under sec_6110 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely sean m dwyer senior technical reviewer branch associate office_of_chief_counsel income_tax accounting


internal_revenue_service department of the treasury number release date index number re washington dc person to contact telephone number refer reply to cc psi 4-plr-119731-99 date date legend trust grantor grantor’s spouse daughter state trustee dear this is in response to your letter of date and prior correspondence requesting a ruling on the income estate and generation-skipping_transfer gst tax consequences of a proposed reformation of trust in grantor and grantor’s spouse created trust for the benefit of daughter the instrument states that grantor and grantor’s spouse are the parents of daughter and it is the desire and purpose of the said grantor and grantor’s spouse to create an irrevocable_trust known as the daughter trust estate for the use and benefit of daughter trustee is currently acting as trustee of trust article i sec_1 provides that the affairs of the trust shall be administered by one trustee in conjunction with the advisory board whose term of office shall continue for and during the entire period or duration of trust unless the same be terminated by voluntary resignation or insanity established by judgement of a court of competent jurisdiction or for breach of personal trust or by death plr-119731-99 article i sec_2 provides that in the case of death resignation or disqualification as defined in sec_1 to act as trustee the advisory board after having filled the vacancy in the board shall have power to fill the vacancy in the trusteeship by the election of a member of the board as the trustee only members of the board being eligible to the trusteeship in such event the successor shall succeed to the same rights and powers and be subject_to the same duties and liabilities as the predecessor and when any new trustee is so elected chosen or appointed by the advisory board the trust estate shall immediately vest in the new trustee without any further act or conveyance or any kind article i sec_3 provides that in all cases the trustee shall hold office until the successor is elected and qualified except in case of death in which event the advisory board shall have the power to manage and control the estate until a successor trustee is chosen but it shall be the duty_of the advisory board to first fill the membership of the board and then select a successor trustee immediately after vacancy occurs article i sec_4 provides that all investments shall be made and the legal_title to all property shall be held and all property managed controlled and disposed of absolutely by the trustee and his successors under the trust with the advise and consent of the advisory board the section further provides that the trustee with the advice and consent of the advisory board shall have full power to buy sell import export and generally to deal in exploit mine drill and explore land or leases that the trust may own or may acquire containing or believed to contain gas petroleum or other mineral deposits and to manufacture the products or by-products thereof into finished articles to purchase or otherwise acquire own and hold real_estate or personal_property which said trustee acting with the consent of said advisory board as herein provided may deem advantageous to said trust estate to sell convey assign transfer lease mortgage pledge encumber or otherwise dispose_of any of the property to take own hold deal in mortgages or other liens and to lease sell exchange transfer or in any manner whatever dispose_of any property real personal or mixed within or without state of state wherever situated to guarantee purchase hold sell assign transfer mortgage pledge or otherwise dispose_of the shares of capital stock or bonds or securities or evidences of indebtedness issued or created by any corporation of any kind or character or any bonds or evidences of indebtedness of any government or subdivision thereof wherever situated and while owner of said stock may exercise all of the rights powers and privileges of ownership including the right to vote thereon to the same extent as natural persons might or could do and to enter into make and perform contracts of every kind or character with any person firm association or corporation of any plr-119731-99 kind or character or whenever situated and without limitation as to the amount and to draw make accept endorse discount execute and issue promissory notes drafts bill of exchange warrants bonds debentures and other negotiable or transferable instruments of evidences of indebtedness whether secured_by mortgage or otherwise and to have offices conduct its business and promote its obligations within and without state of state as may be determined from time to time by said trustee acting with the consent of said advisory board as herein provided without restriction as to place or amount and to do any and all other things whether specifically set out herein or not to the same extent as natural persons might or could do either alone or acting with others and in general the said trustee consent of the advisory board herein provided being first necessary shall have full power in all matters not hereinabove specified to deal with and use trust properties and moneys and the income proceeds profits and revenues arising therefrom and to manage and conduct the trust hereby created in any manner that said trustee and said advisory board should see fit and to execute and make all such agreements deeds mortgages releases lease contracts and instruments of all kinds and to do such other things as may be proper for any of said purposes above named and to do anything else properly incident thereto that to the said trustee and the said advisory board may seem reasonable and in the best interest of said trust estate including the right to sell properties on credit or for cash or partly on credit and the naming of particular powers herein shall not be held to exclude power to do any other things which may be deemed to the interest or advantage of said trust estate article i sec_5 provides that the trustee or any member of the advisory board shall not be liable in any event for the act or omission to act of any other person whomsoever whether employed by the trustee and board or not nor shall they be liable for any act of their own unless such act shall constitute a legal tort or breach of contract article i section provides that the trustee or the advisory board shall have no power to bind a beneficiary personally and independently of the beneficiary interest in trust but in every written contract which they shall enter into relating to the business of trust specific reference shall be made to the declaration of trust and the person firm corporation or association so contracting with them shall look only to the funds and properties of the trust under the contact held by the trustee and advisory board for the payment of any judgement or decree debts damage and for money or other obligation that may become due and payable and neither the trustee nor beneficiary under this trust nor any member of the advisory board present or future shall ever be personally liable therefor or for any debt incurred or engagement or contract entered into by the trustee or by an officer agent servant or employee acting under him for and on behalf plr-119731-99 of the trust or for any other form of liability whether arising from contact express or implied or out of tort or in any other way whatsoever it being the purpose of the trust to vest full power and absolute control of the trust properties in the trustee and advisory board and to exempt them and the beneficiary present and future from any manner of liability whatsoever article i section provides that the trustee with the consent of the advisory board with the power to establish and maintain offices and the authority to appoint agents attorneys accountants and employees as may appear to be expedient beneficial and advantageous to the best interest of the trust and to provide for and pay out of trust any compensation fees commissions or expenses_incurred in the management thereof and compensation_for services rendered provided however that any charges made by the trustee for services rendered by the trustee to the trust shall be approved by the other two members of the advisory board article i section provides that the trustee shall have no power to transact any business whatsoever affecting the trust except the endorsement of cash items for deposit only and except the signing of checks against funds on deposit for purchases made on behalf of the trust or in payment of operating_expenses the aggregate amount of the checks not to exceed dollar_figure in any one calendar month without the consent in writing of one member of the advisory board other than himself this section shall be construed as the definition of expressions requiring the advice and or consent of the advisory board article ii sec_3 provides that in the case of death resignation mental incompetency established by judgment of a court of competent jurisdiction or other disability to act of any or either of the members of the advisory board the remaining two members of the board shall have the power to fill the vacancy in the board and it shall be their duty to fill the vacancy immediately to the end that the advisory board shall at all times consist of three members except the minimum interval that may transpire between the occurrence of a vacancy and the filling of the vacancy by the other members of the board and the members of the board shall continue to serve and function as such during the entire life of the trust estate article ii sec_4 provides that the powers of the advisory board and its members shall be and are limited to the following a to keep its membership of three persons full by elections and designations b to see that the office of the trusteeship is filled c to determine and approve by the unanimous assent of all three members the compensation if any to be paid to the trustee for personal services rendered to the trust and plr-119731-99 d to advise the trustee on any matters concerning the trust estate and cooperate with him in any transaction that in the judgement of the members may be in the best interest of the trust estate the joint action of the trustee and at least one other member is necessary to the transaction of all business except provided in article i section article iii sec_1 provides that no beneficiary can require distribution of trust corpus or partition or termination of the trust article iii sec_2 provides that the death insolvency or bankruptcy of the beneficiary hereunder or the transfer of the beneficiary’s interest in any manner or by descent or otherwise during the continuance of the trust shall not operate as a dissolution of nor terminate the trust nor shall it have any effect whatever upon the trust its operation or mode of business nor shall it entitle her heirs or assigns or representatives to take any_action in the courts of law or equity against the estate its trustees or property or its business operations of any kind all of which shall remain intact and undisturbed thereby but they shall succeed only to the rights of the original beneficiary article iii sec_3 provides that at the time of the death of the beneficiary daughter her equitable interest in the trust unless disposed of otherwise by the beneficiary shall pass to and vest in her heirs in accordance with the laws of descent and distribution then in force applicable to the equitable interest of the beneficiary in the trust the term beneficiary applies not only to daughter but to all her successors to beneficial interests under the trust article iv sec_1 provides that all properties for or on account of the trust shall be conveyed to the daughter trust estate and all business transactions whatsoever of the trust estate shall be conducted in the name of daughter trust estate and the legal_title to all property so acquired by the trust estate shall be vested in the trustee article iv sec_2 provides that all cash or funds of trust shall be kept in one bank that is to be designated by at least two members of the advisory board the bank may be changed at any time by consent in writing of the two members of the advisory board article iv sec_3 provides that the trust will continue during daughter’s life and for a period of years after her death on termination the trustee is to distribute the trust corpus among the then existing beneficiaries article iv sec_4 provides that the beneficiary may receive from time to time a portion of the net profits accruing to the trust as the trustee acting with the advice and consent of the advisory board may see fit to pay over and deliver to the plr-119731-99 beneficiary no duty is imposed upon the trustee to distribute net profits but the power is conferred upon him acting with advice and consent of the advisory board to do so and in exercising this discretion the trustee and advisory board must give full consideration to the interest of both the beneficiary and the trust trustee has petitioned the local court requiring approval for a number of proposed changes to the trust discussed below in addition trustee has requested a construction of the instrument with respect to certain provisions discussed below amendments to article i amendment to article i sec_1 trustee has requested court approval to modify article i sec_1 to provide that the affairs of the said trust estate shall be administered by one trustee in conjunction with the advisory board as hereinafter provided whose term of office shall continue for and during the entire period or duration of the said trust unless the same shall be terminated by voluntary resignation insanity established by judgement of a court of competent jurisdiction for breach of personal trust by death or by removal in accordance with sec_1 a trustee may be removed with or without cause by the unanimous agreement of the other two advisory board members in the event the other two advisory board members shall determine that a trustee should be removed from office they shall memorialize the determination in writing and shall present the writing to the trustee and upon the expiration of thirty days of the receipt of the writing by the trustee the trustee shall be deemed to be removed from office a trustee may resign from office by presenting written notice of his intent to resign to the other advisory board members and upon the expiration of sixty days of the receipt of the notice by the advisory board members the trustee shall be deemed to have resigned from office amendment to article sec_2 trustee has requested approval to modify article i sec_2 by adding the word removal after the word death article i sec_2 will also be amended by adding a sentence to the end of the section to provide that in the case of death removal resignation or disqualification as defined in sec_1 of a trustee the advisory board after having filled the vacancy in the board shall have power to fill the vacancy in the trusteeship by the election of a member of the board as the trustee only members of the board being eligible to the trusteeship and in such event his successor shall succeed to the same rights and powers and be subject_to the same duties and liabilities as his predecessor and when any new trustee is so elected chosen or appointed by the advisory board the trust plr-119731-99 estate created shall immediately vest in the new trustee without any further act or conveyance or any kind provided however that if a beneficiary is serving as a member of the advisory board at the time the vacancy in trusteeship is filled in accordance with the foregoing the vacancy shall not be filled with the beneficiary or a person or entity that is related or subordinate to the beneficiary within the meaning of sec_672 of the internal_revenue_code amendment to article sec_3 trustee has requested that article i sec_3 be modified by adding the words or removal after the word death amendment to article i sec_4 trustee has requested that the following language be added to the end of article i sec_4 in determining whether the trustee and advisory board have made an appropriate investment decision under the trust agreement and applicable state law such determination shall be made taking into consideration the investment of all the assets of the trust rather than by considering the prudence of only a single investment of the trust in isolation the trustee may acquire and retain every kind of property and every kind of investment that the trustee determines to be in the best interest of the trust in applying the foregoing standards to a particular investment or management issues the trustee and advisory board may rely upon interpretations under applicable state law including sec_113 of the state trust code and any successor statute or statutes and commentaries under analogous uniform laws and the prudent investor rule_of the then-current restatement of the law of trusts provided however that no such interpretation including a decision by a court interpreting state law or commentary shall be binding upon the trustee or the advisory board to the extent it is more restrictive than the standard set forth above the trustee may delegate to an agent or agents any or all of the powers and duties discretionary or otherwise to purchase or otherwise acquire sell pledge or otherwise dispose_of stocks bonds securities and other investments on behalf of the trust and such other powers and duties with respect to investments on behalf of the trust and management of trust assets that a prudent person exercising fiduciary discretion in similar circumstances would so delegate the trustee shall exercise care skill and caution in establishing the scope and specific terms of any delegation and shall keep reasonably informed in order to monitor the execution of the delegated power or duty for purposes of article i section hereof the advice and consent of an advisory board member shall be required only with respect to the delegation of authority to a single agent over assets equal in value in the aggregate to the percentage of the plr-119731-99 trust assets described in article i section sec_113 of the state trust code or its successor statute or statutes shall not apply to this trust the trustee’s compliance or failure to comply with the terms and conditions of sec_113 of the trust code in the delegation of investment authority shall not be determinative as to the satisfaction of the trustee’s duty with respect to delegation of investment authority under this section any person dealing with the trustee may rely upon the trustee’s authority to enter into and consummate any transaction involving the trust estate or take any other action on behalf of the trust estate upon the receipt by such third party of a written declaration signed by the trustee stating that the trustee in good_faith believes he has the authority to enter into and consummate the particular transaction or take such other action on behalf of the trust estate amendment to article i sec_5 trustee has requested that article i sec_5 be deleted and replaced with a new sec_5 as amended article sec_5 will provide as follows no individual serving as trustee or as a member of the advisory board shall be liable to any person for negligence but shall be liable only for acts or omissions resulting from the gross negligence of the trustee or member of the advisory board or from the trustee or member acting in bad faith or in a manner that is intentionally adverse or with reckless indifference to the interests of the beneficiary an individual serving as trustee or as a member of the advisory board who engages in or approves a transaction or arrangement described in article i sec_12 in the good_faith belief that the transaction or arrangement was not described in article i sec_12 shall not be liable for acts or omissions occurring in connection with such transaction or arrangement solely on the grounds that the transaction or arrangement was in fact described in article i sec_12 or that the procedure described in article i sec_12 was not followed furthermore no trustee or member of the advisory board shall be liable for the actions or omissions of any prior trustee or member of the advisory board any trustee or advisory board member may accept the trust assets as delivered to it by a predecessor in office without requiring an accounting of the trust estate and shall only be liable for assets actually received addition of a new sec_5a to article i trustee has requested that a new sec_5a be added to article i after sec_5 the new sec_5a will provide as follows plr-119731-99 the trust shall indemnify any individual serving as trustee or as a member of the advisory board who was is or is threatened to be made a named defendant or respondent in a proceeding because the person i is or was a trustee or member of the advisory board_of the trust or ii while a trustee or member of the advisory board is or was serving at the request of the trust as a trustee officer partner venturer proprietor director employee agent or similar functionary of another foreign or domestic_corporation partnership joint_venture sole_proprietorship trust employee_benefit_plan or other enterprise against all expenses other than taxes penalties judgements settlements or expenses of correction including attorneys’ fees arising from any actions decisions or failure to act on the part of the trustee or advisory board member in connection with the management or administration of the trust provided however that indemnification of the trustee or advisory board member shall not be permitted in the event the expense arises from an action or failure to act by the trustee or advisory board member taken or made in bad faith or in a manner that i is or was fraudulent grossly negligent or intended to be adverse to the interests of any beneficiary of this trust whether that beneficiary’s interest is vested or contingent and ii is inconsistent with the terms of the trust and the laws of the state of state the trust shall pay expenses including attorneys’ fees incurred by such trustee or advisory board member in defending any civil criminal administrative or investigative action suit or proceeding in advance of the final disposition of such action suit or proceeding provided however that the payment of expenses_incurred by a trustee or advisory board member in advance of the final disposition of the action suit or proceeding shall be made only upon receipt of a written_statement of the trustee or advisory board member i affirming his good_faith belief that any expenses resulting from the proceeding would be subject_to indemnification under this section and ii stating the trustee’s or advisory board member’s agreement to repay all amounts advanced if it should be ultimately determined that such person is not entitled to be indemnified under this section or otherwise the written_statement referred to in the preceding sentence shall be delivered to and all determinations under this section shall be made by the other two members of the advisory board the trust may purchase and maintain insurance or a similar agreement including but not limited to self-insurance a letter_of_credit guarantee of surety arrangement on behalf of an individual serving as trustee or as a member of the advisory board against any liability asserted against such person and incurred by such person in such a capacity or arising out of the status of the person whether or not the trust would have the power to indemnify the person against the liability under this section notwithstanding any other provision of this trust agreement the resignation or removal with or without cause from office of a trustee or advisory board member shall plr-119731-99 not deprive the trustee or advisory board member of his or her right to indemnification under this sec_5a regardless whether such removal or resignation occurs before or after the initiation of an action suit or proceeding against the trustee or advisory board member amendment to article i section trustee has requested that section be replaced with a new section as amended section will provide the trustee shall have the authority to conduct any business and other financial transactions and to consummate the same without the approval of the advisory board provided however that the trustee must obtain the prior or contemporaneous written consent of one member of the advisory board other than the trustee to all transactions including without limitation sales acquisitions pledges assignments and leases affecting assets and property the value of which exceeds the lesser_of i five-hundred thousand dollars dollar_figure and ii one-fourth of one percent of the net asset value of the trust estate as determined by the most recent audited financial statements of the trust prepared in accordance with article i section hereof all references in this trust agreement to the consent of the advisory board shall be to the consent as set forth above and such consent shall be required only in the circumstances described above addition of a new sec_11 to article i trustee has requested that a new sec_11 be added to article i of the trust the new sec_11 will provide the trustee may not make a non-prorata distribution of trust assets upon the death of a beneficiary or upon final termination of the trust without the prior approval of a court of competent jurisdiction unless the non-pro rata distribution affects assets and property in the aggregate the value of which does not exceed one-hundred thousand dollars dollar_figure as determined by the most recent audited financial statements of the trust prepared in accordance with article i section hereof addition of a new sec_12 to article i trustee has requested that a new sec_12 be added to article i of the trust the new sec_12 will state that the trustee is authorized to purchase from sell to lend funds to or otherwise deal with a the trustee or members of the advisory board only in their capacities as partners in a partnership officers or directors of a corporation or other entity or as executor administrator or guardian of the estate of any person b an affiliate of the trustee or advisory board members c a director officer employee employer partner or other business_associate of the trustee or advisory board members or the plr-119731-99 trustee’s or advisory board members’ affiliate d a relative of the trustee or advisory board members e any beneficiary of the trust created hereunder f any partnership corporation or other entity in which the trustee or advisory board members may have an interest or g any trust with respect to which the trustee or advisory board members serves as fiduciary or has legal or equitable interest to the same extent and manner and for the same purposes as provided in respect of transactions with disinterested parties notwithstanding the foregoing the trustee and advisory board members in their individual capacities are expressly authorized to acquire an interest in the subject matter of the trust provided that the procedure set forth in sec_12 is followed with respect to the investment and the interest is not acquired directly from the trust advisory board members are authorized to consent to any transaction described in the preceding sentence provided however that notwithstanding any other provision including article i section no such transaction may be consummated without i providing to the advisory board notice of the facts giving rise to the potential self- dealing or conflict of interest and ii obtaining the unanimous consent of the advisory board however with respect to transactions involving assets that are equal or greater in value to the amount described in article i sec_11 where the proposed transfer is between separate trusts created hereunder that have at least two members of the advisory board in common the transaction may not be consummated without obtaining either i appraisals of the assets at issue by qualified independent appraisers or ii the consent of all current adult beneficiaries of the particular trusts involved in the transaction the trustee and advisory board members shall be held to the same standard of liability in respect of transactions described in sec_12 as in respect of transaction with disinterested parties addition of a new section to article i trustee has requested that a new section be added to trust that will provide that no trustee or advisory board member need post bond for so acting amendments to article ii amendment to article ii sec_3 trustee has requested that the following language be added to the end of article ii sec_3 p rovided however that if a beneficiary is serving as a member of the advisory board at the time a vacancy in the advisory board is filled the vacancy shall not be filled with the beneficiary or a person or entity that is related or subordinate to the beneficiary within the meaning of sec_672 of the internal_revenue_code plr-119731-99 amendment to article ii sec_4 if the court approves the amendment to article i section as indicated above the trustee will also request that article ii sec_4 outlining the powers and duties of the advisory board in its current form be deleted and replaced as revised article ii sec_4 will provide except with respect to transaction and business described in article i section hereof as to which the consent of the advisory board is not required to advise with the trustee on any matters concerning the trust estate and cooperate with him in any transaction that in the judgment of the members may be to the best interest of the trust estate the joint action of the trustee and at least one other member or both members in the case of transactions or arrangements described in new article i sec_12 hereof being necessary to the transaction of business as required by article i section hereof the trustee shall not be required to seek the advice of the advisory board with respect to any business or transaction described in article i section as to which the consent of an advisory board member is not required amendment to article ii sec_4 trustee has requested that article ii sec_4 be replaced with a new article ii sec_4 the new section will provide that vacancies may exist in the membership of the board as the result of death resignation mental incompetency established by judgement of a court by any member violating the trust conferred upon him by the instrument or by removal by the other members of this board in accordance with this paragraph an advisory board member may be removed with or without cause by the unanimous agreement of the other two advisory board members provided however that if a beneficiary is serving as a member of the advisory board at the time a vacancy in the advisory board is filled the vacancy shall not be filled with the beneficiary or a person or entity that is related or subordinate to the beneficiary within the meaning of sec_672 of the internal_revenue_code in the event the other two advisory board members shall determine that an advisory board member should be removed from office they shall memorialized such determination in writing and shall present such writing to the advisory board member and upon the expiration of thirty days of receipt of such writing by the advisory board member such member shall be deemed removed from office an advisory board member may resign from office by presenting written notice of his intent to resign to the other advisory board members and upon the expiration of sixty days of the receipt of such notice by the advisory board members the resigning advisory board member shall be deemed to have resigned from office plr-119731-99 amendments of article iv amendment to article iv sec_1 trustee has requested that article iv sec_1 be replaced with a new article iv sec_1 the new section will provide as follows during the lifetime of daughter all properties acquired for or on account of the trust shall be conveyed to ‘ daughter trust estate’ and all business transaction whatsoever of the trust estate shall be conducted in the name of ‘ daughter trust estate ’ and the legal_title to all property so acquired by the trust estate shall be vested in the trustee from and after the death of daughter each separate trust created from the trust estate for the benefit of each person who becomes a beneficiary of the trust estate shall be designated as follows ‘ daughter trust estate the beneficiary’s name trust’ the trustee of each such trust for the benefit of a beneficiary shall hold all property and conduct all business and other transactions under the name of each such trust deletion of article iv sec_2 article iv sec_2 requires that all cash be deposited in one bank trustee has requested that this provision be deleted amendment to article iv sec_3 as amended the original sec_3 will become sec_2 and the original sec_4 will become sec_3 in addition trustee has requested that article iv sec_2 be amended to state that the trust will continue during daughter’s life and for a period of years after her death on termination the trustee is to distribute the trust corpus among the then existing beneficiaries upon the death of daughter all separate trusts created from trust shall be administered by the same trustee and advisory board that are serving at the time of daughter’s death provided however that from and after the earliest of i two years from the date of death of daughter and ii the date on which all of the separate trusts have been fully funded with assets from the trust nothing in the trust instrument shall be construed to prohibit the separate trusts from being administered by different trustees and advisory board members likewise upon the death of a beneficiary who succeeds to the beneficial_interest of daughter either directly or upon the death of another beneficiary a successor beneficiary the separate trusts for those who succeed to the beneficial_interest of the deceased successor beneficiary shall be administered by the same trustee and advisory board that are serving at the time of the deceased successor beneficiary’s death provided however that from and after the earliest of i two years from the date of death of the successor beneficiary and ii the date on which all of the separate trusts to be created have been fully funded with assets from the trust held for the benefit of the deceased successor beneficiary nothing within the instrument shall be construed to prohibit the separate trusts from being administered by different trustees and advisory board members plr-119731-99 addition of new sec_4 to article iv trustee has requested that a new sec_4 be added to article iv to provide as follows the trustee shall cause to be maintained for so long as the trustee determines to be appropriate after consultation with legal counsel the retention period under the control of the trustee sufficient records to permit the trustee to comply with all applicable state law requirements to account to the beneficiary of the trust estate and all applicable record keeping requirements for federal tax purposes provided that if the trustee maintains for the retention period all financial statements and audits reports thereon as described in article i section all federal state and local_tax returns and reports and supporting worksheets and schedules correspondence transaction activity statements itemizations of expenditures over dollar_figure per expenditure documentation supporting expenditures over dollar_figure per expenditure and all written consents of the advisory board members obtained pursuant to article i section or article i sec_12 the trustee shall be deemed to have satisfied all requirements of sec_4 and state and federal_law relating to retention of records the trustee shall not be required to keep any records other than the financial statements and audit reports for any period longer than the retention period and the trustee and advisory board members shall have no liability to any person for the destruction of documents upon he expiration of the retention period or for the inability to give an accounting based on documents that have been destroyed in accordance with sec_4 when determining the duration of the retention period the trustee shall be entitled to rely upon an opinion by legal counsel that a proposed retention period is more_likely_than_not to be sufficient for the trustee to satisfy its responsibilities under sec_4 for purposes of this section records of trust-owned corporations partnerships joint ventures limited_liability companies and other business entities shall not be considered records of the trust estate and such records shall be maintained stored and destroyed in accordance with the judgement of the officers directors and managing partners of the entities interpretation sec_1 separate trusts trustee has requested that the local court interpret the trust agreement to require that after the death of daughter separate trusts shall be created for each successor beneficiary interpretation of terms net profit and net earning trustee has requested that the court interpret the terms net earning and net profits as they appear in the trust agreement to mean income under the state trust code and applicable state law plr-119731-99 accounting requirements trustee has requested that the local court rule that the preparation auditing and disclosure of financial statements in accordance with article i section of the trust agreement to date represents and constitutes all of the accounting required of the trustee under state law and that the trustee and his predecessors have fully complied with article i section of the trust agreement and that no beneficiary of the trust may request under the state code or other principal of state law an accounting of the trust estate for any period ending on or before december of the calendar_year prior to the year in which the courts final judgement is entered in addition to the disclosure of the audited financial statements the trustee has requested the following rulings if the probate_court construes the trust to authorize non-pro rata distributions among the new trusts to be established after the death daughter such non-pro rata distributions shall not be treated as a prorata distribution followed by a taxable sale and exchange of assets between distributees neither the granting of the relief requested in the petition nor daughter’s or successor beneficiaries’ consent thereto will constitute the exercise of a general_power_of_appointment under sec_2041 or sec_2514 of the internal_revenue_code neither the granting of the relief requested in the petition nor the daughter’s and successor beneficiaries’ consent thereto will constitute the creation of a new power_of_appointment under sec_2041 and sec_2514 the amendments to trust and the interpretations requested by the trustee in the petition will not cause trust or future distributions from trust to be subject_to the generation-skipping_transfer_tax under sec_2601 ruling_request no sec_61 of the internal_revenue_code provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis over the amount_realized for purposes of sec_1001 in an exchange of property each party to the exchange gives up a property interest in return for a new or additional property interest such an exchange is a disposition under sec_1001 see sec_1_1001-1 of the income_tax regulations plr-119731-99 revrul_69_486 1969_2_cb_159 holds that a non-pro rata distribution of trust corpus in_kind by mutual agreement of the beneficiaries is subject_to gain_or_loss recognition under sec_1001 in the revenue_ruling there was no provision in the trust instrument allowing the trustee to make non-pro rata distributions and local law did not authorize the trustee to make a non-pro rata distribution_of_property in_kind because neither the trust instrument nor local law authorized the trustee to make a non-pro rata distribution the beneficiaries were viewed as having an absolute right to a ratable in- kind distribution accordingly the revenue_ruling holds that the distribution was equivalent to a ratable distribution to the beneficiaries followed by an exchange of property between the beneficiaries that was subject_to sec_1001 trustee represents that local law governing the trust does not address the treatment of non-pro rata distributions and that the trust instrument does not specifically mention a power in the trustee to make non-pro rata distributions taxpayers observe that generally in the absence of specific trust language authorizing non-pro rata distributions the traditional rule_of trust law would apply ie the trustee should distribute property pro_rata among the beneficiaries nevertheless taxpayers suggest that the present case is distinguishable from the circumstances presented in revrul_60_486 trustee states that although the trust instrument does not specifically authorize the trustee to make non-pro rata distributions it nevertheless gives the trustee absolute control_over the trust assets and provides the trustee with such latitude in the administration of the trust that it is clear that the settlors of the trust intended the trustee to have the power to make non-pro rata distributions the trustee therefore has asked the probate_court to construe the trust instrument as including the power of the trustee to make non-pro rata distributions trustee notes that in some circumstances a_trust power may be inferred from the trust instrument even though the power is not conferred in specific words if it appears from the language used in the trust instrument that such a power was intended to be conferred upon the trustee trustee contends that just such an inference should be made here because in the trust instrument the settlors gave the trustee the power to manage and conduct the trust hereby created in any manner that they should see fit and to do anything else properly incident thereto that to in the petition to the probate_court the trustee has also asked the court to construe the trust instrument to require that separate trusts for state law purposes be created for each of the successor beneficiaries from and after the death of daughter trustee states that this request is consistent with a court decision concluding that each heir’s interests as a successor beneficiary in the trust will be separate and the heirs will not be common beneficiaries of an undivided trust that court also found that as a consequence an heir’s interest and powers with respect to the trust as successor beneficiary will extend only to that heir’s respective portion of the trust plr-119731-99 the said trustee may seem reasonable and to the best interest of said trust estate and the naming of particular powers herein shall not be held to exclude power to do any other things which may be deemed to the interest or advantage of said trust estate trustee in the petition urges the probate_court to construe the trust instrument to authorize the trustee to make non-pro rata distributions of trust assets upon daughter’s death the death of the successor beneficiaries during the term of the trust after daughter’s and upon final termination the trustee’s power to make such non-pro rata distributions would be limited by a new trust provision article i sec_11 that the trustee has asked the court to impose interpretation and construction of trust provisions is a matter of state law based on the taxpayers’ representations and provided that the court determines that under applicable state law the powers of the trustee as set forth in the trust instrument include the power to make non-pro rata distributions we conclude that if the probate_court construes the trust agreement to authorize the trustee to make non-pro rata distributions among the successor trusts created after the death of the primary beneficiary such non-pro rata distributions shall not be treated as a pro_rata distribution followed by a taxable sale and exchange of assets between the distributees and thus will not be subject_to recognition of gain_or_loss from a sale_or_other_disposition of property under sec_61 or sec_1001 of the internal_revenue_code ruling requests nos and sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which a general_power_of_appointment created on or before date is exercised by the decedent-- a by will or b by a disposition which is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent's gross_estate under sec_2035 to inclusive but the failure to exercise such a power or the complete release of such a power shall not be deemed an exercise thereof the trustee may not make a non-pro rata distribution of trust assets upon the death of a beneficiary or upon final termination of this trust without the prior approval of a court of competent jurisdiction unless such non-pro rata distribution affects assets and property in the aggregate the value of which does not exceed one hundred thousand dollars dollar_figure as determined by the most recent audited financial statements of the trust prepared in accordance with article i section hereof plr-119731-99 sec_2041 defines the term general_power_of_appointment as a power exercisable in favor of the decedent the decedent’s estate the decedent’s creditors or creditors of the decedent’s estate sec_20_2041-1 of the estate_tax regulations states that the term power_of_appointment includes all powers that are in substance and effect powers of appointment regardless of the nomenclature used in creating the power sec_20_2041-2 provides that a failure to exercise a general_power_of_appointment created on or before date or a complete release of such a power is not considered to be an exercise of a general_power_of_appointment the phrase a complete release means a release of all powers over all or a portion of the property subject_to a power_of_appointment as distinguished from the reduction of a power_of_appointment to a lesser power thus if the possessor completely relinquished all powers over one-half of the property subject_to a power_of_appointment the power is completely released as to that one-half sec_2514 provides that an exercise of a general_power_of_appointment created on or before date shall be deemed a transfer of property by the individual possessing such power but the failure to exercise such a power or the complete release of such a power shall not be deemed an exercise thereof the regulations under sec_2514 generally contain provisions similar to the regulations promulgated under sec_2041 the modifications requested in the petition are administrative in nature further the construction of various provisions proposed by trustee are consistent with applicable state law therefore neither the granting of the relief requested in the petition nor the consent thereto constitutes an exercise of a general_power_of_appointment by daughter or the successor beneficiaries nor the creation of a new general_power_of_appointment ruling_request sec_2601 imposes a tax on each generation-skipping_transfer sec_2611 defines a generation-skipping_transfer to mean a taxable_distribution a taxable_termination or a direct_skip under b a of the tax_reform_act_of_1986 and sec_26 b i of the generation-skipping_transfer_tax regulations the generation-skipping_transfer_tax does not apply to any generation-skipping_transfer made from a_trust that was irrevocable on date except to the extent made from any addition actual or constructive made to the trust after that date under sec_26_2601-1 any trust in existence on date will be considered an irrevocable_trust plr-119731-99 except as provided in sec_26_2601-1 or c relating to property includible in a grantor's gross_estate under sec_2038 and sec_2042 sec_26_2601-1 provides that where a_trust described in sec_26_2601-1 is relieved of any liability properly payable out of the assets of the trust the person or entity who actually satisfies the liability is considered to have made a constructive_addition to the trust in an amount equal to the liability a modification of a_trust that is otherwise exempt from the generation-skipping_transfer_tax will generally result in a loss of its exempt or grandfathered status if the modification changes the quality value or timing of any powers beneficial interests rights or expectancies originally provided for under the terms of the trust in the present case trust was irrevocable on date and the trustee of trust has represented that there have been no additions constructive or otherwise to trust after date as noted above the construction of the trust provisions in the petition are consistent with applicable with state law further the trust modifications requested in the petition are administrative in nature and will not result in any change in the quality value or timing of any beneficiary's interest in the trust the proposed modifications requested by the trustee will not confer any additional powers or beneficial interests upon any of the beneficiaries and will not create any additional generation-skipping transfers or increase the amount of any generation-skipping transfers we conclude that if trust is modified as proposed and if the local court construes the trust in a manner requested by trustee trust’s exempt status for generation-skipping_transfer_tax purposes will not be affected further if no additions are made to the trust actual or constructive all distributions from the trust and all distributions on termination of the trust will be exempt from the generation-skipping_transfer_tax we also conclude that neither the granting of the relief by the probate_court with respect to non-pro rata distributions nor the actual non-pro rata distributions of assets by the trustee will result in the relief of any liability properly payable out of the assets of the trust therefore neither the granting of the relief by the probate_court with respect to non-pro rata distributions nor the actual non-pro rata distributions of assets by the trustee will constitute a constructive_addition to the trust or a new trust this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-119731-99 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely yours associate chief_counsel passthroughs and special industries by george masnik chief branch enclosure copy for purposes


tcmemo_1995_579 united_states tax_court james t and goldie l ryan petitioners v commissioner of internal revenue respondent docket nos filed date karey a schoenfeld for petitioners brenda m fitzgerald for respondent memorandum opinion colvin judge respondent determined deficiencies in petitioners' federal_income_tax of dollar_figure for and dollar_figure for the sole issue for decision is whether petitioners may defer the gain realized on the sale of their old principal_residence under sec_1034 we hold that they may not in so holding we conclude that petitioners failed to establish that they sold their old residence less than years after they bought their new residence the parties agree that if petitioners must recognize gain on the sale of the old residence respondent erred in determining a deficiency for and petitioners must recognize gain in the year they sold it unless otherwise indicated section references are to the internal_revenue_code in effect for the years in issue rule references are to the tax_court rules_of_practice and procedure the facts have been fully stipulated under rule and are background so found a petitioners petitioners resided in clackamas oregon when they filed the petition in this case in petitioners owned a home pincite fifth avenue blue lake california the blue lake residence or blue lake property the blue lake property was petitioners' principal_residence until date petitioners had mortgages on the blue lake property with home federal bank in san diego california and beneficial finance in eureka california b petitioners' purchase of the portland residence petitioners bought a residence pincite5 s e westgate way portland oregon portland residence on date c petitioners' sale of the blue lake residence the earnest money agreement on date robert and jacqueline soper the sopers leased the blue lake property from petitioners on date petitioners and the sopers signed an earnest money agreement under which they agreed to transfer the ownership of the blue lake property for dollar_figure the sopers paid dollar_figure earnest money to petitioners for the planned purchase under the agreement in the earnest money agreement the sopers agreed to make a good_faith effort to arrange financing for their purchase of the house within a reasonable_time including applying for an fha loan if the sopers could not obtain an fha loan petitioners agreed to arrange financing for the house for year after that time the sopers were required to have arranged financing for the continued mortgage petitioners were ready and willing to sell the blue lake property after date the sopers intended to buy the blue lake property at all times after date the option agreement on date the title to the blue lake property was held in escrow by the eureka title co because of financing problems the sopers could not pay the full price for the property on date the sopers agreed to pay petitioners dollar_figure for an option to buy the blue lake property the option agreement the dollar_figure payment was creditable toward the sale price it was not refundable if the sopers did not buy the blue lake residence thereafter the sopers landscaped the exterior installed a dog run and redecorated the interior of the house by doing such things as hanging wallpaper under the option agreement the sopers were responsible for all maintenance on the house petitioners did not make or pay for any repairs on the blue lake property after date the sopers agreed to obtain liability insurance for the residence after date the sopers made petitioners' mortgage payments on the blue lake property to home federal bank and beneficial finance the payments to home federal bank included reserves for all property taxes and liability insurance on the property the home federal bank mortgage required petitioners to maintain liability insurance on the blue lake property petitioners agreed to maintain fire insurance on the residence the sopers obtained renter's insurance for the blue lake property they did not obtain title or hazard insurance for the property the option agreement did not require the sopers to buy the blue lake residence the sopers could exercise the option by notifying petitioners in writing at any time before date the end of the lease_term petitioners and the sopers intended that title to the blue lake property would be held in escrow until the sopers exercised the option and that the escrow would close before date the sopers made a security deposit of dollar_figure when they rented the blue lake property under the option agreement petitioners credited that amount to the purchase_price of the property as of date the sopers had paid to petitioners dollar_figure dollar_figure under the option agreement dollar_figure in security deposit and dollar_figure earnest money which petitioners later applied to the purchase_price of the blue lake property if the sopers did not buy the blue lake residence dollar_figure was nonrefundable this amount is dollar_figure percent of the total price in addition some or all of the security deposit was refundable when and if the sopers vacated the property on date the sopers and petitioners amended the option agreement to delete the provision which required the sopers' mortgage payments to be applied to the purchase_price and to delete the provision which required the amount of interest that would accrue on the principal_amount of dollar_figure to be credited to petitioners from the date of the agreement until the end of the lease the sopers' mortgage payments were not applied to the purchase_price when they bought the blue lake property passage of title to the blue lake property for financial reasons the sopers could not complete the purchase of the blue lake property until date on date eureka title co closed the escrow of the blue lake property around that time the sopers paid dollar_figure for a new roof and dollar_figure for pest and damage repairs petitioners had about dollar_figure equity in the blue lake property when they sold it d petitioners' tax returns petitioners' accountant told them they should report the mortgage payments made by the sopers as rental income and deduct the payment of property taxes and liability insurance as rental expenses petitioners reported rental income from the blue lake property on their and income_tax returns discussion the issue for decision is whether the gain realized by petitioners in from the sale of the blue lake property qualifies for nonrecognition under sec_1034 generally a taxpayer must recognize gain on the sale of a personal_residence sec_1001 however if a taxpayer sells his or her principal_residence and within years of the date of the sale buys and uses another principal_residence gain from the sale is recognized only to the extent that the taxpayer's adjusted sale price for the old residence exceeds the cost of the new residence sec_1034 the parties dispute whether petitioners sold the blue lake property within years of date the date that petitioners bought their portland residence a when petitioners sold the blue lake property for purposes of sec_1034 whether a sale is complete for federal tax purposes depends on all the facts and circumstances 77_tc_708 68_tc_115 48_tc_694 affd 426_f2d_1391 9th cir we consider the following factors in deciding whether a sale occurred a whether the seller transferred legal_title b whether the benefits_and_burdens_of_ownership passed to the buyer c whether the owner had a right under the agreement to require the other party to buy the property and d how the parties treated the transaction 77_tc_1221 derr v commissioner supra pincite baird v commissioner supra pincite 40_tc_66 affd per curiam 336_f2d_771 9th cir 24_tc_1124 affd 241_f2d_288 9th cir we next consider each of these factors title passage to the sopers passage of title is normally the most important factor baertschi v 412_f2d_494 6th cir revg and remanding 49_tc_289 title to the blue lake property passed to the sopers on date more than years after petitioners bought their new residence whether the benefits_and_burdens_of_ownership passed to the sopers petitioners argue that they transferred the benefits_and_burdens_of_ownership of the blue lake property to the sopers on or before date to decide whether the sopers acquired the benefits_and_burdens_of_ownership in the blue lake property we consider whether the sopers a bore the risk of loss of the property from all causes b were obligated to pay all taxes assessments and charges against the property c had the duty to maintain the property d were responsible for insuring the property e had the right to possess the property and to enjoy the use rents and profits thereof f had the right to improve the property without the sellers' consent and g had the right to obtain legal_title at any time by paying the balance of the full purchase_price the principal burdens of ownership the option agreement shifted from petitioners to the sopers were the burdens of maintaining the property and paying property taxes the agreement is silent as to who bore the risk of loss of the blue lake residence the agreement required petitioners to maintain fire insurance on the residence the sopers did not obtain title or hazard insurance for the property we conclude that petitioners bore the risk of loss to the property the sopers were in possession of the blue lake residence when they signed the option agreement this was a continuation of their leasehold which the sopers had under the date lease agreement thus the benefit of possession did not pass to the sopers under the option agreement the agreement is silent as to whether the sopers could make improvements to the blue lake property without petitioners' consent after petitioners and the sopers signed the option agreement the sopers could obtain legal_title at any time by paying the outstanding balance in summary the sopers did not a bear the risk of loss of the property b have the obligation to pay assessments and charges against the property or c have the responsibility to insure the property against fire or other hazards although the sopers made some improvements eg landscaping and new wallpaper they did not have the right to improve the property without petitioners' consent the sopers a had the duty to maintain the property b had the right to obtain legal_title upon payment of the full purchase_price and c had the duty to pay property taxes the sopers had possession of the blue lake property under the lease petitioners contend that this was a benefit of ownership the sopers enjoyed before title passed however the sopers obtained possession independent of the option agreement even if we treat the sopers' possession of the blue lake property under the lease as a benefit of ownership for purposes of deciding whether a sale had occurred an insufficient range of benefits_and_burdens_of_ownership passed to the sopers before title passed on date for us to find that the date of sale preceded that date we conclude that the blue lake property was sold to the sopers on date petitioners rely on baertschi v 412_f2d_494 6th cir to support their position that the sale date is determined by the date the benefits_and_burdens_of_ownership passed to the sopers in baertschi v commissioner supra the the sopers did pay for liability insurance through their mortgage payments to home federal bank taxpayers sellers of a residence argued that the date of sale was the date they delivered the deed to the buyers before the sellers delivered the deed the buyers had signed a land_contract paid percent of the purchase_price assumed responsibility for taxes and insurance and had the right to improve the property without the sellers' consent and to receive title on payment of the full purchase_price id pincite the sellers did not have the right to receive full payment if the buyers defaulted id pincite the court_of_appeals for the sixth circuit held that the sale of the residence was complete when the benefits_and_burdens_of_ownership passed to the buyers rather than on the later date when the taxpayers delivered the deed and received full payment of the purchase_price id pincite petitioners' reliance on baertschi is misplaced for several reasons first the parties there signed a land_contract which was not considered by the purchasers to be an option agreement id pincite under a land sale contract the seller holds title to the property as security for the payment by the buyer of the remaining purchase_price cal civ code sec west cal civ code sec west defines a land sale contract as an agreement wherein one party agrees to convey title to real_property to another party upon the satisfaction of specified conditions set forth in the contract and which does continued second the court held that a sale occurred because the benefits_and_burdens_of_ownership passed under the contract as discussed above petitioners did not pass sufficient benefits_and_burdens_of_ownership to the sopers under the option agreement to constitute a complete sale until date third the court_of_appeals in baertschi reasoned that the sellers were not entitled to sec_1034 deferral because income_tax provisions which exempt taxpayers under given circumstances from paying taxes or as here postponing them are strictly construed baertschi v commissioner supra pincite the circumstances here are from petitioners' standpoint at best ambiguous strict construction of the statutory requirement that petitioners sell the blue lake property within years of date requires us to conclude that they did not meet that requirement whether petitioners could compel the sopers to exercise the option petitioners rely on awalt v commissioner tcmemo_1987_ to support their position that we should treat the option agreement as a sale in awalt v commissioner supra the taxpayer did not qualify for sec_1034 treatment because the sale of his residence in hawaii occurred in when he received continued not require conveyance of title within one year from the date of formation of the contract the first payment and significant benefits_and_burdens_of_ownership shifted from him to the buyer rather than in when he received the final payment the taxpayer delayed the transfer of title to secure payment of the purchase_price we found that under the contract the parties intended to shift the benefits_and_burdens_of_ownership in the buyer was liable for the full purchase_price if he defaulted in contrast the sopers were not obliged to exercise the option or otherwise liable to pay the full purchase_price if they chose not to exercise the option under california law an instrument is a contract of sale if the optionee has an obligation to buy which the owner can enforce by specific performance welk v fainbarg cal app 2d cal rptr here the option agreement did not provide that petitioners could enforce it by specific performance the sopers believed the agreement was an option agreement the fact that petitioners and the sopers expected that the sopers would exercise the option does not change the fact that it was an option at some time not disclosed in the record on or around date the sopers exercised the under hawaii law an agreement of sale is a contract which lets the seller keep title to property as a means of securing the purchase_price awalt v commissioner tcmemo_1987_42 option and bought the blue lake residence until the sopers exercised the option their payments of petitioners' mortgage including property taxes and liability insurance were rent payments on the leasehold they were not installment payments under an installment land sale contract we conclude that the option agreement was not an enforceable land sale contract intent of the parties petitioners contend that the option agreement should be treated as a sale contract because the sopers paid a large amount for the option 1_f3d_502 7th cir affg 94_tc_464 and tcmemo_1992_269 in williams the parties signed an option contract under which the buyers paid dollar_figure percent of the purchase_price for the right to buy property and the seller waived any right to seek specific performance or damages if the buyers defaulted the court_of_appeals for the seventh circuit held that the possible forfeiture of percent of the purchase_price did not convert the option into a sale that court stated that it is true that as the amount to be forfeited creeps toward the purchase_price of the house a point is reached at which the sale is not of the call but of the house id pincite petitioners' reliance on williams is misplaced because we do not view their circumstances where the sopers paid a nonrefundable dollar_figure percent of the purchase_price as materially different from the percent in williams we see no grounds for treating petitioners' and the sopers' option agreement as anything other than an option agreement b whether it is significant that the sopers occupied the blue lake property before title passed to them respondent argues in the alternative that petitioners' sale of the blue lake property is ineligible for sec_1034 because they leased it to the sopers before the sopers bought it we need not decide this issue because we hold that petitioners sold the blue lake property more than years after they bought their portland residence c conclusion we conclude that for purposes of sec_1034 petitioners sold the blue lake property to the sopers on date they may not defer gain realized from the sale under sec_1034 if we treat the sopers' dollar_figure security deposit as nonrefundable they paid dollar_figure percent of the purchase_price that percentage is not materially different from that in 1_f3d_502 7th cir affg 94_tc_464 and tcmemo_1992_269 cf spyglass partners v commissioner tcmemo_1995_452 purchase agreements were enforceable obligations and not options despite relatively small downpayment benefits and burdens passed to buyers in date when they had right to possess property had obligation to pay pro_rata share of property_tax and bore risk of loss of property because they had bought the portland home more than years before on date decisions will be entered under rule