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 b05 plr-123314-06 date date -------------------- --------------------- --------------------------------- -------------------------- taxpayer taxpayer’s father ------------------------- taxpayer’s mother ------------------- state trust date dear ----------------- this responds to your letter dated date requesting a private_letter_ruling regarding whether the exchange by taxpayer with the trust and taxpayer’s three siblings siblings of her undivided twenty-five percent interest in parcel for a hundred percent interest in parcel will constitute a like-kind_exchange under sec_1031 of the internal_revenue_code the code facts taxpayer’s father during his lifetime acquired certain timberlands in state which he held for income producing and investment purposes among the interests were parcels that are subject_to this ruling_request parcel parcel and parcel after taxpayer’s father’s death parcel was transferred to taxpayer’s mother and parcels and were transferred to the trust subsequent to the receipt of parcel taxpayer’s mother transferred parcel as a gift to taxpayer and her siblings in equal undivided interests as tenants-in-common the trust held parcel’s and for the benefit of taxpayer’s mother during her lifetime the taxpayer and her siblings are equal remainder beneficiaries of the trust’s assets the trustees of the trust and the siblings decided to sell all of their land holdings including parcels and taxpayer did not want to divest herself in ownership of real_estate so to accommodate the parties’ desires and to increase the marketability plr-123314-06 of the parcels the parties agreed that taxpayer would exchange her undivided twenty- five percent interest in parcel for a one hundred percent unencumbered fee simple interest in parcel the parties agreed that the fair_market_value of taxpayer’s twenty-five percent interest in parcel was equal to the fair_market_value of parcel following the exchange on date the trust and siblings sold parcels and to an unrelated third party law and analysis sec_1031 of the code provides that no gain_or_loss shall be recognized on the exchange of property held for productive use in a trade_or_business or for investment if such property is exchanged solely for property of like_kind which is to be held either for productive use in a trade_or_business or for investment sec_1031 of the code also provides that replacement_property must be identified within days of relinquished_property and that the receipt of replacement_property for relinquished_property must occur within days of the sale of relinquished_property revrul_73_476 1973_2_cb_300 provides that exchanges of undivided interests in multiple parcels of real_estate for percent ownership of one or more parcels of the same real_estate qualify as valid like-kind_exchanges sec_1031 of the code generally provides that if a a taxpayer exchanges property with a related_person b there is nonrecognition_of_gain_or_loss to the taxpayer under this section with respect to the exchange and c before the date years after the date of the last transfer which was part of such exchange- i the related_person disposes of such property or ii the taxpayer disposes of the property received in the exchange from the related_person which was of like_kind to the property transferred by the taxpayer there shall be no nonrecognition_of_gain_or_loss under this section to the taxpayer with respect to such exchange except that any gain_or_loss recognized by the taxpayer by reason of this subsection shall be taken into account as of the date on which such subsequent disposition occurs sec_1031 of the code provides that there shall not be taken into account any disposition with respect to which it is established to the satisfaction of the secretary that neither the exchange nor such disposition had as one of its principal purposes the avoidance of f ederal income_tax the legislative_history of sec_1031 identifies several situations intended to qualify under this provision it lists among others that the non-tax avoidance exception applies to transactions that do not involve the shifting of basis between properties h_r conf_rep no pincite the purpose of the exception is to prevent plr-123314-06 related parties from shifting basis from a low basis asset to a high basis asset in anticipation of the sale of the low basis asset to reduce gain recognition on the disposition of the low basis asset in the instant case taxpayer exchanged an undivided_interest in parcel for a fee simple interest in parcel pursuant to revrul_73_476 an exchange of an undivided_interest in real_estate for a fee interest in real_estate constitutes an exchange of like_kind properties in addition since the exchange of taxpayer’s undivided_interest in parcel for a fee simple interest in parcel occurred simultaneously the exchange meets the day requirement provided in sec_1031 further neither the exchange nor the subsequent disposition of parcel is a disposition that causes recognition of gain to taxpayer pursuant to the income_recognition rule_of sec_1031 for exchanges between related_persons the legislative_history of sec_1031 states that dispositions that do not involve the shifting of basis between properties are not taken into account under sec_1031 c taxpayer has represented that that the respective per acre basis in parcels and were equivalent as a result of the step-up_in_basis which occurred when taxpayer’s father died owning the parcels accordingly under f c this disposition does not involve basis shifting and therefore will not be taken into account under sec_1031 conclusion the exchange by taxpayer with the trust and siblings of her undivided twenty-five percent interest in parcel for a hundred percent interest in parcel will constitute a like-kind_exchange under sec_1031 of the code in addition the trust’s subsequent sale of its interest in parcel was not a disposition that caused recognition of any gain to taxpayer pursuant to f because the avoidance of federal_income_tax was not one of the principal purposes of the exchange or subsequent disposition of parcel 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 plr-123314-06 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 sincerely yours george f wright senior technician reviewer branch office of associate chief_counsel income_tax accounting


t c summary opinion united_states tax_court larry d marte a land petitioners v commissioner of internal revenue respondent docket no 3034-o00s filed date larry d land pro_se blaine c holiday for respondent pajak special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subseguent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency of dollar_figure in petitioners' federal_income_tax and a sec_6662 penalty of dollar_figure at trial petitioners conceded that they are not entitled to deductions of dollar_figure for contract labor and dollar_figure for utilities expenses which they claimed on their schedule c respondent conceded the sec_6662 penalty this court must decide whether petitioners are entitled to a claimed schedule c deduction of dollar_figure for vehicle expense and whether petitioners are entitled to an dollar_figure deduction for expenses claimed on their schedule f the earned_income_credit under sec_32 will automatically be adjusted for any changes some of the facts in this case have been stipulated and are so found petitioners resided in st paul minnesota at the time they filed their petition larry land petitioner filed a schedule c for a business named new tech ideas new tech which was in the business of new products petitioner is the proprietor of new tech apparently petitioner has various products he has invented such as a wrist saver and a dice randomizer he claimed he had games copyrighted petitioner claimed he had a lot of copyrights anda lot of patents out there at trial he stated hopefully one day i'll be able to market them as part of his business petitioner claimed that he drove around to various stores to window shop where he would look at the merchandise in order to find new products to make on the new tech schedule c petitioners reported no income and no inventory petitioner explained this by stating most all of this stuff at that point is give away stuff you give to people and give away hoping that they will say ‘hey we like that idea and we're going to do it with you ’ during petitioner was also a partner in nashville north llc a partnership the purpose of which was to promote greg shires a country and western singer and produce cds on the new tech schedule c petitioners deducted dollar_figure of their home mortgage interest as rent and dollar_figure of property taxes as taxes petitioners did not elect to itemize their deductions petitioners paid dollar_figure in mortgage interest_expense and dollar_figure in taxes respondent disallowed the dollar_figure of rent expense and the dollar_figure of taxes claimed on the schedule c instead respondent determined that petitioners are entitled to a dollar_figure deduction for business use of their home petitioners agreed with the determination that they were limited to that deduction for the business use of their home we sustain respondent's determinations that disallowed the rent and tax deductions claimed by petitioners on the new tech schedule c and allowed petitioners a dollar_figure deduction for the business use of their home petitioner claimed dollar_figure of deductions for prototype manufacturing expense on new tech's schedule c the money was for the production of country and western cds which petitioner planned to give away petitioner thought that if he gave away the cds people would invest in that endeavor respondent contends that this dollar_figure prototype expense was an expense of the nashville north llc partnership because the partnership was the entity promoting greg shires the singer on the cds petitioner agreed with this characterization at trial accordingly the expense belonged to the partnership we sustain respondent's determination as to this issue respondent disallowed dollar_figure of vehicle expense deducted on petitioners' new tech schedule c deductions are strictly a matter of legislative grace 503_us_79 292_us_435 taxpayers must substantiate claimed deductions 65_tc_87 affd per curiam 540_f2d_821 5th cir moreover taxpayers must keep sufficient records to establish the amounts of the deductions 43_tc_824 sec_1 l a income_tax regs sec_274 imposes stringent substantiation requirements for the deduction of travel_expenses and automobile expenses taxpayers must substantiate by adequate_records certain items in order to claim deductions such as the amount and place of each separate expenditure the property's business and total usage the date of the expenditure or use and the business_purpose for an expenditure or use sec_274 sec_1_274-5t temporary income_tax regs fed reg date to substantiate a deduction by means of adequate_records a taxpayer must maintain an account book diary log statement of expense trip sheets and or other documentary_evidence which in combination are sufficient to establish each element of expenditure or use sec_1_274-5t temporary income_tax regs fed reg date petitioner provided a calendar with circled numbers that allegedly represent the total number of miles driven each day for business purposes petitioner also had a hand-written sheet with the total business and nonbusiness miles traveled during the year in his car and truck there was no mention in any document of where petitioner traveled who he visited or the business_purpose of each trip many notations appear to be personal in nature even assuming petitioner had a trade_or_business these records are not adequate to satisfy the requirements of sec_274 we sustain respondent's determination as to this issue petitioners reported a dollar_figure annual installment_payment from the sale of their home and farm as income on their schedule f profit or loss from farming under sales of livestock produce grains and other products you raised respondent determined that the dollar_figure installment_payment should not have been reported on schedule f but it should have been reported on schedule d as capital_gain income of dollar_figure petitioner appeared to agree to this adjustment we sustain respondent’s determination respondent also disallowed dollar_figure of the deductions on petitioners' schedule f the deductions consist of dollar_figure of legal fees dollar_figure of accounting fees dollar_figure for office expense dollar_figure of telephone expense dollar_figure of miscellaneous expense and dollar_figure of other interest_expense respondent contends that the expenses are not farm expenses and that the majority of the expenses are personal expenses aside from the legal fees petitioners did not substantiate the remaining dollar_figure of claimed expenses petitioner has been engaged in a law suit against the united_states for damage done to his cattle and family when the u s army allegedly disposed of nerve agents into the water supply of the farm respondent concedes that petitioners paid dollar_figure of legal expenses in in connection with the lawsuits respondent contends that the lawsuits were principally for personal injuries suffered by petitioner and his family and that the legal fees would not be deductible because any recovery from the lawsuits would be nontaxable under sec_104 litigation expenses may be deductible under either sec_162 or sec_212 112_tc_325 noons v commissioner tcmemo_2000_106 sec_162 allows a deduction for all ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business under sec_212 a taxpayer may deduct all the ordinary and necessary expenses paid_or_incurred during the taxable_year for the production_or_collection_of_income if such income will be taxable when received andrews v commissioner tcmemo_1992_668 orr v commissioner tcmemo_1992_566 sec_1_212-1 income_tax regs sec_265 provides that no deduction is allowable for expenses allocable to income which is wholly exempt from income_tax in the lawsuit petitioners claim that they suffered personal injuries and property damage 35_fedclaims_345 affd 37_fedclaims_231 under sec_104 gross_income does not include the amount of any damages received whether by suit or agreement on account of personal injuries or sickness any damages that petitioners potentially could have received on account of their personal injuries would not be taxable under sec_104 therefore the expenses associated with the personal injury portion of their suit are not deductible sec_265 petitioners provided no allocation of the fees they paid nevertheless we recognize that some part of the legal fees was business_expenses where the court is satisfied that the taxpayer is entitled to some deduction but where the records are inadequate to establish the amount of the deduction the court may make an approximation of the amount of the deduction 39_f2d_540 2d cir in such cases we are cautioned to bear heavily against the taxpayer whose inexactitude is of his own making cohan v commissioner supra pincite we find that dollar_figure of the legal fees are deductible under sec_162 to the extent that we have not addressed any of the parties' arguments we have considered them and conclude they are without merit reviewed and adopted as the report of the small_tax_case division decision will be entered under rule


t c memo united_states tax_court linda k minton petitioner v commissioner of internal revenue respondent docket no filed date p was a 50-percent_shareholder in lpp which had claimed s_corporation status since it elected that status in by p’s father and founder of the business had sharply reduced his participation in the conduct of lpp’s business affairs which were then run by p’s brother and p in that year p her brother father and mother the directors and shareholders of lpp agreed that lpp would begin to make fixed monthly distributions to p’s father prior to filing her return p was advised that that agreement had created a second class of lpp stock which negated lpp’s s_corporation status in and for all subsequent years see sec_1361 i r c on that basis p failed to report on her return the lpp income listed on the schedule_k-1 shareholder’s share of income credits deductions etc issued to her by lpp the issue for decision is whether the agreement caused lpp to lose its s_corporation status held p has failed to prove that the agreement constituted a binding agreement relating to distribution proceeds within the meaning of sec_1_1361-1 income_tax regs and therefore that that agreement created a second class of stock which caused lpp to lose its s_corporation status william a pesnell for petitioner daniel n price for respondent memorandum findings_of_fact and opinion halpern judge respondent has determined a deficiency of dollar_figure in petitioner’s federal_income_tax liability and an addition_to_tax of dollar_figure for that year on account of petitioner’s failure_to_file her return on time petitioner concedes the addition_to_tax and two of respondent’s adjustments resulting in his determination_of_a_deficiency putting aside a computational adjustment that requires no decision by us there remain two issues for decision whether before by creating a second class of stock long’s preferred products inc lpp lost its status as a pass-through entity an s_corporation thereby eliminating the requirement that petitioner include her allocable share of lpp’s income in her income and whether the duty_of_consistency bars petitioner from asserting that lpp lost its s_corporation status before because we decide the first issue in respondent’s favor we need not and do not address the second issue unless otherwise indicated all section references are to the internal_revenue_code in effect for and all rule references are to the tax_court rules_of_practice and procedure all dollar amounts have been rounded to the nearest dollar findings of fact1 some facts have been stipulated and are so found the stipulation of facts with attached exhibits is incorporated by this reference in part rule provides as follows rule briefs e form and content in an answering or reply brief the party shall set forth any objections together with the reasons therefor to any proposed findings of any other party showing the numbers of the statements to which the objections are directed in addition the party may set forth alternative proposed findings_of_fact petitioner has filed an answering brief but she has failed therein to set forth objections to the proposed findings_of_fact made by respondent accordingly we must conclude that petitioner has conceded respondent’s proposed findings_of_fact as correct except to the extent that respondent has failed to direct us to any evidence in the record supporting those proposed findings or those findings are clearly inconsistent with either evidence in the record or petitioner’s proposed findings_of_fact see eg 118_tc_106 n affd 353_f3d_1181 10th cir at trial the court reserved judgment with respect to respondent’s objection to two and petitioner’s objection to one of the exhibits exs 17-p 22-p and 35-r attached to the stipulation of facts before the conclusion of the trial the court sustained respondent’s objection hearsay to ex 17-p the court directed the parties to address on brief the admissibility of the two other exhibits assuming arguendo that we were to resolve the two remaining disputes in petitioner’s favor we would nonetheless find for respondent in this case therefore our findings_of_fact and opinion take into account petitioner’s ex 22-p and exclude from consideration respondent’s ex 35-r at the time the petition was filed petitioner resided in pineville louisiana background petitioner’s parents julian e long julian e and alma kathryn long alma both of whom are now deceased alma in julian e in operated lpp as a sole_proprietorship in the early 1950s initially no one else worked in the business lpp sells janitorial and paper supplies lpp was incorporated under louisiana law on date from its inception through lpp had shares of stock issued and outstanding pursuant to its articles of incorporation those shares constituted its total authorized capital stock julian e and alma were the initial shareholders of lpp shortly after its incorporation lpp filed an election with respondent to be treated as an s_corporation respondent accepted that election in petitioner’s brother julian w long julian w began working on a full-time basis for lpp as a janitor he later worked as a delivery driver a salesman and finally a manager in early he became president of lpp the articles of incorporation do not specifically state that those shares of stock the shares represent a single class of stock with identical rights as to dividends or distributions the articles however do not state the contrary also petitioner’s argument that the allegedly disproportionate distributions to julian e beginning in evidence the creation of a second class of stock indicates her belief that the shares constituted a single class of stock prior to we think it a fair inference that the shares constituted a single class at least until then and we so find in petitioner began working on a full-time basis for lpp she worked in outside sales for approximately years thereafter until the early 1990s she was involved in the management of lpp and was appointed vice president and secretary treasurer on date prior to julian e carried on the business of lpp by the mid-1980s however he had ceased to be actively involved in day-to-day operations and essentially had became a consultant lpp never paid him anything for his services that it labeled a salary he did however draw money out of the corporation to pay his and his wife’s living_expenses as they needed it lpp’s distributions to julian e long beginning in during julian e alma julian w and petitioner agreed the agreement that from then on julian e and alma would receive a monthly distribution from lpp initially fixed at dollar_figure but which amount fluctuated thereafter during the last three full years in which julian e was a shareholder in lpp with the exception of two dollar_figure payments in one to julian w and one to petitioner and one payment of dollar_figure in on behalf of julian w for the purchase of a boat the only distributions from lpp to its shareholders other than in the form of payments on their behalf of income taxes to either the internal_revenue_service or the louisiana department of revenue were made to julian e in each of and julian e received twelve dollar_figure distributions in he received eleven dollar_figure distributions and like julian w and petitioner one dollar_figure distribution also in lpp made four dollar_figure payments to a bank on behalf of julian e in there were distributions to julian e in the form of tax_payments on his behalf for lpp’s total distributions to shareholders closely approximated the 42-29-29-percent ownership interests of julian e julian w and petitioner respectively as reflected on lpp’s returns as filed petitioner’s and amended and returns and lpp’s and returns during the course of litigation in the louisiana state courts instituted by petitioner against lpp julian e julian w and others with respect to the number of lpp shares owned by the record contains no evidence as to the actual amounts of the monthly payments to julian e from to and only petitioner’s testimony that they in fact were made we make no findings_of_fact regarding ownership of the shares between after alma died and when julian w and petitioner each became the owner of of the shares in lpp’s accountant represented to respondent that lpp’s returns show that julian e held percent of its shares and julian w and petitioner percent each and that effective date julian e conveyed all of his lpp shares to julian w and petitioner one-half to each that representation is corroborated by trial testimony given in an earlier louisiana state court_proceeding by lpp’s prior accountant there is however contradictory evidence in the record indicating that at the time of her death in alma owned a one-half community interest with julian e in shares of lpp stock she bequeathed the shares represented by that interest shares to julian w and petitioner shares to each thereby giving each shares or a 5-percent interest in lpp as of and in julian e transferred shares to his children not shares her the first louisiana litigation petitioner discovered an audio tape of a purported lpp shareholders directors meeting attended by julian e julian w and alma her attorney who is also her counsel in this case after listening to the tape and having it transcribed advised her that the participants at the meeting by providing for a fixed level of distributions to julian e had created a second class of stock in lpp thereby negating lpp’s s_corporation status consistent with that position petitioner on her form_1040 u s individual_income_tax_return which she filed on or about date omitted dollar_figure of ordinary_income and other pass-through items reported on the schedule_k-1 shareholder’s share of income credits deductions etc issued by lpp to her for along with her return petitioner submitted a form_8082 notice of inconsistent treatment or administrative_adjustment_request aar which purported to justify that omission on the basis that the agreement created a second class of stock in lpp in an unpublished opinion minton v long’s preferred prods inc so 2d la ct app the court of appeal held in petitioner’s favor in that litigation and confirmed that she purchased shares of lpp stock in and owned shares or percent of that stock as of not shares or percent as had been alleged by julian e and julian w and reported on the schedule_k-1 shareholder’s share of income credits deductions etc issued to her by lpp respondent’s adjustment for petitioner’s alleged omission of lpp income is dollar_figure based upon her ownership of shares of lpp stock whereas the schedule_k-1 issued to her by lpp reflects her ownership of only shares a position that was subsequently rejected by the louisiana court of appeal see supra note thereby causing it to lose its s_corporation status in thereafter petitioner filed amended and returns in which she took a position vis-a-vis lpp’s earnings consistent with that taken in her return lpp’s form_1120s u s income_tax return for an s_corporation reports dollar_figure of ordinary_income from trade_or_business activities total distributions to shareholders of dollar_figure retained earnings at the start of the year of dollar_figure and yearend retained earnings_of dollar_figure lpp’s form_1120s reports dollar_figure of ordinary_income from trade_or_business activities total distributions to shareholders of dollar_figure and yearend retained earnings_of dollar_figure the schedule_k-1 issued to julian w and petitioner do not list any amount as having been distributed to them lpp filed forms 1120s for tax years except for her amended and federal returns for all tax years prior to during which she was a shareholder in lpp petitioner included in income all lpp pass-through items in conformance with the schedule_k-1 issued to her by lpp petitioner’s transfer of one share of lpp on date petitioner contributed one share of her lpp stock to h c chemicals inc hcc which had been incorporated by her daughter heather minton fuller heather on date heather became the president and sole shareholder of hcc lpp’s financial records for however do reflect distributions to julian w and petitioner in the sum of dollar_figure the sole function of which has been to hold shares of lpp lpp utilized date as the date of termination of its s_corporation status louisiana court of appeal decision the first louisiana litigation ended with an unpublished opinion by the louisiana court of appeal affirming the decision of the louisiana rapides parish district_court that petitioner did in fact purchase shares of lpp stock from julian e in the court of appeal stated linda could not remember what each document was entitled nor the terms of the sale of shares of lpp stock to her and shares to julian w other than to say that the consideration for the sale would come in the form of payments to julian e from the corporation petitioner’s date affidavit in connection with the first louisiana litigation petitioner executed an affidavit in which she made the following representations on date julian edward long sold shares of stock in equal amounts to affiant and julian w long they signed an act of sale promissory notes and stock certificates to this effect thereafter consideration for the sale of the stock was paid to julian edward long monthly out of the profits of the corporation in the form of cash house payments car payments payments on all monthly expenses and credit card bills and other_payments minton v long’s preferred prods inc supra petitioner’s date deposition in connection with additional litigation in the louisiana courts this time in a suit to rescind the sale of lpp stock by julian e to petitioner together with the first louisiana litigation the louisiana litigation petitioner was deposed on date by plaintiffs’ counsel during the deposition petitioner testified that she executed a promissory note to julian e in consideration for shares of lpp stock in testifying as to the manner in which she made payments on that note the following exchanges occurred between petitioner and plaintiffs’ counsel a petitioner q counsel a petitioner okay the payments to my father were made on my behalf through long’s preferred products in other words you are saying that the corporation paid your note is that correct that was owed to your father he -- the stock that i purchased from my father was paid on my behalf through the corporation and that was the way that my father and my brother and myself talked about having it done q counsel so you as of this date -- have you yourself personally made any payment towards the retirement of this note a petitioner i have through the corporation of long’s preferred products q counsel a petitioner if long’s preferred products did not make any payments on your behalf who else would have made the payments mr lee i know long’s preferred products did i know i was working i know i had the meeting with my father and my brother i know what took place i know he was not working i know i was not -- i mean i was working and i know he was happy with the arrangement so i don’t know what the books would reflect but i know what took place q counsel when did this meeting take place a petitioner it would have been in i introduction opinion we must determine whether on account of a second class of stock lpp’s status as an s_corporation terminated in if it did then petitioner did not have to include in her income her allocable share of lpp’s income except to the extent distributed to her petitioner concedes that she bears the burden_of_proof see rule a ii discussion a internal_revenue_code and regulations with respect to any taxable_year sec_1361 defines an s_corporation as a small_business_corporation for which an election to be an s_corporation is in effect for such year sec_1361 defines a small_business_corporation as a domestic_corporation which must satisfy a number of requirements one of which is that it not have more than class of stock see sec_1361 in pertinent part and with exceptions not here relevant sec_1_1361-1 income_tax regs provides that a corporation is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds in pertinent part sec_1_1361-1 income_tax regs provides the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state law and binding agreements relating to distribution and liquidation proceeds collectively the governing provisions pursuant to sec_1362 s_corporation status terminates when the corporation ceases to qualify as an s_corporation eg upon the creation of a second class of stock b analysi sec_1 absence of a binding agreement petitioner argues that the agreement constituted a binding agreement within the meaning of sec_1 l i income_tax regs to make guaranteed payments to we note that pursuant to sec_1_1361-1 income_tax regs sec_1_1361-1 does not apply to an arrangement entered into before date and not materially modified after that date sec_1_1361-1 income_tax regs continues however a corporation and its shareholders may apply this sec_1_1361-1 to prior taxable years we consider petitioner’s return position and her reliance upon sec_1_1361-1 and i income_tax regs in this case as an election by petitioner in her capacity as a shareholder of lpp to apply sec_1_1361-1 income_tax regs to the agreement therefore we shall apply that regulation continued julian e beginning in in whatever monthly amounts would be necessary to cover his and alma’s living_expenses those payments were made over time and accounted for properly as state law dividends and because n o other shareholder received the monthly guaranteed payments that were received by julian e long lpp ceased to be an s_corporation from the moment that the agreement was made we find that the evidence does not support petitioner’s position she has failed to carry her burden of proving that the agreement constituted a binding agreement giving julian e enhanced or disproportionate rights to lpp’s distribution and liquidation proceeds as required by sec_1_1361-1 and i income_tax regs such an agreement is necessary in order for us to conclude that lpp had a second class of stock to begin with petitioner has failed to establish that the agreement was in any way binding at best petitioner testified that that agreement was nothing more than an informal oral understanding among the board members shareholders of lpp to have lpp make monthly distributions to julian e in whatever amounts he and alma needed to cover their living_expenses a practice similar to that which prevailed prior to there is no evidence that the family members in their capacity as directors and or shareholders of lpp took any formal corporate continued in deciding whether the agreement created a second class of lpp stock action to implement that understandingdollar_figure louisiana corporation law specifically addresses the manner in which directors or shareholders of a louisiana corporation shall act on behalf of the corporation petitioner has cited no provisions of louisiana corporation law and therefore no authority in support of her position that lpp was bound by the agreement with the result that it might be said to constitute a binding agreement for purposes of sec_1 l i income_tax regs our own review of louisiana corporation law leads us to conclude that the procedures required to institute a board_of directors’ or shareholders’ meeting and adopt binding resolutions at such meetings are either governed by the articles of incorporation and or the bylaws or by the louisiana corporation law itselfdollar_figure that absence of corporate action is inconsistent with what appears to have been the normal practice of lpp’s shareholders directors to keep written minutes of directors’ and shareholders’ meetings and of resolutions adopted at those meetings with regard to board_of directors’ meetings see la rev stat ann sec_12 81c a n otice of meetings of the board shall be given as provided in the articles or bylaws if not so provided i regular meetings of the board may be held without notice of the date time place or purpose of the meeting provided that the date time and place are fixed by the board or are determinable pursuant to the articles or bylaws ii special meetings of the board shall be preceded by at least two days notice of the date time and place of the meeting continued lpp’s articles of incorporation do not address the procedures for instituting directors’ or shareholders’ meetings or adopting binding resolutions at such meetings and petitioner has failed to place lpp’s bylaws into evidence nor has she demonstrated compliance with the provisions of louisiana corporation law that pertain to those procedures in the absence of controlling articles or bylaws without evidence that the agreement constituted a binding agreement within the meaning of sec_1 l i income_tax regs the most that can be said of the monthly distributions to julian e is that they in effect provided him with a timing benefit vis-a-vis lpp’s distributable earnings which in total have not been shown to belong to lpp’ sec_12 continued iii the notice of a special meeting of the board shall describe the purpose of the special meeting see also la rev stat ann sec_12 81c any_action which may be taken at a meeting of the board_of directors may be taken by a consent in writing signed by all of the directors and filed with the records of proceedings of the board with regard to shareholders’ meetings see la rev stat ann sec_12 73d which in pertinent part provides unless otherwise provided in the articles or by-laws and except as otherwise provided in this chapter the authorized person or persons calling a shareholders’ meeting shall cause written notice of the time place and purpose of the meeting to be given to all shareholders entitled to vote at such meeting at least ten days and not more than sixty days prior to the day fixed for the meeting notice of any shareholders’ meeting may be waived in writing by any shareholder at any time shareholders on other than a pro_rata basis in accordance with their respective stock ownership percentages see sec_1 l vi example income_tax regs indicating that differences in the timing of distributions to shareholders do not cause an s_corporation to be treated as having more than one class of stock dollar_figure purpose and nature of the fixed distributions to julian e the only support for petitioner’s argument that in the directors shareholders of lpp agreed to make fixed distributions to julian e in amounts necessary to cover his and alma’s living_expenses is petitioner’s testimony to that effect but that testimony is contradicted by the louisiana court of appeal’s description of petitioner’s trial testimony and by petitioner’s affidavit and a deposition given in connection with the louisiana litigation all of which indicate that all or a portion of the fixed distributions to julian e commencing in were made for the purpose of paying him through lpp for his sale of lpp stock to julian w and petitioner if that is so it follows that some or all of the distributions to julian in this connection we note the absence of evidence that any disproportionate distributions to julian e prior to when he ceased to be a shareholder in lpp would not be offset by future remedial distributions to the other shareholders out of lpp’s substantial retained earnings which totaled dollar_figure at the end of moreover the payment of dollar_figure in on behalf of julian w for the purchase of a boat indicates that remedial payments could occur whenever julian w or petitioner needed distributions in excess of lpp’s tax_payments on their behalf that payment also indicates that all of the shareholders were on equal footing vis-a-vis profit distributions from lpp in that all were entitled to distributions on an as-needed basis e were from lpp profits that belonged and were taxable to julian w and petitioner not to julian e see eg bitker v commissioner tcmemo_2003_209 partnership’s payments of interest on the taxpayer-partner’s personal debt included in his taxable_distributions from the partnership thus assuming arguendo that the agreement represented a binding agreement on the part of lpp’s directors shareholders to make disproportionate distributions to julian e petitioner has failed to establish that the payments did in fact constitute distributions with respect to julian e ’s shares rather than distributions in discharge of julian w ’s and petitioner’s personal debts to julian e and therefore distributions with respect to their shares moreover the conflicting evidence regarding the purpose of the fixed distributions to julian e raises the possibility that they were intended to achieve both of those purposes and therefore that they were made in part with respect to julian e ’s shares and in part with respect to julian w ’s and petitioner’s shares in that event they very well may have constituted proportionate distributions a result fully consistent with the continued existence of one class of lpp stock conclusion petitioner has failed to prove that lpp had more than one class of stock in iii conclusion in light of petitioner’s concessions and our disposition of the more than one class of stock issue we must sustain respondent’s determination_of_a_deficiency decision will be entered for respondent


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 7-plr- date date legend p new p q r s t w x y z agreement date date date dear this letter responds to a letter dated date and subsequent correspondence submitted on behalf of p by its authorized representatives requesting rulings under sec_29 and sec_702 of the internal_revenue_code facts the facts as represented by p and p’s authorized representatives are as follows p is a limited_liability_company taxable as a partnership x and y were the initial members in p w is the sole member of x because x is disregarded as an entity for federal_income_tax purposes w is treated as owning x’s member interest in p y is a wholly-owned subsidiary of w z is the indirect parent_corporation of w on date x sold a member interest in p to r pursuant to a purchase and sale agreement dated as of date between r and x p represents that a termination of p under sec_708 occurred as a result of such sale the reconstituted partnership following the termination of p under sec_708 is referred to as new p p acquired the facility from q pursuant to an agreement dated as of date q was the original owner of the facility which was constructed pursuant to a construction_contract dated date that was assigned to q the construction_contract does not provide for liquidated_damages or any other limitation on the maximum amount of damages available should either party fail to perform the construction_contract includes a description of the facility to be constructed a completion date and a price p provided an opinion of counsel that the construction_contract constituted a binding written contract under applicable state laws prior to date and at all times thereafter through completion of the contract the facility is a movable facility that can be moved from one site to another depending on the availability price and location of coal feedstock subsequent to the purchase p relocated the facility to a site owned by an indirect subsidiary of w following the relocation the fair_market_value of the original property was more than percent of the facility’s total value the cost of the new property plus the value of the original property p operated and maintained the facility p purchased coal feedstocks for the facility from a variety of sources the feedstock coal was thoroughly mixed with a chemical reagent in a pugmill after leaving the pugmill the mixture was carried by conveyor belt to a conveyor from which it was distributed to one of three briquetters by an arrangement of diverters and chutes each briquetter was equipped with a short conveyor belt running under it that received the resulting solid synthetic_fuel product and carried it to a common collection belt and then out of the facility to a storage area in p and new p’s production process the combination of the chemically reactive agent the mixing process the retention time and the compression pressure used in the roll briquetter process results in the formation of a solid synthetic_fuel product the synthetic_fuel produced by p was sold to third party utilities and industrial users the facility utilized coal feedstock and chemical reagents that meet the requirements of revproc_2001_34 2001_22_irb_1293 the facility has used various feedstock sources chemical reagents and chemical reagent concentrations as described in p’s letter_ruling request p has had recognized experts in coal and chemical analysis conduct numerous tests on synthetic_fuel samples produced by p using each reagent identified in the request for rulings these tests are described in detail in p's letter_ruling request and subsequent correspondence from p’s authorized representatives based on this testing of the reagents the experts have concluded that there was a measurable significant change in the chemical composition of the resulting synthetic_fuel compared to the unreacted coal feedstocks and chemical reagent p’s amended and restated limited_liability_company agreement allocated receipts from the sale of synthetic_fuel among its members in accordance with their membership interests the rulings requested by p are as follows p with use of the process produces a qualified_fuel within the meaning of sec_29 the contract for construction of the facility constitutes a binding written contract in effect before date for purposes of sec_29 the facility is placed_in_service for purposes of sec_29 on the date that the facility was first placed in a condition or state of readiness and availability to produce qualified_fuel as provided in sec_1_46-3 and sec_1_167_a_-11 production of qualified_fuel from the facility will be attributable solely to p within the meaning of sec_29 of the code and p will be entitled to the sec_29 credit for qualified_fuel from the facility that is sold to unrelated persons if the facility was placed_in_service prior to date within the meaning of sec_29 relocation of the facility to a different location after date or replacement of parts of the facility after that date will not result in a new placed_in_service_date for the facility for purposes of sec_29 provided the fair_market_value of the original property is more than percent of the facility’s total fair_market_value at the time of relocation or replacement the credit allowed under sec_29 may be passed through to and allocated among all the members in p in accordance with the principles of sec_702 if the facility was placed_in_service prior to date within the meaning of sec_29 the facility will continue to be treated as placed_in_service before date if sold to a new owner after such date the termination of p and any termination of new p under sec_708 will not preclude the reconstituted partnership from claiming the sec_29 credit for the production and sale of synthetic_fuel to unrelated persons ruling_request sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer the credit for the taxable_year is an amount equal to dollar_figure adjusted for inflation multiplied by the barrel-of-oil_equivalent of qualified_fuels sold sec_29 defines qualified_fuels to include liquid gaseous or solid synthetic fuels produced from coal including lignite including such fuels when used as feedstocks in revrul_86_100 1986_2_cb_3 the internal_revenue_service ruled that the definition of the term synthetic_fuel under sec_48 and its regulations is relevant to the interpretation of the term under sec_29 former sec_48 provided a credit for the cost of equipment used for converting an alternate_substance into a synthetic liquid gaseous or solid fuel revrul_86_100 notes that both sec_29 and former sec_48 contain almost identical language and have the same overall congressional intent namely to encourage energy conservation and aid development of domestic energy production under sec_1_48-9 of the income_tax regulations a synthetic_fuel differs significantly in chemical composition as opposed to physical composition from the alternate_substance used to produce it coal is an alternate_substance under sec_1_48-9 of the income_tax regulations in revproc_2001_30 2001_19_irb_1163 the service announced that it will resume issuance of rulings under sec_29 for processes that do not go beyond the processes approved in the rulings issued prior to sec_3 of revproc_2001_34 provides that the service will issue rulings that a solid fuel other than coke produced from coal is a qualified_fuel under sec_29 if the conditions set forth below are satisfied and evidence is presented that all or substantially_all of the coal used as feedstock undergoes a significant chemical change the conditions are that the feedstock coal consists of coal fines or crushed coal comprised of particles the majority of which by weight are no larger than inch the feedstock coal is thoroughly mixed in a mixer a with styrene or other monomers b with quinoline c9h7n or other organic resin and left to cure for several days c with ultra heavy hydrocarbons or d with an aluminum and or magnesium silicate binder following heating to a minimum temperature of degrees fahrenheit and the treated feedstock is subjected to elevated temperature and pressure that results in briquettes pellets or an extruded fuel product or the taxpayer represents that the omission of this procedure will not significantly increase the production of the facility over the remainder of the period during which the sec_29 credit is allowable based on the representations of p and p's authorized representatives including the test results submitted by p we conclude that the conditions of revproc_2001_34 are met and that the process and reagents used in the facility as described in p's ruling_request and subsequent correspondence produced a significant chemical change to the coal transforming the coal feedstock into a solid synthetic_fuel from coal ruling_request sec_29 and f provide that sec_29 applies with respect to qualified_fuels which are produced in a facility placed_in_service after date and before date and which are sold before date sec_29 modifies sec_29 in the case of a facility producing qualified_fuels described in sec_29 sec_29 provides that for purposes of sec_29 a facility shall be treated as placed_in_service before date if the facility is placed_in_service before date pursuant to a binding written contract in effect before date sec_29 provides that if the facility is originally placed_in_service after date sec_29 shall be applied by substituting date for date a contract is binding only if it is enforceable under local law against a taxpayer and does not limit damages to a specified amount eg by use of a liquidated_damages provision a contract provision limiting damages to an amount equal to at least five percent of the total_contract_price for example should be treated as not limiting damages the construction_contract executed prior to date does not provide for liquidated_damages and includes such essential features as a description of the facility to be constructed a completion date and a price p provided an opinion of counsel that the construction_contract constituted a binding written contract under applicable state laws prior to date and at all times thereafter through completion of the contract therefore we conclude that the construction_contract is a binding written contract for purposes of sec_29 ruling requests and sec_29 and f of the code provide that sec_29 applies with respect to qualified_fuels which are produced in a facility placed_in_service after date and before date and which are sold before date sec_29 of the code modifies sec_29 in the case of a facility producing qualified_fuels described in sec_29 which qualified_fuels include solid synthetic fuels produced from coal or lignite sec_29 provides that for purposes of sec_29 such a facility is to be treated as placed_in_service before date if the facility is placed_in_service before date pursuant to a binding written contract in effect before date sec_29 provides that if the facility is originally placed_in_service after date sec_29 is to be applied by substituting for the date therein date to qualify for the sec_29 credit the facility must be placed_in_service before date pursuant to a binding written contract in effect before date while sec_29 does not define placed_in_service the term has been defined for purposes of the deduction for depreciation and the investment_tax_credit property is placed_in_service in the taxable_year the property is placed in a condition or state of readiness and availability for a specifically assigned function sec_1_167_a_-11 and sec_1 d ii of the income_tax regulations placed_in_service has consistently been construed as having the same meaning for purposes of the deduction for depreciation and the investment_tax_credit see revrul_76_256 1976_2_cb_46 when property is placed_in_service is a factual determination and we express no opinion on when the facility was placed_in_service revrul_94_31 1994_1_cb_16 concerns sec_45 which provides a credit for electricity produced from certain renewable resources including wind the credit is based on the amount of electricity produced_by_the_taxpayer at a qualified_facility during the 10-year period beginning on the date the facility was originally placed_in_service and sold by the taxpayer to an unrelated_person during the taxable_year revrul_94_31 holds that for purposes of sec_45 a facility qualifies as originally placed_in_service even though it contains some used_property provided the fair_market_value of the used_property is not more than percent of the facility's total value the cost of the new property plus the value of the used_property revrul_94_31 concerns a factual context similar to the present situation consistent with the holding in revrul_94_31 the relocation of the facility after date or replacement of parts of the facility after that date will not prevent the relocated facility from continuing to be treated as originally placed_in_service prior to date for purposes of sec_29 if the fair_market_value of the original property is more than percent of the facility's total fair_market_value at the time of relocation or replacement ruling_request sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer under sec_7701 taxpayer means any person subject_to any internal revenue tax furthermore sec_7701 provides that when used in title_26 where not otherwise distinctly expressed or manifestly incompatible with the intent thereof person will be construed to mean and include an individual trust estate partnership_association company or corporation p is the taxpayer for purposes of sec_29 of the code because a limited_liability_company such as p may be treated for tax purposes as either a partnership or a corporation either of which is a taxpayer under sec_7701 p owned and operated the facility and produced and sold the resulting qualified_fuel all production of qualified_fuels by the facility therefore was attributable solely to p within the meaning of sec_29 and p was entitled to the sec_29 credit for the production of the qualified_fuel from the facility that was sold to unrelated persons ruling_request sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer sec_7701 provides that taxpayer means any person subject_to any internal revenue tax generally under sec_7701 the term person includes an individual a_trust estate partnership_association company or corporation sec_702 provides that each partner determines the partner's income_tax by taking into account separately the partner's_distributive_share of the partnership's other items of income gain loss deduction or credit to the extent provided by regulations prescribed by the secretary sec_1_702-1 provides that the distributive_share is determined as provided in sec_704 and sec_1_704-1 sec_704 provides that a partner's_distributive_share of income gain loss deduction or credit is except as otherwise provided in chapter of subtitle a of title_26 determined by the partnership_agreement sec_704 provides that a partner's_distributive_share of income gain loss deduction or credit or item thereof is determined in accordance with the partner's_interest_in_the_partnership determined by taking into account all facts and circumstances if the partnership_agreement does not provide as to the partner's_distributive_share of income gain loss deduction or credit or item thereof or the allocation to a partner under the agreement of income gain loss deduction or credit or item thereof does not have substantial economic_effect sec_1_704-1 b ii provides that allocations of tax_credits and tax_credit recapture except for sec_38 property are not reflected by adjustments to the partners' capital accounts thus these allocations cannot have economic_effect under sec_1 b ii b and the tax_credits and tax_credit recapture must be allocated in accordance with the partners' interests in the partnership as of the time the tax_credit or credit recapture arises if a partnership expenditure whether or not deductible that gives rise to a tax_credit in a partnership_tax_year also gives rise to valid allocations of partnership loss or deduction or other downward capital_account adjustments for the year then the partners' interests in the partnership with respect to such credit or the cost giving rise to it are in the same proportion as the partners' respective distributive shares of the loss or deduction and adjustments see sec_1_704-1 b example identical principles apply in determining the partners' interests in the partnership with respect to tax_credits that arise from receipts of the partnership whether or not taxable based on the information submitted and the representations made we conclude that assuming the solid synthetic_fuel produced and sold qualified for the sec_29 credit the credit was allowed to p and the credit may be passed through to and allocated to the members of p under the principles of sec_702 in accordance with each member's interest in p as of the time the tax_credit arose for the sec_29 credit a member's interest in p is determined based on a valid allocation of the receipts from the sale of the sec_29 credit qualified_fuel ruling_request the sec_29 credit has always been a time sensitive credit in that eligibility for the credit is determined when facilities or wells producing qualified_fuels are placed_in_service and when the qualifying fuels are produced and sold to unrelated persons for example the sec_44d credit as originally enacted in the crude_oil windfall profit tax act of was generally available for the production and sale of alternative fuels after date and before date on property that first began production after date congress has extended the sec_29 credit four times the placed-in-service deadline and the period for claiming the sec_29 credit were extended in the technical_and_miscellaneous_revenue_act_of_1988 for placed_in_service omnibus budget reconciliation act of for placed_in_service and for the end of the credit_period energy policy act of for placed_in_service and for the end of the credit_period and small_business job protection act of date for placed_in_service it is clear from the legislative_history of sec_44d that congress intended the credit to apply to facilities placed_in_service after and that the placed-in-service deadline in sec_29 must be read as applying to when the facility is first placed_in_service within the applicable dates the placed-in-service deadlines contained in sec_29 and sec_29 focus on the facility and not the owner of the facility the legislative_history of sec_44d clearly shows that congress wanted to encourage the production of new alternative fuels from facilities first placed_in_service after and not provide tax incentive for production capacity in service before sec_29 demonstrates that congress knows how to preclude transferees of facilities from claiming the sec_29 credit that provision provides that extension of the period for placing facilities in service after does not apply to any facility that produces coke or coke gas unless the original_use of the facility commences with the taxpayer accordingly the determination of whether a facility has satisfied the placed-in- service deadline under either sec_29 or sec_29 is made by reference to when the facility is first placed_in_service not when the facility is transferred or sold to a different taxpayer therefore if the facility was placed_in_service prior to date within the meaning of sec_29 the sale of the facility after date will not result in a new placed_in_service_date for the facility for purposes of sec_29 for the new owner ruling_request sec_708 provides that a partnership shall be considered as terminated if within a twelve-month period there is a sale_or_exchange of percent or more of the total interest in partnership capital and profits sec_1_708-1 provides that if a partnership is terminated by a sale_or_exchange of an interest the following is deemed to occur the partnership contributes all of its assets and liabilities to a new partnership in exchange for an interest in the new partnership and immediately thereafter the terminated partnership distributes interests in the new partnership to the purchasing partner and the other remaining partners in proportion to their respective interests in the terminated partnership in liquidation of the terminated partnership either for the continuation of the business by the new partnership or for its dissolution and winding up sec_1_708-1 applies to terminations of partnerships under sec_708 occurring on or after date as discussed above the placed-in-service deadline in sec_29 and sec_29 must be read as applying to when the facility is first placed_in_service within the applicable dates the placed-in-service deadlines contained in sec_29 and sec_29 focus on the facility and not the taxpayer owning the facility accordingly the determination of whether a facility has satisfied the placed-in- service deadline under sec_29 and sec_29 is made by reference to when the facility is first placed_in_service not when the facility is placed_in_service by a transferee taxpayer therefore we conclude that the termination of p under sec_708 on r’s purchase of its interest will not preclude new p from claiming the sec_29 credit on the production and sale of synthetic_fuel to unrelated persons conclusions accordingly based on the representations of p and ps authorized representatives we conclude as follows p with use of the process and reagents described in the request for rulings produced a qualified_fuel within the meaning of sec_29 the contract for construction of the facility constitutes a binding written contract within the meaning of sec_29 the facility is placed_in_service for purposes of sec_29 on the date that the facility was first placed in a condition or state of readiness and availability to produce qualified_fuel as provided in sec_1_46-3 and sec_1_167_a_-11 we express no opinion on when the facility was placed_in_service production of qualified_fuel from the facility was attributable solely to p within the meaning of sec_29 of the code and p was entitled to the sec_29 credit for qualified_fuel from the facility that was sold to unrelated persons if the facility was placed_in_service prior to date within the meaning of sec_29 relocation of the facility to a different location after date or replacement of parts of the facility after that date did not result in a new placed_in_service_date for the facility for purposes of sec_29 provided the fair_market_value of the original property was more than percent of the facility’s total fair_market_value at the time of relocation or replacement the credit allowed under sec_29 may be passed through to and allocated among all the members in p in accordance with the principles of sec_702 if the facility was placed_in_service prior to date within the meaning of sec_29 the facility will continue to be treated as placed_in_service before date if sold to a new owner after such date the termination of p under sec_708 will not preclude new p from claiming the sec_29 credit for the production and sale of synthetic_fuel to unrelated persons except as specifically ruled upon above we express no opinion concerning the federal_income_tax consequences of the transaction described above specifically we express no opinion on when the facility was placed_in_service for purposes of sec_29 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling may be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in this ruling see dollar_figure of revproc_2001_1 2001_1_irb_1 however when the criteria in dollar_figure of revproc_2001_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to p's authorized representative sincerely yours joseph h makurath senior technician reviewer branch office of associate chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


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 b04 plr-121349-16 date january re ---------------------------------------- legend settlor son trust law firm date date year -------------------- ---------------------- --------------------------------------------------------------------------- ---------------------------------------- ---------------------------- -------------------- ------- dear ------------ this letter responds to your authorized representative's letter dated date requesting an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-1 of the procedure and administration regulations to allocate settlor’s gst_exemption to a transfer to a_trust facts the facts and representations submitted are summarized as follows on date settlor created and funded trust an irrevocable_trust for the benefit of son and settlor’s descendants date is in year a year prior to date settlor failed to file a timely form_709 united_states gift and generation-skipping_transfer_tax return to report the date transfer because settlor relied on tax professionals to advise and prepare all necessary tax returns the failure to allocate settlor’s gst_exemption was discovered by law firm when reviewing the gst status of trust a form_709 was filed on date by settlor and an election under sec_2513 to split the gift was made plr-121349-16 it is represented that no additions constructive or actual were made to trust after date and that settlor has sufficient gst_exemption to allocate to the date transfer you request an extension of time pursuant to sec_2642 and sec_301_9100-3 to allocate settlor’s gst_exemption to the date transfer to trust that the gst_exemption allocated to the date transfer will be effective as of the date of the transfer law and analysis sec_2601 imposes a tax on every generation-skipping_transfer a generation- skipping transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the tax imposed by sec_2601 is the taxable_amount multiplied by the applicable_rate sec_2641 defines the term applicable_rate with respect to any gst transfer as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2642 provides that the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is the excess if any of over the applicable_fraction under sec_2642 the applicable_fraction is defined as a fraction the numerator of which is the amount of the gst_exemption allocated to the trust or to property transferred in a direct_skip and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip reduced by the sum of any federal estate_tax or state death_tax actually recovered from the trust attributable to such property and any charitable deduction allowed under sec_2055 or sec_2522 with respect to such property sec_2631 as in effect for year provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides in part that an allocation of gst_exemption to property transferred during the transferor’s lifetime other than in a direct_skip is made on form_709 plr-121349-16 sec_2642 provides in part that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 and such allocation will be effective on and after the date of such transfer sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides in part that under sec_2642 the time for allocating the gst_exemption to lifetime transfers is to be treated as if not expressly prescribed by statute and taxpayers may seek an extension of time to make an allocation described in sec_2642 or b under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-3 provides that in general requests for extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under the rules of sec_301_9100-3 sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 plr-121349-16 requests for relief under sec_301_9100-3 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 that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore settlor is granted an extension of time of days from the date of this letter to allocate settlor’s available gst_exemption to the date transfer to trust the allocation will be effective as of the respective date of the transfer to trust and the value of the transfer to trust as determined for federal gift_tax purposes will be used in determining the amount of settlor’s gst_exemption to be allocated to trust this allocation should be made on an amended form_709 and filed with the cincinnati service_center at the following address internal_revenue_service cincinnati service_center - stop cincinnati oh a copy of this letter should be attached to the supplemental form sec_709 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 except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code plr-121349-16 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely associate chief_counsel passthroughs special industries melissa liquerman melissa liquerman branch chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes