internal_revenue_service department of the treasury number release date index no p o box ben franklin station washington dc person to contact telephone number refer reply to cc psi - plr-118700-01 date august re legend taxpayer decedent trust agreement date court date dear this is in response to a letter dated date and subsequent correspondence submitted on behalf of the taxpayers in which rulings were requested concerning the federal gift and estate_tax consequences under sec_2041 and sec_2514 of the internal_revenue_code of a court order modifying a_trust agreement facts the facts submitted and representations made are as follows taxpayer and his spouse decedent executed trust agreement a joint revocable_trust and named themselves as cotrustees article ii paragraph of trust agreement provides that during their joint lives either spouse may amend or revoke trust agreement to the extent it pertains to the assets of that spouse after the death of the first spouse to die the surviving_spouse may amend and revoke the survivor’s trust and the decedent’s trust will be irrevocable under article v at the death of the first spouse to die the trust estate is to be divided into the survivor’s trust and the decedent’s trust under article v paragraph the surviving spouse’s separate_property and share of the community_property will plr-118700-01 be allocated to the survivor’s trust under article v paragraph the balance of the trust assets will be allocated to the decedent’s trust under article v paragraph during the surviving spouse’s life the trustee will pay to the spouse all of the net_income of the survivor’s trust any amounts of principal the trustee deems necessary for the surviving spouse’s health welfare and maintenance considering the spouse’s income from other sources and any amounts of principal the spouse demands at the death of the surviving_spouse the remaining assets of the survivor’s trust will be distributed as appointed under the surviving spouse’s will or in default of such appointment will be added to the decedent’s trust under article v paragraph during the surviving spouse’s life all of the net_income of the decedent’s trust and principal requested by the spouse in any calendar_year equal to the greater of dollar_figure or percent of the value of the trust assets at the end of the calendar_year will be distributed to the surviving_spouse further article v paragraph provides in addition trustee shall from time to time pay to or for the benefit of the surviving trustor such sums from the principal of the decedent’s trust as trustee may deem in its sole and exclusive discretion to be necessary for the health welfare and maintenance of the surviving trustor trustee is directed that prior to making any distributions for the health welfare and maintenance of the surviving trustor from the principal of the decedent’s trust trustee shall not first ascertain all other assets available to the surviving trustor which other assets would be available to provide for his or her health welfare and maintenance trustee is directed that distributions of principal under the terms of this paragraph shall be made liberally article v paragraph provides that in making investments of the principal of the decedent’s trust the trustee must consider the needs of the income_beneficiary to be paramount and shall so invest the principal accordingly at the death of the surviving_spouse the decedent’s trust will terminate and under the terms of article vi be distributed to specified family members decedent died on date taxpayer is currently the sole trustee of the survivor’s and the decedent’s trusts after decedent’s death taxpayer spoke with a bank about the possibility of its becoming trustee during those discussions a representative of the bank stated that plr-118700-01 as trustee and beneficiary of the decedent’s trust taxpayer has a general_power_of_appointment over the trust due to the use of the word welfare in article v paragraph taxpayer intended that his and decedent’s estate_taxes would be minimized by their each using their unified credits against federal estate_tax as provided under sec_2010 in a date letter to the taxpayer and decedent the scrivener of trust agreement stated under the decedent’s trust the survivor receives all of the income every year has the right to take out dollar_figure or per year and can have the principal invaded for their needs they do not however own this share the survivor’s share is different the survivor’s share consists of that person’s half of the community_property they can do anything with it they want as trustee of the decedent’s trust taxpayer petitioned court for reformation of trust agreement on date court issued an order modifying article v paragraph in the order court states that notice was proper and that the interests of any unascertained potential beneficiaries of the trust are adequately represented the court further states that article v paragraph contains a scrivener’s error due to which taxpayer is deemed to have a general_power_of_appointment the court order further states that taxpayer has never exercised this general_power_of_appointment under article v paragraph court ordered that trust agreement is modified retroactively as of its date of execution by deleting the language of article v paragraph in its entirety and substituting the following language principal invasion in addition trustee shall from time to time pay to or for the benefit of the surviving trustor such sums from the principal of the decedent’s trust as trustee may deem to be necessary for the health education support and maintenance of the surviving trustor trustee is directed that prior to making any distributions for the health education support and maintenance of the surviving trustor from the principal of the decedent’s trust trustee shall not first ascertain all other assets available to the surviving trustor which other assets would be available to provide for his or her health education support and maintenance plr-118700-01 taxpayer has exercised his and power over the decedent’s trust but has not withdrawn any principal under article v paragraph the following rulings have been requested taxpayer’s power to invade the principal of the trust under article v paragraph as modified under the court order so that it is only exercisable as necessary for the taxpayer’s health education support and maintenance is limited by an ascertainable_standard and is not considered a general_power_of_appointment for federal estate and gift_tax purposes under sec_2041 and sec_2514 modification of trust agreement under the court order does not cause taxpayer to be deemed to have released a general_power_of_appointment resulting in a gift pursuant to sec_2514 law and analysis under sec_2041 the value of the gross_estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of death a general_power_of_appointment created after date sec_2041 defines general_power_of_appointment as a power which is exercisable in favor of the decedent his estate his creditors or creditors of his estate however under sec_2042 a power to consume invade or appropriate property for the benefit of the decedent which is limited by an ascertainable_standard relating to the health education support or maintenance of the decedent is not a general_power_of_appointment under sec_20_2041-1 a power is limited by an ascertainable_standard if the extent of the holder's duty to exercise and not to exercise the power is reasonably measurable in terms of his needs for health education or support or any combination of them the words support and maintenance are synonymous and their meaning is not limited to the bare necessities of life a power to use property for the comfort welfare or happiness of the holder of the power is not limited by the requisite standard in determining whether a power is limited by an ascertainable_standard it is immaterial whether the beneficiary is required to exhaust his other income before the power can be exercised sec_2501 imposes a tax for each calendar_year on the transfer of property by gift by any individual resident or nonresident sec_2511 provides that the tax imposed by sec_2501 shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible plr-118700-01 under sec_2514 the exercise or release of a general_power_of_appointment created after date is deemed the transfer of property by the individual possessing such power under sec_2514 general_power_of_appointment is defined as a power which is exercisable in favor of the individual possessing the power the possessor his estate his creditors or creditors of his estate however under sec_2514 a power to consume invade or appropriate property for the benefit of the possessor which is limited by an ascertainable_standard relating to the health education support or maintenance of the possessor is not a general_power_of_appointment under sec_25_2514-1 a power is limited by an ascertainable_standard if the extent of the possessor's duty to exercise and not to exercise the power is reasonably measurable in terms of his needs for health education or support or any combination of them the words support and maintenance are synonymous and their meaning is not limited to the bare necessities of life a power to use property for the comfort welfare or happiness of the holder of the power is not limited by an ascertainable_standard in determining whether a power is limited by an ascertainable_standard it is immaterial whether the beneficiary is required to exhaust his other income before the power can be exercised powers of appointment limited by an ascertainable_standard are defined in the same way under sec_2041 and sec_2514 powers of appointment have the same meaning for purposes of both the gift and estate_tax see revrul_76_547 1976_2_cb_302 in 387_us_456 the court considered whether a state trial court's characterization of property rights conclusively binds a federal court or agency in a federal estate_tax controversy the court concluded that the decision of a state trial_court as to an underlying issue of state law should not be controlling when applied to a federal statute rather the highest court of the state is the best authority on the underlying substantive rule_of state law to be applied in the federal matter if there is no decision by that court then the federal authority must apply what it finds to be state law after giving proper regard to the state trial court's determination and to relevant rulings of other courts of the state in this respect the federal_agency may be said in effect to be sitting as a state court generally if due to a mistake in drafting the instrument does not contain the terms of the trust that the settlor and the trustee intended the settlor or other interested_party may maintain a suit in equity to have the instrument reformed so that it will contain the terms that were actually agreed upon bogert bogert the law of trusts and trustees sec_991 revised 2d ed based on an analysis of the facts submitted and the representations made we conclude that the court order modifying the instrument based on scrivener’s error is consistent with applicable state law as it would be applied by the highest court of the state accordingly we rule as follows plr-118700-01 taxpayer’s power to invade the principal of the trust under article v paragraph as modified under the court order so that it is only exercisable as necessary for the taxpayer’s health education support and maintenance is limited by an ascertainable_standard and is not considered a general_power_of_appointment for federal estate and gift_tax purposes under sec_2041 and sec_2514 modification of trust agreement under the court order does not cause taxpayer to be deemed to have released a general_power_of_appointment resulting in a gift pursuant to sec_2514 except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours associate chief_counsel passthroughs and special industries acting senior technician reviewer by lorraine e gardner branch enclosure copy for sec_6110 purposes


t c memo united_states tax_court thomas arthur endicott and melinda jane endicott commissioner of internal revenue respondent petitioners v docket no filed date thomas arthur endicott and melinda jane endicott pro_se timothy s sinnott for respondent memorandum findings_of_fact and opinion ruwe judge respondent determined deficiencies in petitioners’ federal_income_tax of dollar_figure dollar_figure and dollar_figure for the taxable years and years at issue respectively and accuracy-related_penalties under section a of dollar_figure dollar_figure and dollar_figure for the taxable years and respectively the issues for decision are whether thomas endicott petitioner was a trader in securities during the years at issue and whether petitioners are liable for accuracy-related_penalties under sec_6662 if we find that petitioner was not a trader during the years at issue the investment_expenses that he claimed as trade_or_business_expenses on schedules c profit or loss from business of petitioners’ tax returns will be disallowed in full as schedule c expenses the parties agree that if we find that petitioner is not a trader then petitioners will not be entitled to a dollar_figure claimed deduction for tuition and fees for the taxable_year petitioners’ schedules a itemized_deductions will be decreased by dollar_figure for the taxable_year and unless otherwise indicated all section references are to the internal_revenue_code code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure we note that respondent does not dispute petitioners’ treatment of income and losses from the purchase and sale of stocks and call options a trader’s expenses are deducted in determining adjusted_gross_income see kay v commissioner tcmemo_2011_159 tax ct memo lexis at an investor’s expenses are deducted under sec_212 as itemized_deductions and as pertinent to petitioners the deduction of investment_interest is limited by sec_163 see arberg v commissioner tcmemo_2007_244 tax ct memo lexis at increased by dollar_figure and dollar_figure for the taxable years and respectively petitioners’ claimed exemptions for the taxable_year will be reduced by dollar_figure petitioners’ social_security_benefits for the taxable_year will be taxable in the amount of dollar_figure petitioners will be liable for a dollar_figure alternative_minimum_tax for the taxable_year petitioners will be liable for self-employment taxes of dollar_figure dollar_figure and dollar_figure for the taxable years and respectively and petitioners will be entitled to deductions equal to one-half of the self-employment taxes of dollar_figure dollar_figure and dollar_figure for the taxable years and respectively findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time the petition was filed petitioners resided in indiana petitioner had been the president of duffy tool stamping until he retired in in petitioner began a new endeavor purchasing and selling stocks and call options the notice_of_deficiency incorporated these adjustments in determining petitioners’ deficiencies for the years at issue petitioner’s primary strategy was to purchase shares of stock and then sell call options on the underlying stock petitioner explained that he did not purchase stocks without selling call options and that he did not sell call options without owning the underlying stock petitioner’s goal was to earn a profit from the premiums received from selling call options against a corresponding quantity of underlying stock that he held petitioner held the underlying stock as a means to reduce his risk of loss in the event the purchaser of the call option exercised the option petitioner typically sold call options with a term between one and five months petitioner’s goal was for the options to expire thus the entire amount of the premium received would be a profit petitioner did not trade options on a daily basis due to the high commission costs associated with selling and purchasing call options if the options expired petitioner usually would continue to hold the in a call option transaction the seller of the call option promises to deliver to the purchaser of the call option a certain number of shares in the underlying stock at a certain price exercise price the purchaser must exercise his right to purchase the underlying stock by a certain date expiration date if the purchaser does not exercise the option then the option expires and the seller does not deliver the underlying stock as consideration for entering into the call option transaction the purchaser pays a premium to the seller the premium received by the seller is a certain amount of money per share of the underlying stock covered by the option agreement see 92_tc_101 for a general discussion of options underlying stock and sell additional call options with a new term if the options were exercised petitioner would deliver the underlying stock to the purchaser of the call option if petitioner felt it was no longer profitable to maintain an option position he would exit out of the position by purchasing a call option similar to the one he sold the record demonstrates that some of petitioner’s call options expired some were exercised by the purchaser of the option and some petitioner exited out of before the expiration date it is helpful to provide an example to illustrate petitioner’s strategy on date petitioner purchased big_number shares of stock in slm corp slm on date petitioner sold call options on big_number shares of slm stock with an expiration date of date the options expired on date on date petitioner sold call options with an expiration date of date and exited out of the position on date on date petitioner sold call options with an expiration date of date and exited out of the position on date on date thus petitioner’s liability to deliver the underlying stock from the call option he sold would be netted out by his right to purchase the underlying stock from the call option he purchased all of the call options sold in this discussion covered big_number shares of slm stock petitioner sold call options with an expiration date of date and exited out of the position on date on date petitioner sold call options with an expiration date of date and exited out of the position on march and on march and petitioner sold call options with an expiration date of date which expired on that date petitioner earned net_premiums of dollar_figure from selling these call options this amount was reported as a short-term_capital_gain during this period slm paid a dividend to shareholders on five occasions petitioner did not offer into evidence all of the account statements from his brokers for the years at issue however by multiplying the dividend paid per share of slm stock by the big_number shares he held we can determine that petitioner received approximately dollar_figure of dividends on date petitioner sold the big_number shares of slm stock giving him a long-term_capital_loss of dollar_figure as a result of employing this strategy petitioner could hold the underlying stock for a period of time that was much longer than the term of the individual call options during the years at issue petitioner held his stocks on average for this amount is reduced by the amounts paid to purchase call options to exit out of his positions for example the longest term for which petitioner maintained a call option continued days however petitioner held a significant number of stocks for well over a year and held some stocks for over four years as a result of holding the underlying stock petitioner received dividends of dollar_figure in dollar_figure in and dollar_figure in petitioner would monitor his portfolio to ensure that the number of shares covered by the call options was the exact number of shares that he held in the underlying stock he would also monitor the market price of the underlying stock because if it precipitously dropped he would sell the underlying stock and purchase a call option equivalent to the one he earlier sold to close out of his position although petitioner did not execute trades on every business_day he testified that he devoted every business_day to monitoring his portfolio as well as performing research to find new positions to take once his current positions were closed at different times throughout the years at issue petitioner had accounts with the following brokers brown co first alliance asset management inc and e trade securities the brokers allowed petitioner to use margin for his stock purchases the process of using margin entails the broker lending money to continued position on slm was for months however petitioner held the big_number shares of slm stock for months petitioner for him to purchase additional shares of stock petitioner testified that he usually used margin for his purchases of stock this meant that if he bought dollar_figure of stock with his money in the brokerage account he would borrow dollar_figure from the broker so he could purchase an additional dollar_figure of stock to give him a total purchase of dollar_figure of stock by using margin petitioner would double the number of shares of underlying stock that he could purchase which allowed him to double the number of call options he sold thereby doubling the amount of premiums he received the brokers would charge petitioner interest on the amount he borrowed the brokers charged petitioner interest of dollar_figure in dollar_figure in and dollar_figure in during the taxable_year petitioner executed trades on days during the taxable_year petitioner executed trades on days in date petitioner changed his trading strategy instead of purchasing stock and selling call options petitioner began purchasing and selling shares of the the term executed trade refers to either a purchase of stock sale of stock sale of a call option or purchase of a call option a call option that expires is not counted as an executed trade because an expired call option does not require the seller to enter into a transaction with a broker for example if petitioner purchased stock sold a call option that expired unexercised and subsequently sold the stock then petitioner would have executed three trades spdr s p etf trust during the taxable_year petitioner executed big_number trades on days for each of his and federal_income_tax returns petitioner attached two separate schedules c on the first schedule c petitioner listed as his principal business other financial investments activities financial schedule c and the other schedule c as consulting consulting schedule c petitioner reported the expenses associated with his trading activities on financial schedules c of his federal_income_tax returns for and petitioner reported expenses of dollar_figure for dollar_figure for and dollar_figure for the interest petitioner was charged for using margin was included in these amounts and comprised almost the entire balance the gains and losses from the sale of stocks and options were reported on schedules d capital_gains_and_losses to summarize petitioner reported the gains and losses from purchasing and selling the spdr s p etf trust is an exchange-traded fund that seeks to provide the investment results that generally correspond to the performance of the standard poor’s index shares of the spdr s p etf trust are sold on the new york stock exchange approximately of petitioner’s reported total expenses of dollar_figure on financial schedule c for consisted of interest he was charged for using margin dollar_figure the percentage was similar for the taxable_year and decreased to for the taxable_year stocks and options on schedules d but reported the expenses associated with this activity on financial schedules c petitioner reported dollar_figure of income on consulting schedules c for and dollar_figure of income for and petitioner testified that the income was from a noncompete agreement with duffy tool stamping and not for services provided as a consultant petitioner did not offer the noncompete agreement into evidence petitioners retained the services of a tax_return_preparer for their federal_income_tax returns for the years at issue on date respondent issued to petitioners a notice_of_deficiency for the years at issue petitioners filed a petition disputing the determinations in the notice_of_deficiency opinion the commissioner’s determinations in a notice_of_deficiency are generally presumed correct and the taxpayer bears the burden of proving that the determinations are in error rule a 290_us_111 trader or investor in general for federal tax purposes a person who purchases and sells securities falls into one of three distinct categories dealer trader or investor kay v commissioner tcmemo_2011_159 tax ct memo lexis at citing 89_tc_445 traders are engaged in the trade_or_business of selling securities for their own account kay v commissioner tax ct memo lexis at citing king v commissioner t c pincite a trader’s profits are derived through the very acts of trading -- direct management of purchasing and selling levin v united_states ct_cl see 889_f2d_29 2d cir aff’g tcmemo_1988_264 investors purchase and sell securities for their own account but they are not considered to be in the trade_or_business of selling securities see kay v commissioner tax ct memo lexis at arberg v commissioner tcmemo_2007_244 tax ct memo lexis at investors derive profit from the interest dividends and capital appreciation of securities estate of yaeger v commissioner f 2d pincite this court has held that taxpayers who purchase and sell options also fall into one of the three categories of dealer trader or investor see holsinger v commissioner tcmemo_2008_191 tax ct memo lexi sec_187 taxpayer who purchased and sold stocks and options was an investor see also 92_tc_101 taxpayer who purchased and sold options was a trader a trader’s expenses are deducted in determining adjusted_gross_income see kay v commissioner tax ct memo lexis at an investor’s expenses are deducted under sec_212 as itemized_deductions and deduction of investment_interest is limited by sec_163 see arberg v commissioner tax ct memo lexis at furthermore an investor’s expenses do not reduce alternative_minimum_taxable_income see mayer v commissioner tcmemo_1994_209 tax ct memo lexi sec_216 at as a result it is generally more favorable for a taxpayer to be classified as a trader rather than an investor petitioner argues that he is a trader respondent contends that petitioner is an investor neither party argues that petitioner is a dealer petitioner repeatedly cites topic traders in securities information for form_1040 filers a publication electronically published by the commissioner to support his argument that he is a trader we note that informal irs publications are not authoritative sources of federal tax law see zimmerman v commissioner 71_tc_367 aff’d without published opinion 614_f2d_1294 2d cir the code does not define the term trade_or_business for purposes of sec_162 see 480_us_23 mayer v commissioner tax ct memo lexi sec_216 at whether a taxpayer’s activities constitute a trade_or_business is a question of fact see 312_us_212 holsinger v commissioner tax ct memo lexi sec_187 at in determining whether a taxpayer is a trader nonexclusive factors to consider are the taxpayer’s intent the nature of the income to be derived from the activity and the frequency extent and regularity of the taxpayer’s transactions see 721_f2d_810 fed cir ball v commissioner tcmemo_2000_245 tax ct memo lexis at for a taxpayer to be a trader the trading activity must be substantial which means ‘frequent regular and continuous enough to constitute a trade or business’ ball v commissioner tax ct memo lexis at quoting hart v commissioner tcmemo_1997_11 tax ct memo lexis at a taxpayer’s activities constitute a trade_or_business where both of the following requirements are met the taxpayer’s trading is substantial and the taxpayer seeks to catch the swings in the daily market movements and to profit from these short-term changes rather than to profit from the long-term holding of investments see holsinger v commissioner tax ct memo lexi sec_187 at mayer v commissioner tax ct memo lexi sec_216 at trading was not substantial for a taxpayer to be a trader the trading activity must be substantial see ball v commissioner tax ct memo lexis at in determining whether a taxpayer’s trading activity is substantial the court considers the number of executed trades in a year the amount of money involved in those trades and the number of days that trades were executed see kay v commissioner tax ct memo lexis at holsinger v commissioner tax ct memo lexi sec_187 at petitioner executed trades during trades during and big_number trades during we have held that trading was not substantial when the number of executed trades exceeded the number of trades petitioner executed in and see kay v commissioner tax ct memo lexis at executed trades was not substantial holsinger v commissioner tax ct memo lexi sec_187 at executed trades was not substantial cameron v commissioner tcmemo_2007_260 tax ct memo lexi sec_265 at executed trades was not substantial we have held that trading is substantial when a taxpayer executed big_number trades in a year see mayer v commissioner tax ct memo lexi sec_216 at we find that the number of trades petitioner executed was not substantial for the and taxable years but was substantial for the taxable_year petitioner made purchases and sales of approximately dollar_figure million during dollar_figure million during and dollar_figure million during these amounts are considerable however managing a large amount of money is not conclusive as to whether petitioner’s trading activity amounted to a trade_or_business kay v commissioner tax ct memo lexis at citing moller f 2d pincite in the cases in which taxpayers have been held to be in the business of trading in securities for their own account the number of their transactions indicated that they were engaged in market transactions on an almost daily basis moller f 2d pincite see also chen v commissioner tcmemo_2004_ tax ct memo lexi sec_131 at traders are engaged in market transactions almost daily for a substantial and continuous period generally exceeding a single taxable_year in holsinger we held that executing trades on days was not frequent continuous or regular enough to constitute a trade_or_business see holsinger v commissioner tax ct memo lexi sec_187 at see also kay v commissioner tax ct memo lexis at trading on days was not frequent petitioner executed trades on days in days in and days in in none of the years at issue did petitioner execute trades on an almost daily basis or even every other day we note that during the months in the years at issue there were ten months in which petitioner executed three or fewer trades seven of these low frequency trading months occurred in one month occurred in and two months occurred in included in these ten months were two months in which petitioner executed only one trade this indicates that petitioner’s trading activity was not regular and continuous see paoli v commissioner tcmemo_1991_351 tax ct memo lexis at accordingly we find that the number of days petitioner executed trades was not frequent continuous or regular enough to constitute a trade_or_business we review the number of days a taxpayer executed trades because one of the requirements for trading to be substantial is that a taxpayer must purchase and sell securities with the frequency regularity and continuity to constitute a trade_or_business see kay v commissioner tax ct memo lexis at ball v commissioner tax ct memo lexis at we will refer to this as we use the term trading activity to refer to petitioner’s purchase and sale of options and stocks by using this term we do not imply that petitioner’s activity was that of a trader the frequency requirement petitioner argues that options are unique and different from stocks and that in determining if a taxpayer meets the frequency requirement the court should add the number of days that the taxpayer maintained an option position to the number of days that the taxpayer executed trades we decline to do so first while options are different from stocks they are similar in that both can be purchased and sold on a daily basis on exchanges petitioner testified that due to the high commission costs for options it was not profitable for him to purchase and sell options on a daily basis petitioner’s inability to profit from the frequent purchasing and selling of options is not a reason to relieve petitioner from the frequency requirement furthermore we note that petitioner’s proposed rule leads to the opposite result intended by the frequency requirement using petitioner’s rationale a taxpayer that closed out of an option position after maintaining it for one day would be treated as trading on one day a taxpayer that closed out of an option position maintained for days would be treated as trading on days the longer a taxpayer holds an option position the more it the period that petitioner maintained an option position begins with the date that the call option was sold and ends on the date that the option was exercised exited or expired resembles a long-term investment thus petitioner’s proposed rule would result in long-term option investors’ being classified as highly frequent option traders for the and taxable years we have found that the number of executed trades was not substantial and the number of days that petitioner executed trades did not evidence the frequency continuity and regularity to constitute a trade_or_business as a result petitioner’s trading was not substantial for the and taxable years for the taxable_year we have found that the number of executed trades was substantial however we have also found that the number of days petitioner executed trades did not evidence the frequency continuity and regularity necessary to constitute a trade_or_business accordingly petitioner’s trading was not substantial for the taxable_year swings in the daily market for a taxpayer to be a trader he must seek to catch the swings in the daily market movements and to profit from these short-term changes kay v commissioner tax ct memo lexis at citing mayer v commissioner tax ct memo lexi sec_216 at to determine if a taxpayer seeks to catch the swings in the daily market the court reviews the length of the holding periods of the securities see estate of yaeger v commissioner f 2d pincite mayer v commissioner tax ct memo lexi sec_216 at in holsinger v commissioner tax ct memo lexi sec_187 at we held that the taxpayer did not seek to catch the swings in the daily market because a significant amount of his stock was held for more than days similarly in kay v commissioner tax ct memo lexis at we held that the taxpayer was not a trader because most of his stocks were held for over days during the years at issue petitioner held his stocks on average for days with some stocks being held for over four years petitioner’s average holding_period of days demonstrates that he was not attempting to catch and profit from the swings in the daily market on his respective schedules d petitioner reported long-term_capital_losses of dollar_figure for dollar_figure for and dollar_figure for a loss from the sale of a capital_asset that is held for more than one year is reported as a long- term capital_loss see sec_1222 therefore petitioner’s substantial long-term_capital_losses are from stocks that he held for more than one year holding periods of one year belie any effort to capitalize on daily or short-term swings in the market mayer v commissioner tax ct memo lexi sec_216 at we we excluded the long-term_capital_loss carryover from these amounts so as to present the long-term_capital_loss attributable to petitioner’s trading activities for each year specifically note that for the taxable_year petitioner’s long-term_capital_loss from the sale of stocks held for more than one year exceeded his short-term_capital_loss from the sale of stocks held less than one year and from options maintained for less than one year petitioner argues that his primary goal was to profit from the sale of short- term options therefore the holding_period of his stocks is not indicative of his intention to catch and profit from the swings in the daily market as a result we construe petitioner’s argument to be that the court should not consider his average holding_period of stocks and presumably should consider only the average period that he maintained option positions we disagree for the following reasons first owning the underlying stock was an integral part of petitioner’s activity petitioner testified that selling call options without owning the underlying stock could expose him to unlimited losses as a result petitioner did not sell call options unless he owned the underlying stock second almost all of the expenses that petitioner incurred were interest charged for using margin to purchase stock it would make no sense to exclude stock from the average holding_period when the purchase of stock was the dominant cause of incurring expenses finally even if we were to consider only the average period in which petitioner as previously stated petitioner’s strategy changed in date maintained his option positions we would still come to the conclusion that petitioner was not seeking to catch the swings in the daily market the record demonstrates that petitioner usually maintained his option positions for a period between one and five months maintaining option positions for a period of between one and five months is not indicative of seeking to catch and profit from the swings in the daily market on the basis of petitioner’s average holding_period of his stocks and the periods he maintained option positions we find that petitioner was not seeking to catch and profit from the swings in the daily market dividend income petitioner received dividends of dollar_figure in dollar_figure in and dollar_figure in the dividends received by petitioner from his holdings of stock are in the nature of an investor activity see estate of yaeger v commissioner f 2d pincite investors derive profits from dividends liang v commissioner 23_tc_1040 other income generally a taxpayer engaged in a substantial trading activity will rely on that income as his or her sole or primary source_of_income see kay v commissioner tax ct memo lexis at paoli v commissioner tax ct memo lexis at on his respective consulting schedules c petitioner reported income of dollar_figure for the taxable_year and dollar_figure for the and taxable years whereas petitioner’s purchase and sale of stocks and options produced a net_loss for the and taxable years conclusion for the years at issue we find that petitioner’s trading activity was not substantial and he was not seeking to catch and profit from the swings in the daily market as a result petitioner’s trading activity did not constitute a trade_or_business see kay v commissioner tax ct memo lexis at accordingly we find that petitioner was an investor and not a trader for the years at issue this conclusion is buttressed by the substantial amount of dividend and other income petitioner received during the years at issue petitioners claimed investment_expenses on financial schedules c of dollar_figure dollar_figure and dollar_figure for the taxable years and respectively as a result of finding that petitioner was an investor for the years at issue the investment_expenses that petitioner claimed on financial schedules c for the years at issue are disallowed in full as schedule c expenses accuracy-related_penalty sec_6662 and b imposes a accuracy-related_penalty on any portion of an underpayment attributable to a substantial_understatement_of_income_tax sec_7491 provides that the commissioner bears the burden of production with regard to penalties and must come forward with sufficient evidence indicating that it is appropriate to impose the penalty see 116_tc_438 once the commissioner meets his burden of production however the burden_of_proof remains with the taxpayer including the burden of proving that the penalty is inappropriate because of reasonable_cause under sec_6664 see rule a higbee v commissioner t c pincite for individuals there is a substantial_understatement_of_income_tax for any taxable_year if the amount of the understatement for the taxable_year exceeds the greater of of the tax required to be shown on the return for the taxable_year or dollar_figure sec_6662 petitioners’ federal_income_tax returns for the years at issue reported zero taxable_income and therefore zero tax owed petitioners’ deficiencies in income_tax are dollar_figure dollar_figure and dollar_figure for the taxable years and respectively the understatements of income_tax on petitioners’ joint federal_income_tax returns for the years at issue are substantial consequently we conclude that respondent has met his burden of production with respect to petitioners’ substantial understatements of income_tax reasonable_cause sec_6664 provides that the penalty under sec_6662 shall not apply to any portion of an underpayment if it is shown that there was reasonable_cause for the taxpayer’s position and that the taxpayer acted in good_faith with respect to that portion see higbee v commissioner t c pincite the determination of whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all the pertinent facts and circumstances sec_1_6664-4 income_tax regs petitioners have the burden of proving that the penalty is inappropriate because of reasonable_cause under sec_6664 see rule a higbee v commissioner t c pincite- reasonable_cause requires that the taxpayer have exercised ordinary business care and prudence as to the disputed item 115_tc_43 aff’d 299_f3d_221 3d cir the good-faith reliance on the advice of an independent competent professional as to the tax treatment of an item may meet this requirement id citing 469_us_241 sec_1_6664-4 income_tax regs whether a taxpayer relies on the advice and whether such reliance is reasonable hinge on the facts and circumstances of the case and the law that applies to those facts and circumstances neonatology assocs p a v commissioner t c pincite sec_1_6664-4 income_tax regs for reliance to be reasonable the taxpayer must prove by a preponderance_of_the_evidence that the taxpayer meets each requirement of the following three-prong test the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment neonatology assocs p a v commissioner t c pincite petitioners’ federal_income_tax returns for the years at issue were prepared by a tax_return_preparer petitioners did not call the tax_return_preparer as a witness furthermore petitioners did not establish that the tax_return_preparer was a competent professional with sufficient expertise to justify reliance as a result petitioners have not proven reasonable_cause by good-faith reliance on the advice of a professional substantial_authority the amount of an understatement is reduced by that portion of the understatement which is attributable to the tax treatment of any item by the taxpayer if there is or was substantial_authority for such treatment sec_6662 in evaluating whether a taxpayer’s position regarding treatment of a particular item is supported by substantial_authority the weight of authorities in support of the taxpayer’s position must be substantial in relation to the weight of authorities supporting contrary positions 91_tc_686 aff’d 893_f2d_656 4th cir see also sec_1 d i income_tax regs the substantial_authority standard is objective and therefore it is not relevant in determining whether the taxpayer believed substantial_authority existed sec_1_6662-4 income_tax regs as discussed earlier the weight of authorities clearly supports the conclusion that petitioner’s trading activity was that of an investor not a trader furthermore in kay v commissioner tax ct memo lexis at we held that the sec_6662 accuracy-related_penalty was appropriate for a taxpayer whose trading activity was similar to that of petitioner to reach his conclusion that he is a trader petitioner asks the court to create a novel exception to the established rules articulated in prior cases for taxpayers who purchase and sell options petitioner’s proposed exception departs from prior caselaw and we declined to adopt it we therefore conclude that there was not substantial_authority supporting petitioner’s position that he was a trader accordingly we hold that petitioners are liable for the accuracy-related_penalties under sec_6662 for their underpayments of tax for the years at issue conclusion we have held that petitioner was not a trader during the years at issue therefore the expenses claimed on petitioners’ financial schedules c for the years at issue are disallowed in full as schedule c expenses as a result the adjustments to petitioners’ federal_income_tax returns for the years at issue described supra pp are necessary petitioners are also liable for the sec_6662 accuracy-related_penalty for the years at issue in reaching our decision we have considered all arguments made by the parties to the extent not mentioned or addressed they are irrelevant or without merit to reflect the foregoing decision will be entered for respondent


t c memo united_states tax_court leif d rozin petitioner v commissioner of internal revenue respondent docket no filed date henry louis sirkin for petitioner gary r shuler jr for respondent memorandum opinion goeke judge the parties agree that there is a deficiency in income_tax of dollar_figure and a penalty pursuant to section of dollar_figure for tax_year 1unless otherwise indicated section references are to the internal_revenue_code applicable at all relevant times rule references are to the tax_court rules_of_practice and procedure all monetary amounts are rounded to the nearest continued the only question for decision is whether the deficiency and penalty are reduced before assessment by petitioner’s remittances of dollar_figure and dollar_figure made on date and date respectively background the parties submitted this case fully stipulated under rule the stipulation of facts and the facts drawn from stipulated exhibits are incorporated herein at the time the petition was filed petitioner resided in florida on date petitioner filed form_1040 u s individual_income_tax_return return reporting tax owed of dollar_figure for tax_year petitioner made total payments of dollar_figure for tax_year on date the internal_revenue_service irs issued petitioner a refund of dollar_figure as petitioner had overpaid the tax_liability reported on his return the irs has not made any additional civil tax_assessment for petitioner’s tax_year criminal proceeding on date after a criminal trial in the u s district_court for the southern district of ohio a jury found petitioner guilty of subscribing a false tax continued dollar return under sec_7206 attempting to evade taxes under sec_7201 and conspiracy to defraud the government in violation of u s c sec_371 by letter dated date petitioner made a payment of dollar_figure to the department of the treasury the payment was calculated by the u s probation department as the tax loss for in united_states v rozin no cr-000139 sjd-1 s d ohio on date the u s court_of_appeals for the sixth circuit affirmed the judgment of the district_court and upheld the convictions under sec_7206 and sec_7201 and u s c sec_371 664_f3d_1052 6th cir on date the district_court entered judgment ordering petitioner to pay dollar_figure in restitution to the irs the judgment document stated as of the date of this judgment petitioner has paid dollar_figure leaving a balance of dollar_figure on date petitioner made a payment of dollar_figure to the department of treasury internal_revenue_service attn ms restitution petitioner’s two restitution payments made to the department of the treasury totaled dollar_figure petitioner and his co-defendants made restitution payments that fully paid the restitution ordered by the district_court on date the government filed a satisfaction of criminal judgment with the district_court and released the lien arising from the restitution order filed against petitioner examination at the time the restitution payments were received the irs’ books_and_records reflected that petitioner did not have a balance due for tax_year respondent did not issue an examination_report to petitioner until date over a year after the restitution payments were received on date respondent mailed a notice_of_deficiency notice to petitioner in the notice respondent determined a deficiency on the basis of flowthrough adjustments to an s_corporation return for which petitioner was a shareholder wherein income of the s_corporation was underreported respondent determined that petitioner was liable for a resulting deficiency in income_tax of dollar_figure and a penalty under sec_6663 of dollar_figure petitioner has not executed a form 4089-b notice of deficiency--waiver for tax_year on date petitioner timely filed a petition with this court for redetermination respondent has not assessed the deficiency and sec_6663 penalty for tax_year respondent has not yet applied the restitution payments against petitioner’s income_tax_liability and sec_6663 penalty for tax_year discussion the parties agree that there is a deficiency of dollar_figure and a sec_6663 penalty of dollar_figure for tax_year the parties however disagree about the treatment and characterization of petitioner’s restitution payments this dispute boils down to an issue of timing petitioner requests that we treat the restitution payments as payment in satisfaction of his deficiency and sec_6663 penalty for tax_year respondent however is statutorily prohibited from crediting petitioner’s account until the deficiency and the sec_6663 penalty are assessed see sec_6201 sec_6213 b see also schwartz v commissioner tcmemo_2016_144 our jurisdiction in a deficiency case is predicated on the commissioner’s issuing a valid notice_of_deficiency and the taxpayer’s timely filing a petition with this court challenging the notice sec_6212 sec_6213 sec_7442 rules see eg 73_tc_902 respondent is unable to reduce his deficiency and sec_6663 penalty determinations before assessment by amounts of restitution previously ordered by the district_court and remitted by petitioner although restitution is based upon an estimate of civil tax_liability it is not determinative of civil tax_liability see 419_f3d_829 8th cir aff’g t c memo 183_f3d_535 6th cir aff’g tcmemo_1997_566 the restitution statute specifically contemplates that a civil claim may be brought after the criminal prosecution by providing that the amount_paid under a restitution order shall be reduced by any amount later recovered as compensatory_damages for the same loss by the victim in any federal civil_proceeding u s c sec j furthermore any amount_paid to the irs as restitution for taxes owed must be deducted from any civil judgment the irs obtains to collect the same tax_deficiency see 217_f3d_960 8th cir 941_f2d_71 2d cir it follows that until a civil judgment is entered the irs is unable to reduce a taxpayer’s liability by restitution paid see schwartz v commissioner tcmemo_2016_144 at petitioner relies upon 419_f3d_1135 11th cir in support of his contention that his civil tax_liabilities have been extinguished by the restitution paid petitioner’s reliance on creel however is misplaced in creel the taxpayer was not contesting the assessment of tax and penalties but rather challenging the irs’ collection actions post assessment of civil tax_liabilities in excess of restitution ordered respondent is not attempting to collect additional_amounts he is merely attempting to officially record the fact and amount of petitioner’s administratively determined tax_liability or rather to make an assessment a deficiency must first exist before restitution remittances for taxes owed can be applied to reduce that deficiency in other words the restitution assessment which is assessed as if it were a tax cannot offset a tax_assessment until a tax_assessment of the deficiency has been made the amount of a deficiency turns not on what payments have been applied to an account but rather on what assessments have been made with respect to that account longino v commissioner tcmemo_2013_80 at aff’d 593_fedappx_965 11th cir see sec_301_6211-1 proced admin regs payments on account of estimated income_tax like other_payments of tax by the taxpayer shall likewise be disregarded in the determination_of_a_deficiency see also burke v commissioner tcmemo_2009_282 slip op pincite ndollar_figure o nce the tax actually due has all been assessed there is no more deficiency--whether or not the tax due has been paid mackey v commissioner tcmemo_2004_70 slip op pincite holding that remittances made before issuance of notice_of_deficiency without corresponding assessments did not affect amount of deficiency hillenbrand v commissioner tcmemo_2002_303 slip op pincite payments are not included in determining or redetermining a deficiency simply because they do not fit within the definition of a deficiency the irs is authorized to make various types of assessments sec_6201 the most common types are summary assessments which can be immediately assessed and deficiency assessments a deficiency assessment requires the irs to follow a number of statutory steps before it may undertake to collect the deficiency 24_f3d_901 7th cir sec_6212 provides that if the secretary determines that there is a deficiency he is authorized to send a notice of the deficiency to the taxpayer the irs generally cannot assess a deficiency unless a notice_of_deficiency has been issued see sec_6213 as income_tax is subject_to the deficiency procedures an assessment generally cannot be made until the taxpayer waives the restrictions prohibiting assessment the 90-day or 150-day period expires following the issuance of a notice_of_deficiency or if the taxpayer timely files a petition with this court the court’s decision becomes final sec_6213 sec_301_6213-1 proced admin regs deficiency procedures apply to amounts attributable to a deficiency sec_6211 defines a deficiency as follows sec_6211 in general --for purposes of this title in the case of income estate_and_gift_taxes imposed by subtitles a and b and excise_taxes imposed by chapter sec_41 sec_42 sec_43 and sec_44 the term deficiency means the amount by which the tax imposed by subtitle a or b or chapter or exceeds the excess of-- the sum of a the amount shown as the tax by the taxpayer upon his return if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon plus b the amounts previously assessed or collected without assessment as a deficiency over-- the amount of rebates as defined in subsection b made in other words a deficiency is the correct_tax minus the tax_shown_on_the_return minus prior deficiency assessments plus rebates petitioner contends that respondent erred in calculating the tax due and owing to the irs because the n otice does not account for p etitioner’s payments of dollar_figure and dollar_figure on date and date respectively this argument however assumes that respondent was required to give petitioner credit for the restitution payments pursuant to sec_6211 petitioner’s restitution payments were not shown as the tax on his return petitioner reported tax owed of dollar_figure on his return made total payments of dollar_figure and was issued a refund for the difference the irs has since made no additional civil tax assessments for petitioner’s tax_year accordingly petitioner’s restitution payments do not discharge or reduce his deficiency and sec_6663 penalty determinations under sec_6211 although petitioner’s restitution payments were previously assessed they were not assessed as a deficiency rather they were summarily assessed sec_6213 provides that regular deficiency procedures do not apply to amounts of restitution assessments a restitution order under u s c sec is a criminal_penalty and even if computed by reference to civil tax_liability is not a final_determination of civil tax_liability in re jara no 14-80057-g3-13 wl at bankr s d tex a restitution order is a lien in favor of the united_states on all property and rights to property of the person fined as if the liability of the person fined were a liability for a tax assessed under the internal_revenue_code u s c sec c the irs is instructed to assess and collect restitution for failure to pay any_tax in the same manner as if such amount were such tax sec_6201 emphasis added the irs is permitted 2that is assessed before our decision see 135_tc_238 n 3this section applies for restitution orders entered after date continued to immediately assess without issuing a statutory_notice_of_deficiency and collect as if it were a tax the restitution ordered see sec_6201 sec_6213 accordingly restitution ordered is assessed separately from a taxpayer’s tax_liability and does not provide a basis on which a tax may be assessed thus petitioner’s restitution payments are not included as amounts previously assessed as a deficiency and respondent was not permitted to reduce his determination by those payments under sec_6211 see also weber v commissioner tcmemo_1995_125 wl at because restitution does not fit within the definition of a deficiency under sec_6211 restitution payments made do not reduce or discharge a deficiency determination before the deficiency is assessed by failing to waive restrictions on assessment and filing a petition in this court petitioner has effectively prevented respondent from doing exactly what he is requesting respondent to do--reduce the amount due by amounts remitted before petitioner received the notice see sec_6213 after the amount of petitioner’ sec_3 continued firearms excise_tax improvement act of pub_l_no sec_3 stat pincite the restitution order in petitioner’s district_court case was issued on date restitution order was summarily assessed respondent determined an income_tax deficiency for petitioner’s tax_year upon making that determination respondent was statutorily obligated to send petitioner a notice_of_deficiency before assessing the deficiency and the sec_6663 penalty see sec_6212 respondent has stipulated that following entry of a final_decision in this proceeding he will assess the income_tax deficiency of dollar_figure the penalty pursuant to sec_6663 of dollar_figure and interest as provided by law for tax_year and respondent will credit petitioner’s account with the restitution payments as of the date of those payments against those civil tax assessments to reflect the foregoing 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 b02-plr-133879-02 date date x state date date date year year year year dollar_figurea dollar_figureb dear this letter responds to a letter dated date together with subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code plr-133879-02 facts x was incorporated under state law on date and elected to be treated as an s_corporation for its taxable_year beginning date in the consecutive taxable years of year year and year x received passive_investment_income within the meaning of sec_1362 in excess of of its gross_receipts furthermore x had accumulated_earnings_and_profits remaining in each of these years which amounted to dollar_figurea at the close of year as a result x’s s election terminated on date x represents that it filed its federal_income_tax return as a c_corporation for year and requested this ruling soon after discovering that its s election terminated x represents that the termination of its s election was inadvertent and not the result of tax_avoidance or retroactive tax planning x and its sole shareholder agree to make any adjustments consistent with the treatment of x as an s_corporation that may be required by the secretary law and analysis sec_1361 defines an s_corporation with respect to any taxable_year as a small_business_corporation for which an s election under sec_1362 is in effect for such year sec_1362 provides that an election under sec_1362 shall be terminated whenever the corporation has accumulated_earnings_and_profits at the close of each of three consecutive taxable years and has gross_receipts for each of the taxable years more than of which are passive_investment_income the termination is effective on and after the first date of the first tax_year beginning after the third consecutive tax_year referred to in sec_1362 sec_1362 except as otherwise provided in sec_1362 sec_1362 provides that the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities sec_1362 provides in relevant part that if an election under sec_1362 by any corporation was terminated under paragraph sec_1362 the secretary determines that the circumstances resulting in the termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder in the corporation at any time during the period specified pursuant to this subsection agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the termination the corporation shall be treated as an s_corporation during the period specified by the secretary plr-133879-02 sec_1368 provides rules for determining the source of distributions made by an s_corporation having accumulated_earnings_and_profits with respect to its stock sec_1368 and sec_1_1368-1 provide that an s_corporation may with the consent of all of its affected_shareholders elect to distribute earnings_and_profits first sec_1_1368-1 provides that an s_corporation may elect to distribute all or part of its accumulated_earnings_and_profits through a deemed_dividend if an s_corporation makes the election provided in sec_1_1368-1 the s_corporation will be considered to have made the election under sec_1368 and sec_1_1368-1 to distribute earnings_and_profits first sec_1375 imposes a tax on the income of an s_corporation that has accumulated_earnings_and_profits at the close of a taxable_year and that has gross_receipts more than percent of which are passive_investment_income within the meaning of sec_1362 conclusions based solely on the representations made and the information submitted we conclude that x’s s election terminated on date under sec_1362 because x had accumulated_earnings_and_profits at the close of each of three consecutive tax years beginning year and had gross_receipts for each of those tax years more than of which were passive_investment_income we further conclude that the termination of x’s s election was inadvertent within the meaning of sec_1362 pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation beginning on date and thereafter unless x’s s election is otherwise terminated under sec_1362 provided that the following conditions are met within days from the date of this letter x shall file an amended_return for the year taxable_year electing pursuant to sec_1_1368-1 to make a deemed_dividend distribution of dollar_figurea also within days x’s sole shareholder will amend his respective year income_tax return to reflect the changes made to x’s year return no amendments shall be made to x’s year and year income_tax returns with respect to the tax imposed pursuant to sec_1375 however as an adjustment under sec_1362 x must send a payment of dollar_figureb with a copy of this letter to the following address internal_revenue_service philadelphia service_center attn accounting branch philadelphia pa x must send this payment no later than days from the date of this letter if all of the above conditions are not met then this ruling is null and void furthermore if these conditions are not met x must notify the ogden service_center that the election has terminated plr-133879-02 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x’s s_corporation_election was a valid election under sec_1362 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 pursuant to the power_of_attorney on file with this office a copy of this ruling is being sent to your authorized representative sincerely matthew lay acting chief branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


qwhuqdo 5hyhqxh 6huylfh department of the treasury number release date index no washington dc person to contact donna m crisalli id no 50-18843r telephone number refer reply to cc ita - plr-119780-01 date date in re legend taxpayer settling parties managing settling party state state_agency plr-119780-01 date date date dear this letter responds to your letter dated date requesting on behalf of taxpayer an extension of time under sec_301_9100-3 of the procedure and administration regulations to make a relation-back election under sec_1_468b-1 of the income_tax regulations the taxpayers identified in the legend as settling parties are interested parties in that they are persons who may claim deductions for transfers to the escrow account that is the subject of the ruling_request facts state_agency alleged that certain of settling parties violated environmental laws relating to waste disposal at a property in state and were responsible for environmental remediation as a result settling parties entered into an escrow agreement effective on date with taxpayer to fund the remediation several of settling parties transferred funds to taxpayer as an escrow agent to hold in an escrow account and to administer disburse and distribute under the escrow agreement the escrow account was established under the law of state and was intended to be a qualified_settlement_fund qsf in accordance with sec_1_468b-1 to 468b-5 on date state_agency entered into an agreement with settling parties to provide for the environmental remediation in which state_agency approved the escrow account taxpayer relied on managing settling party to arrange for preparation of the escrow account tax returns due to a series of miscommunications the tax accountant selected by managing settling party to prepare the tax_return for the escrow account decided that the escrow account is not a qsf and that it should file form_1041 instead of form 1120-sf on date managing settling party delivered documents including a relation-back election to the tax accountant that indicated that the escrow account is a qsf taxpayer had received extensions of time to file form_1041 and the escrow account's tax_return had not yet been filed the following month the tax accountant reviewed the documents and determined that the escrow account is a qsf and should file form 1120-sf the tax accountant prepared both form sec_1041 and 1120-sf attached plr-119780-01 election statements under sec_1_468b-1 to both forms and filed them with the service on date date was within the extended time for taxpayer to file form_1041 ruling requested taxpayer requests a ruling that it acted reasonably and in good_faith and that granting an extension of time to make the relation-back election will not prejudice the interests of the government an extension of time to make the relation-back election is granted and the election made on form 1120-sf on date is timely conclusion taxpayer acted reasonably and in good_faith and granting taxpayer an extension of time to make the relation-back election will not prejudice the interests of the government an extension of time to make the relation-back election is granted and the election taxpayer made on form 1120-sf on date is timely law and analysis sec_1_468b-1 provides in general that a fund account or trust is a qualified_settlement_fund if it satisfies each of the following three requirements it is established pursuant to an order of or is approved by specified governmental entities including courts and is subject_to the continuing jurisdiction of that entity it is established to resolve or satisfy one or more claims that have resulted or may result from an event that has occurred and that has given rise to at least one claim asserting certain liabilities and the fund account or trust is a_trust under applicable state law or its assets are otherwise segregated from other assets of the transferor and related_persons sec_1_468b-1 provides in part that a fund account or trust is not treated as the owner of assets of the fund account or trust until all three of the requirements of sec_1_468b-1 are met prior to that time the transferor is treated as the owner of those assets the relation-back rule_of sec_1 j i provides that if a fund account or trust meets the requirements of paragraphs c and c of sec_1_468b-1 prior to the time it meets the requirements of paragraph c the transferor and the administrator may jointly elect a relation-back election to treat the fund account or trust as coming into existence as a qualified_settlement_fund on the later of the date the fund account or trust meets the requirements of paragraphs c and c or plr-119780-01 january of the calendar_year in which all of the requirements of paragraph c are met if a relation-back election is made the assets held by the fund account or trust on the date the qualified_settlement_fund is treated as coming into existence are treated as transferred to the qualified_settlement_fund on that date sec_1_468b-1 states that a relation-back election is made by attaching a copy of the election statement signed by each transferor and the administrator to and as part of the timely filed income_tax return including extensions of the qualified_settlement_fund for the taxable_year in which the fund is treated as coming into existence sec_1_468b-2 states that the federal_income_tax return of a qualified_settlement_fund must be filed on or before march of the year following the close of the taxable_year of the qualified_settlement_fund unless the fund is granted an extension of time for filing under sec_6081 sec_301_9100-1 provides in part that the commissioner has discretion to grant a reasonable extension of time 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_9100-1 defines the term regulatory election as including an election the due_date of which is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-3 provides that requests for extensions of time for regulatory elections other than automatic extensions covered in sec_301_9100-2 will be granted when the taxpayer provides evidence including affidavits to establish that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government under b a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer -- i requests relief before the failure to make the regulatory election is discovered by the 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 the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or plr-119780-01 v reasonably relied an a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election under sec_301_9100-3 a taxpayer will be considered to not 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 fully informed 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 original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief sec_301_9100-3 provides that the interests of the government will be prejudiced if as a result of granting relief-- i the taxpayer's aggregate tax_liability for all affected years will be lower than it would have been if the election had been timely made taking into account the time_value_of_money or if the tax consequences of more than one taxpayer are affected by the election extending the time for making the election may result in the affected taxpayers in the aggregate having a lower tax_liability than if the election had been timely made or ii tax years that would have been affected by the election had it been timely made are closed by the statute_of_limitations before the taxpayer's receipt of a ruling granting relief under this section accordingly although taxpayer did not file the relation-back election by the original due_date of its return and did not obtain extensions of time to file form 1120-sf under the facts presented we conclude that taxpayer acted reasonably and in good_faith none of the circumstances delineated in sec_301_9100-3 are present in this case granting taxpayer an extension of time to make the relation-back election will not prejudice the interests of the government holding plr-119780-01 taxpayer is granted an extension of time to make an relation-back election for the escrow account the election taxpayer made on form 1120-sf on date is timely however we express no opinion on whether the escrow account is a qualified_settlement_fund under sec_1_468b-1 through 468b-4 caveats a copy of this letter must be attached to any income_tax return to which it is relevant we enclose a copy of the letter for this purpose also 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 of the internal_revenue_code except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent sincerely associate chief_counsel income_tax accounting by robert a berkovsky chief branch