t c memo united_states tax_court william f poppe petitioner v commissioner of internal revenue respondent docket no filed date kamelia k poppe for petitioner jane j kim for respondent memorandum findings_of_fact and opinion laro judge petitioner petitioned the court to redetermine respondent’s determination_of_a_deficiency in his federal_income_tax for the tax_year and additions thereto under sec_6651 and and unless otherwise indicated section references are to the internal revenue continued on date the parties filed a stipulation of settled issues which resolved most issues raised in the notice_of_deficiency issued on date respondent conceded that there is no issue of previously unreported dividend or interest_income before the court the remaining issues before the court are as follows whether petitioner is entitled to use the mark-to-market accounting_method under sec_475 for the tax_year to report his securities and trading activity on the basis of an election petitioner purportedly made on date we hold he is not whether petitioner is liable for additions to tax under sec_6651 and and where he claims he failed to file his federal_income_tax returns continued code code applicable to the relevant years and rule references are to the tax_court rules_of_practice and procedure dollar amounts are rounded to the nearest dollar specifically the parties stipulated that for tax_year petitioner’s adjusted_gross_income should not be increased by dollar_figure in ira_distributions and petitioner’s tax is not increased by of a premature_distribution petitioner is entitled to a capital_loss deduction of dollar_figure petitioner received dollar_figure of taxable interest and dollar_figure of tax-exempt_interest petitioner received dollar_figure of ordinary dividends and dollar_figure of qualified dividends petitioner received dollar_figure in nonemployee compensation from z seven fund c o gemini fund services llc petitioner is entitled to a withholding credit of dollar_figure and petitioner is entitled to a standard_deduction for one individual of dollar_figure timely because he suffered from an autistic spectrum disorder asd previously known as asperger’s syndrome we hold he is findings_of_fact the facts set forth below are based on the pleadings and other pertinent materials of the record some of the facts have been stipulated the stipulations of fact and the facts drawn from stipulated exhibits are incorporated herein and we find those facts accordingly petitioner resided in new york when the petition was timely filed on date absent a stipulation to the contrary an appeal of this case would lie in the court_of_appeals for the second circuit petitioner graduated from the u s merchant marine academy in with a double major in marine engineering and nautical science and received a third assistant engineer’s license and a third mate’s license from the u s coast guard petitioner worked as a stock broker from to and was a registered and licensed securities representative in petitioner received a master’s degree in computer science from hofstra university from to petitioner worked as a high school mathematics teacher in new york city to help support himself and his family from through petitioner conducted trades through a personal trading account with fidelity investments fidelity petitioner used his personal funds for trading during the school year petitioner traded every day during the two free school periods and devoted substantial time--four to five hours a day--to researching his trades petitioner testified that some of his trades were short-term trades for options with monthly expiration and some of the trades were stocks although petitioner occasionally received dividends on stocks he traded those dividends were incidental petitioner claims his intent was to make short-term trading profits petitioner testified he executed about trades per month in on the advice of his accountant petitioner intended to file a sec_475 mark-to-market_election petitioner however did not retain a signed copy of any election or any evidence of mailing it petitioner filed his federal_income_tax return for the tax_year on date the tax_return contained a statement that petitioner had made an election pursuant to sec_475 but did not have a copy of form_3115 application_for change in accounting_method attached to it out of the dollar_figure gross_income reported on the tax_return dollar_figure came from wages dollar_figure from interest dollar_figure from dividends received dollar_figure from capital_gains and dollar_figure from business income from the fidelity account had approximately dollar_figure million in personal funds but petitioner confirmed he rarely used all of that money for trading a portion of the account was just earning interest securities trading reported on schedule c profit or loss from business petitioner indicated on the tax_return that his occupation for was teacher beginning in date petitioner became a full-time trader associated with madison proprietary trading group llc mptg mptg provided petitioner with access to a goldman sachs execution and clearing gsec account and an office space to conduct his trades during petitioner traded daily on business days excluding two business days in date petitioner had over trades per month excluding date for which he had a total of the year gsec statements show that petitioner’s totals for were dollar_figure in securities purchased and dollar_figure in securities sold with p l bookings by cusip as of date showing a loss of dollar_figure the parties stipulated that all transactions and capital in the gsec account belonged to petitioner petitioner was deemed a class b member of mptg according to the side letter issued to petitioner sometime in date the parties stipulated that p l bookings by cusip is the yearend calculation showing realized and unrealized gains and losses it is standard for goldman sachs account statements and is used to clear or reset the account for the new year in respondent prepared and filed a substitute for petitioner’s federal_income_tax return and on date issued a notice_of_deficiency which forms the basis of this case on date petitioner filed a tax_return petitioner also subsequently submitted an amended tax_return with a signature date of date on the tax_return petitioner reported a loss of dollar_figure on a schedule_k-1 partner’s share of income deductions credits etc allegedly filed on his behalf by mptg the schedule_k-1 was attached to the tax_return respondent cross-checked mptg’s tax_year form_1065 u s return of partnership income which included schedules k-1 for its partners mptg’s return did not include a schedule_k-1 for petitioner respondent also checked the tax_year form_1065 for mt trading llc a second-tier_partnership of mptg and it also had no schedule_k-1 for petitioner in the amended tax_return petitioner corrected amounts of short-term and long-term_capital_gains and losses and included a statement to the effect that under sec_475 he is entitled to the mark-to-market accounting_method and plans to carry forward the losses_incurred in at all relevant times petitioner suffered from an asd previously known as asperger’s syndrome until petitioner filed his tax returns timely with the assistance of his wife in and petitioner retained a certified_public_accountant to assist him with tax matters petitioner understood he had a duty to file tax returns but claims that in he was despondent because of the losses he suffered and could not organize himself to file a tax_return timely opinion i eligibility for the mark-to-market treatment of the loss a background petitioner claims that in he made an election under sec_475 allowing him to use the mark-to-market method_of_accounting and so a loss he sustained in should be treated as a net_operating_loss this treatment would allow petitioner to shield from taxation some prior and future trading gains respondent argues that the trading loss is not entitled to the mark-to-market treatment because petitioner failed to meet the requirements for a valid election under sec_475 in general sec_475 provides that a taxpayer engaged in a trade_or_business as a trader in securities may elect to apply the mark-to-market method_of_accounting to securities held in connection with such trade_or_business the mark- to-market method allows a trader in securities to recognize gain_or_loss on any security held in connection with the trade_or_business at the close of the taxable year as if the security were sold for its fair_market_value at the end of the year sec_475 knish v commissioner tcmemo_2006_268 chen v commissioner tcmemo_2004_132 the gains or losses attributable to the securities covered by the mark-to- market provisions are treated as ordinary_income or loss see sec_475 d if a taxpayer is entitled to make and timely makes an election under sec_475 any net_loss from the business of trading in securities will be an ordinary_loss deductible in full under sec_165 if the election is not made any net_loss is deductible only to the extent of any capital_gains plus dollar_figure see sec_165 c f b revproc_99_17 1999_1_cb_503 provides a procedure for making an election under sec_475 once the election is made use of the mark-to-market method continues for all subsequent taxable years unless the election is revoked with the consent of the commissioner revproc_99_17 sec_4 c b pincite b burden_of_proof petitioner argues that the burden_of_proof should be shifted to respondent under sec_7491 because petitioner produced credible_evidence and satisfied the requirements of sec_7491 with respect to the issue of whether petitioner is entitled to use the mark-to-market accounting_method for his trading loss generally the commissioner’s determinations are presumed correct and the taxpayer bears the burden of proving that those determinations are erroneous rule a 290_us_111 under sec_7491 the burden_of_proof shifts to the commissioner subject_to certain limitations where a taxpayer introduces credible_evidence with respect to a factual issue relevant to ascertaining the taxpayer’s tax_liability if the taxpayer introduces credible_evidence regarding the issue see ashley v commissioner tcmemo_2000_376 sec_7491 applies with respect to a factual issue only if the requirements of sec_7491 are satisfied sec_7491 requires that a taxpayer maintain all records required by the code and cooperate with reasonable requests by the secretary for witnesses information documents meetings and interviews petitioner raised the issue of eligibility of the loss for the mark-to- market treatment in his amended petition filed after the trial petitioner cooperated with respondent to resolve the issues raised in the notice_of_deficiency however he filed his tax_return many years after it was due and did not retain the records relating to the alleged mark-to-market_election respondent argues that when the only evidence available to the court is petitioner’s self-serving testimony that evidence does not meet the credibility standard set out in sec_7491 we agree with respondent because petitioner failed to keep adequate_records and did not file a tax_return until after the notice_of_deficiency was issued to him the burden_of_proof is on petitioner with respect to eligibility the effectiveness of the mark-to-market_election and the loss treatment c petitioner’s entitlement to make a mark-to-market_election in the first issue we consider to determine whether petitioner is entitled to use the mark-to-market accounting_method in is whether petitioner was entitled to make a mark-to-market_election in sec_475 identifies being a trader in securities as a prerequisite to filing the mark-to-market_election the code does not define the term trade_or_business 480_us_23 889_f2d_29 2d cir aff’g in part rev’g and remanding in part tcmemo_1988_ whether a taxpayer’s securities activities during the years in issue constituted a trade_or_business is a question of fact 312_us_212 estate of yaeger v commissioner f 2d pincite paoli v commissioner tcmemo_1991_351 in determining whether a taxpayer in a securities activity is engaged in a trade_or_business courts have distinguished between traders who are in a trade_or_business and investors who are not mayer v commissioner tcmemo_1994_209 citing 721_f2d_810 fed cir management of securities investments whatever the extent and scope of such activity is seen as the work of a mere investor not the trade_or_business of a trader id quoting estate of yaeger v commissioner f 2d pincite see also 373_us_193 higgins v commissioner u s pincite paoli v commissioner tcmemo_1991_351 this result is the same notwithstanding the amount of time the individual devotes to the activity mayer v commissioner tcmemo_1994_209 even full-time market activity in managing and preserving one’s own estate is not embraced within the phrase ‘carrying on a business ’ and salaries and other expenses incident to the operation are not deductible as having been paid_or_incurred in a trade_or_business commissioner v groetzinger u s pincite mayer v commissioner tcmemo_1994_209 instead an investor’s expenses are deductible under sec_212 as incurred in the production_of_income in determining whether a taxpayer who manages his own investments is a trader nonexclusive factors to consider are the taxpayer’s investment intent the nature of the income to be derived from the activity and the frequency extent and regularity of the taxpayer’s securities transactions moller f 2d pincite thus a taxpayer’s activities constitute the trade_or_business of trading only where both of the following are true 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 mayer v commissioner tcmemo_1994_ as to the first requirement substantial means frequent regular and continuous enough to constitute a trade_or_business holsinger v commissioner tcmemo_2008_191 sporadic trading does not constitute a trade_or_business commissioner v groetzinger u s pincite mayer v commissioner tcmemo_1994_209 the number of trades executed in a year and the amount of money traded are helpful in determining whether a taxpayer’s trading activity was substantial holsinger v commissioner tcmemo_2008_191 as to the second requirement a trader’s activities must seek profit from short-term market swings unlike those of an investor who seeks capital appreciation and income and who is usually not concerned with short-term market developments that would influence prices on the daily market paoli v commissioner tcmemo_1991_351 courts also look at whether the taxpayer’s securities income is principally derived from frequent sales of securities rather than from dividends interest or long-term appreciation moller f 2d pincite 89_tc_445 liang v commissioner 23_tc_1040 mayer v commissioner tcmemo_1994_209 petitioner meets the first prong of the two-part test outlined above in petitioner executed about trades each month for a total of approximately trades per year petitioner’s trading was not sporadic petitioner testified that he devoted a significant amount of time to the trading activities during the school year--four to five hours every trading day--and always traded on the last hour of the day when there is a lot of activity on the market during the summer petitioner spent to hours a day on his trading activities petitioner had prior experience as a stock broker petitioner also had a substantial amount of trading activity in which prompted him to think of making a mark-to-market_election under sec_475 for we find petitioner’s trading was sufficiently frequent regular and continuous to constitute a trade_or_business as to the second prong of the test petitioner testified that his intent with respect to trading in was to profit from short-term market swings petitioner’s testimony during the trial was organized and coherent providing sufficient details on petitioner’s trading strategy we find persuasive petitioner’s testimony on the issue of intent in addition to petitioner’s intent we look to the two fundamental criteria that distinguish traders from investors the length of the holding_period of the securities and the source of the profit estate of yaeger v commissioner f 2d pincite mayer v commissioner tcmemo_1994_209 petitioner testified that his trading consisted largely of short-term stocks and monthly options with a holding_period of less than one month in a margin_account funded with his own money petitioner’s tax_return shows that only of his gross_income came from his teaching wages while came from trading in securities another of petitioner’s income in came from interest_income and approximately came from dividends and long-term_capital_gains we note however that the high percentage of interest_income is unusual for petitioner as in the prior and following years petitioner reported significantly lower interest_income numbers thus it is not indicative of whether petitioner was a trader or the large amount of interest_income reported in is only partially attributable to the money petitioner held in the fidelity trading account over of the interest_income is attributable to payments from jonathan c poppe likely petitioner’s relative an investor in when petitioner’s income from trading activities was almost four times more than his wages from teaching--his primary occupation in 2003--there is very little doubt that petitioner met the second prong of the test thus we conclude that petitioner was a trader in securities in and was entitled to make an election under sec_475 for a mark-to-market accounting_method d election under sec_475 the second issue we consider is whether petitioner made a proper election under sec_475 in a securities trader electing under sec_475 to use the mark-to-market method_of_accounting for securities held in the business is generally required to file with the commissioner a statement making the mark-to-market_election identifying the first taxable_year for which the election is effective and describing the business to which the election relates see kantor v commissioner tcmemo_2008_297 knish v commissioner tcmemo_2006_268 lehrer v commissioner tcmemo_2005_167 aff’d 279_fedappx_549 9th cir revproc_99_17 sec_5 c b pincite the statement must be filed no later than the due_date of the trader’s original federal_income_tax return without regard to extension for the taxable_year immediately preceding the election_year and if the election entails a change in accounting_method the trader must also attach a form_3115 application_for change in accounting_method to the trader’s timely filed original federal_income_tax return for the election_year revproc_99_17 sec_5 1999_1_cb_504 this court has on several occasions held that a securities trader failed to make an election under sec_475 where the trader did not follow the election requirements of revproc_99_ supra kohli v commissioner tcmemo_2009_287 kantor v commissioner tcmemo_2008_297 knish v commissioner tcmemo_2006_ we find that petitioner failed to comply with the requirements for the mark- to-market election set out in revproc_99_17 supra the evidence does not show conclusively whether petitioner signed or mailed a form_3115 in petitioner did not submit a copy of any executed version of form_3115 or any evidence of mailing it respondent did not find any record of petitioner’s form_3115 in his electronic database but also admitted that in some years not all forms received were actually entered in the database next petitioner filed his federal_income_tax return for on date failing to comply with the filing deadlines the tax_return contained a statement that petitioner made an election pursuant to sec_475 but did not have a form_3115 attached to it thus petitioner did not comply with the requirements of revproc_99_17 supra petitioner argues we should find that he made a valid sec_475 election under the substantial compliance doctrine the substantial compliance doctrine has no place in determining whether a timely sec_475 f election has been made kohli v commissioner tcmemo_2009_287 revproc_99_17 supra fixes a deadline by which the election must be made and the requirements for the election because petitioner failed to comply with the requirements of revproc_99_17 he did not make an effective mark-to-market_election in the substantial compliance doctrine is a narrow equitable doctrine that courts use to avoid taxpayer hardship if the taxpayer establishes that he or she intended to comply with a provision did everything reasonably possible to comply with the provision but did not comply with the provision because of a failure to meet the provision’s specific requirements kohli v commissioner tcmemo_2009_287 slip op pincite n see also 719_f2d_1001 9th cir 87_tc_116 aff’d 843_f2d_224 6th cir the commissioner may grant administrative relief to a securities trader with regard to an improper mark-to-market_election if the trader among other things requests sec relief and demonstrates that he acted reasonably and in good_faith in failing to make a timely election under sec_475 see 126_tc_279 sec_301_9100-3 proced admin regs a taxpayer must request relief through a private_letter_ruling in a petition or in a refund claim see knish v commissioner tcmemo_2006_268 relief continued assuming for the sake of argument that the substantial compliance doctrine did apply in this case it would not change the outcome petitioner failed to meet all of the requirements set out in revproc_99_17 supra except one petitioner failed to show that he attached and timely mailed a form_3115 with his tax_return and that he timely filed the tax_return the only indication that petitioner made an election in is a statement attached to the tax_return but this statement alone is insufficient to meet the requirements petitioner was aware of the election requirements and did not challenge the validity of revproc_99_17 supra under these circumstances the substantial compliance argument would not save the day e amount of loss and petitioner’s status at mptg the parties disagree as to the amount of petitioner’s loss that would be eligible for mark-to-market treatment in because petitioner is not entitled to use the mark-to-market accounting_method in this dispute is moot petitioner’s gains or losses arising out of his trading through mptg should be continued denied where request not made in petition 76_fedclaims_237 petitioner however did not request such relief therefore we do not consider this issue calculated under the rules for capital_gain loss calculation not the mark-to- market approach further petitioner maintains he was a partner at mptg in but he never argued in the briefs or introduced any evidence as to whether mptg itself made the mark-to-market_election so its partners could avail themselves of the election benefits this argument is thus deemed waived in addition the record is inconclusive on whether mptg treated petitioner as a partner the side letter says the petitioner was a class b member and a party to the mptg operating_agreement petitioner however did not introduce into evidence the mptg operating_agreement itself according to the side letter the mutual obligations of mptg and petitioner were very limited mptg created a trading account for petitioner and provided him with an office space to trade and access to the trading platform petitioner in turn fully funded his trading account and was obligated to split the trading profit sec_90 with mptg the side letter does not discuss capital contributions by petitioner to mptg itself only to petitioner’s trading account the side letter is also silent as to the extent of petitioner’s partnership_interest in mptg and share of mptg’s gains and losses the preliminary schedule_k-1 that petitioner obtained from one of mptg’s employees does not match the mptg tax_return which does not list petitioner as a partner and does not include a schedule_k-1 for him on the basis of the limited facts available to the court we conclude that petitioner did not meet his burden_of_proof on the issue of whether he was a partner in mptg f conclusion for the reasons stated above petitioner is not entitled to treat the trading loss as a net_operating_loss petitioner failed to meet the requirements for a valid election thus the securities trading loss petitioner suffered in is a capital_loss not an ordinary one ii additions to tax under sec_6651 and sec_6651 imposes an addition_to_tax for failure_to_file a return when due the addition equal sec_5 for each month that the tax_return is late not to exceed in total sec_6651 imposes a corresponding addition_to_tax for failing to pay timely the tax shown to be due on a federal_income_tax return the amount of the addition_to_tax for failure to pay timely equals for each complete or partial month a taxpayer fails to pay the tax not to exceed in the aggregate id the additions to tax for failure to both file and pay timely do not apply where the failures were due to reasonable_cause and not to willful neglect sec_6651 and the commissioner has the burden of production with respect to the liability of an individual for additions to tax under sec_6651 and see sec_7491 see also rule a the burden of showing reasonable_cause under sec_6651 remains on the taxpayer see 116_tc_438 respondent has met his burden of production by demonstrating that petitioner filed his return late and failed to pay on time reasonable_cause requires the taxpayer to demonstrate that he exercised ordinary business care and prudence and nevertheless was unable to file his or her federal_income_tax return by the due_date see 469_us_241 sec_301_6651-1 proced admin regs willful neglect is defined as a conscious intentional failure or reckless indifference boyle u s pincite the existence of willful neglect or reasonable_cause is a factual determination to be made in the light of well-established legal principles id pincite n we synthesize our discussion of reasonable_cause under sec_6651 and because the standard has been interpreted to be the same see e wind indus inc v united_states 196_f3d_499 n 3d cir russell v commissioner tcmemo_2011_81 reasonable_cause may exist if the taxpayer’s or a family member’s illness or incapacity prevents the taxpayer from filing his or her tax_return but not if the taxpayer is able to continue his or her business affairs despite the illness or incapacity see timbarella v commissioner 139_fedappx_319 2d cir aff’g tcmemo_2004_47 138_tc_228 hardin v commissioner tcmemo_2012_162 ruggeri v commissioner tcmemo_2008_30 in hardin v commissioner slip op pincite the taxpayer suffered from a mild to moderate form of attention deficit hyperactivity disorder adhd as well as posttraumatic stress syndrome and bipolar disorder because of these conditions the taxpayer had difficulty concentrating being organized and completing tasks id pincite the court held that these conditions did not rise to the level of reasonable_cause when the taxpayer was able to manage his business affairs including managing two rental properties selling one of them and being employed full time as an engineer id pincite in mclaine v commissioner t c pincite the court held that the taxpayer’s alcoholism did not constitute reasonable_cause for failing to file a tax_return on time when the taxpayer understood he had a tax_liability and tried to take steps to pay the tax such as borrowing against or selling some of his assets petitioner alleges that his mental impairment--an asd previously known as asperger’s syndrome--constitutes reasonable_cause for purposes of sec_6651 and petitioner offered testimony of a fact witness lynda geller ph d to confirm his diagnosis mrs geller is a licensed psychologist in the state of new york but is not a medical doctor mrs geller has been petitioner’s psychologist since date and has been seeing petitioner approximately once a month mrs geller testified that the condition petitioner suffered from was a chronic pervasive lifelong neurological disorder that manifests itself in impairment of some executive functions poor social cognition and high dependence on routines mrs geller also opined that petitioner did not fully appreciate the seriousness of his failure_to_file his tax returns we note that mrs geller was not petitioner’s treating healthcare provider in or the years at issue and is not a medical doctor for these reasons we give her testimony minimal weight petitioner’s situation is similar to that of the taxpayer in hardin who had difficulty with concentrating organizing and completing tasks because of adhd posttraumatic stress syndrome and bipolar disorder petitioner argues that because of his mental condition he was not able to organize his affairs and file the tax_return timely in however as in hardin that mental condition did not prevent petitioner from engaging in activities that required a high degree of concentration and ability to analyze and organize information for a number of years including and petitioner worked as a high school teacher there is no evidence in the record that at any time from through petitioner filed for a disability accommodation while he was employed as a school teacher in petitioner was trading in securities petitioner’s work station was equipped with six monitors showing the status of his trades petitioner was able to collect analyze and organize information to base his trades on petitioner understood he had a duty to file tax returns but claims that in he was despondent because of the losses he suffered and could not organize himself to file a tax_return timely we are sympathetic to petitioner’s plight we cannot find however under these circumstances that petitioner’s mental condition prevented him from managing his business affairs thus petitioner’s failure_to_file the tax_return timely and pay any taxes due on said return was not due to reasonable_cause petitioner is liable for additions to tax under sec_6651 and iii addition_to_tax under sec_6654 sec_6654 imposes an addition_to_tax for failure to pay estimated_tax where prepayments of tax either through withholding or by making estimated quarterly payments during the year do not equal the lesser_of of the tax shown for the current taxable_year or of the tax shown for the previous taxable_year sec_6654 provides some exceptions to the general_rule where the tax is a small amount less than dollar_figure where there was no liability for the preceding_taxable_year or a waiver applies sec_6654 - a taxpayer may qualify for a waiver in two sets of circumstances the commissioner determines that by reason of casualty disaster or other unusual circumstances the imposition of an addition_to_tax would be against equity and good conscience and a taxpayer retires after having attained the age of or becomes disabled in the taxable_year for which estimated payments were required to be made or in the taxable_year preceding that taxable_year when an underpayment was due to reasonable_cause and not to willful neglect sec_6654 the commissioner bears the burden of production to show that the taxpayer had an estimated_tax payment obligation the burden includes showing whether a return was filed for the preceding year sec_7491 127_tc_200 aff’d 521_f3d_1289 10th cir petitioner bears the burden of persuasion with respect to any defenses or exceptions see higbee v commissioner t c pincite because petitioner did not file his tax_return for the tax_year until date he was required to make estimated payments equal to of his tax for the tax_year see sec_6654 hardin v commissioner tcmemo_2012_162 evans v commissioner tcmemo_2010_62 the record shows that the amount of petitioner’s estimated payments in was less than the determined tax_liability for the year accordingly respondent’s burden of production is satisfied see hardin v commissioner tcmemo_2012_162 petitioner asserts the same reasonable_cause defenses for the sec_6654 addition_to_tax as for the sec_6651 and additions to tax petitioner did not retire in or petitioner’s mental condition an asd was already present at that time thus he does not fall into the reasonable_cause exception under sec_6654 the record does not show that petitioner’s failure to make estimated_tax payments was due to casualty disaster or other unusual circumstances petitioner understood he had a duty to pay tax on his income in and did not argue that there were unusual circumstances in such that imposing a sec_6654 addition_to_tax would be against equity and good conscience accordingly we conclude that petitioner is liable for the sec_6654 addition_to_tax for iv financial disability and relief under sec_6511 petitioner argues that he is entitled to relief from all additions to tax because his mental disorder qualifies him as a financially disabled taxpayer sec_6511 provides for statutory tolling of the period of limitations on filing a claim for a refund_or_credit for overpayment of taxes when taxpayers are unable to manage their financial affairs financial disability under sec_6511 however has nothing to do with deadlines to file tax returns pay tax or pay estimated_tax thus petitioner’s argument under sec_6511 is irrelevant v conclusion we have considered all of the arguments made by petitioner and to the extent not discussed above conclude that those arguments not discussed herein are irrelevant moot or without merit we have considered respondent’s arguments only to the extent stated herein to reflect the foregoing and concessions by the parties decision will be entered under rule


t c summary opinion united_states tax_court david h zatz and joan cassidy o’holland petitioners v commissioner of internal revenue respondent docket no 12618-10s filed date pattie s christensen for petitioners richard w kennedy for respondent swift judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the 1all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent proposed deficiencies and penalties with respect to petitioners’ and federal income taxes as follows year deficiency sec_6662 penalty dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number petitioners conceded that the proposed tax deficiencies were correct and paid the proposed deficiencies before the issuance of the notice_of_deficiency the only issue before us is whether petitioners are liable for the sec_6662 accuracy-related_penalties due to negligence or substantial_understatement_of_income_tax background this case has been fully stipulated under rule and the stipulated facts are so found at the time of filing the petition petitioners resided in utah david h zatz petitioner owned percent of crossways corp crossways a lucrative utah corporation engaged in the business of managing condominiums before the establishment of the various other entities described below crossways paid petitioner a substantial salary for his personal services apparently as president and chief_executive_officer in petitioner contacted a number of financial planners to obtain tax_advice for a fee of dollar_figure petitioner hired hewlett brothers financial hbf a utah financial advisory firm owned by john hewlett hbf presented to petitioner a plan to reduce his federal income and employment_taxes and utah state income taxes under which his salary each year from crossways would be reported not just by him rather his salary would be divided and reported in part by him and in part by other entities that would be formed and effectively controlled by him the plan also under the plan petitioner and possibly his wife would transfer to the other entities to be set up and controlled by him ownership of a number of personal assets eg home cars airplane and sailboats and expenses relating to these assets would be deducted as business_expenses larry cox cox a utah licensed certified_public_accountant c p a and miles lignell lignell a utah attorney both apparent employees of hbf and not working independently of hbf prepared certain financial legal and tax documents for the 2the record does not reflect petitioner’s exact title and responsibilities with crossways entities that petitioner would form at some point petitioner questioned cox and lignell about the legitimacy of the purported tax benefits of the plan cox and lignell assured petitioner that the plan was within the law in its promotional materials or presentations to petitioner hbf also represented that the strategy proposed in the plan had been reviewed with approval by prominent and prestigious accounting and law firms and that the internal_revenue_service irs blesses the hbf process no copy of any independent accounting or legal opinion relating to the plan was offered into evidence hbf’s representation that the irs blesses the hbf strategy was false although petitioner interviewed other financial advisers before formally engaging hbf petitioners relied solely upon the advice of cox and lignell in deciding to implement the plan in petitioner adopted hbf’s plan and formed the related entities and nominal ownership of a number of petitioners’ personal assets apparently was transferred to the related entities in and relating to and in compensation_for petitioner’s personal services for crossways crossways paid salaries or commissions of dollar_figure dollar_figure 3the record does not disclose the names of any other financial tax or other professionals from whom petitioners sought advice nor what advice if any was received dollar_figure and dollar_figure respectively as explained under the hbf plan the above amounts were split among petitioner and the related entities reported accordingly and offset by large personal expenses of petitioner’s that were claimed as business_expenses of the related entities of the total above salary or commission amounts crossways paid with respect to petitioner’s services in and approximately and percent respectively were offset by the claimed expenses to prepare their and federal_income_tax returns petitioners hired fpg business services fpg an independent accounting firm unrelated to hbf apparently petitioners relied on hbf to provide fpg with the financial data required to file petitioners’ federal_income_tax returns and fpg prepared petitioners’ tax returns on the basis of information hbf provided petitioners discussed the tax returns with fpg and were told that the returns accurately reflected the financial data that hbf had provided petitioners did not seek advice from fpg as to the legitimacy of the plan under federal tax law on audit respondent recast the salaries or commissions paid_by crossways with respect to petitioner’s services as income received solely by petitioner disallowed the business_expense deductions claimed by the various entities that had been formed reallocated legitimate deductions to petitioners’ individual tax returns and proposed the tax deficiencies and sec_6662 accuracy-related_penalties set forth above before the issuance of a notice_of_deficiency petitioners agreed with and paid the tax deficiencies the only matter in dispute is respondent’s determination of the sec_6662 accuracy-related_penalties discussion sec_6662 authorizes respondent to impose a 20-percent penalty for negligence or substantial_understatement_of_income_tax sec_6662 and for the purposes of sec_6662 negligence is defined as the failure to exercise the due care of a reasonable and ordinarily prudent person under like circumstances 85_tc_934 a substantial_understatement_of_income_tax is defined as an understatement_of_tax that exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 petitioners agree with the tax deficiencies for through accordingly respondent has met his burden of production and the burden_of_proof is on petitioners to show that the sec_6662 accuracy-related_penalty does not apply for any year see sec_7491 116_tc_438 sec_6664 provides a defense to the sec_6662 accuracy-related_penalty where the taxpayer establishes that there was reasonable_cause for a portion of an underpayment and that the taxpayer acted in good_faith with respect to such portion the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all the facts and circumstances including the taxpayer’s efforts to assess his proper tax_liability the knowledge and experience of the taxpayer and reliance on the advice of a tax professional sec_1 b income_tax regs reasonable_cause may be established where a taxpayer relies on the advice of a competent tax adviser even where the advice was wrong see 162_f2d_628 3d cir affg in part and revg in part a memorandum opinion of this court 122_f2d_843 3d cir however the adviser must be a competent professional with sufficient expertise to justify the taxpayer’s reliance the taxpayer must have provided necessary and accurate information to the adviser and the taxpayer must have actually relied in good_faith on the adviser 115_tc_43 affd 299_f3d_221 3d cir 113_tc_135 petitioner claims that his reliance on c p a cox and attorney lignell was in good_faith and should establish reasonable_cause we look first to determine whether cox and lignell had sufficient expertise to justify petitioner’s reliance petitioner emphasizes that both cox and lignell were licensed in their fields being licensed as an accountant or attorney however is only a minimum requirement to practice as an attorney or accountant and by itself does not establish expertise in tax law relying on assurances of professionals may demonstrate good_faith but only when the professionals are acting independently from the entity promoting the claimed benefits 439_f3d_1243 10th cir affg tcmemo_2004_275 440_f3d_375 6th cir affg tcmemo_2004_279 91_tc_524 the evidence does not indicate that cox and lignell were providing advice to petitioner independently of hbf see mortensen v commissioner supra pincite advice from otherwise qualified professionals with an interest in the transaction is better classified as sales promotion vojticek v commissioner tcmemo_1995_444 the conflict of interest inherent in the relationships between hbf and cox and lignell should have caused petitioner to seek advice from an independent adviser petitioner points to a brochure of hbf which purports to list the qualifications of cox and lignell however this self- serving hbf brochure is not sufficient evidence to establish that cox and lignell in fact were qualified and independent tax experts on whose advice petitioner reasonably relied both worked for hbf their testimony was not presented to us we conclude that petitioner’s reliance on cox and lignell does not constitute reasonable_cause petitioners argue that they relied on the advice of fpg--an independent tax preparer--to prepare their federal_income_tax returns petitioners emphasize that fpg had no association with hbf however reliance on a second professional’s advice is subject_to the same test discussed above see 205_f3d_54 2d cir affg sann v commissioner tcmemo_1997_259 857_f2d_1383 9th cir affg dister v commissioner tcmemo_1987_217 it appears that fpg was not provided the complete and accurate information necessary to prepare accurately petitioners’ federal_income_tax returns as has been stated the mere fact that a certified_public_accountant has prepared a tax_return does not mean that he or she has opined on any or all of the items reported therein neonatology associates p a v commissioner supra pincite the details of the discussions petitioners had with representatives of fpg are not in the record and there is no evidence that petitioners either asked fpg to conduct a meaningful review of the plan or that fpg did so on its own fpg represented to petitioners that the returns were correct only according to the financial data hbf provided fpg did not claim that the plan hbf established was proper fpg simply stated that the returns accurately reflected data hbf provided petitioner appears to be a successful businessman and should not have implemented hbf’s plan without consulting independent tax or legal counsel petitioners pursued what appears to have been a patently improper tax_avoidance scheme which they have conceded was improper petitioners have not established reasonable_cause for the accuracy-related_penalties we sustain respondent’s determination of the sec_6662 accuracy-related_penalty for each of the years in issue to reflect the foregoing decision will be entered for respondent


internal_revenue_service date number release date uil the honorable united_states senate washington d c attention dear senator this letter is in response to your inquiry dated date about your constituent is concerned about the use of technical services firms body shops to obtain the services of skilled technical workers-including nonimmigrant aliens holding h1-b visas provides technical services in the capacity of an independent_contractor service recipients are reluctant to contract directly with requirements he can be characterized as an employee of the service recipients neither relationship to the contrary they want their independent_contractor relationship to be valid for federal tax purposes nor the service recipients intend to establish an employment subchapter_s_corporation because under irs the irs recognizes independent contractors like the internal_revenue_service irs recognizes the independent_contractor relationship as a valid business arrangement businesses can hire either employees or the immigration and naturalization service can give you more information on the does not object to the h1-b visa program and eligible nonimmigrant aliens use of h1-b workers but rather to their treatment as employees of the technical services firms and to his potential treatment as an employee of the service recipients service recipients contract with technical services firms for however the technical services firms add an administrative charge of approximately to the amount billed to the service_recipient consequently services are considerably less expensive-and more competitive-when provided directly by his subchapter_s_corporation rather than through a technical services firm services independent contractors thus if an independent_contractor relationship exists between recipient will not be treated as an employer conversely if an employment relationship exists between a service_recipient and a worker provided by a technical services firm the service_recipient will be characterized as an employer subchapter_s_corporation and a service_recipient the service common_law rules separate employees from independent contractors when determining a worker’s status the irs applies common_law rules to separate employees from independent contractors under the common_law rules treating a worker as an employee or an independent_contractor originates from this definition one party the principal is legally responsible for the acts or omissions of another party the agent ultimately an employment relationship depends on the principal’s right to direct and control the agent the decision is based on who directs and controls following the common_law rules the tax regulations say an employer-employee relationship exists when the business for which the services are performed directs and controls the worker performing the services the right to direct and control refers to both the result to be accomplished and the means by which that result is accomplished thus an employee is subject_to the control of the business both as to what will be done and as to how it will be done the employer does not have to actually direct or control how the services are performed it is sufficient if the business has the right to do so if however an individual is subject_to the control of another merely as to the result to be accomplished and not as to the means and methods for accomplishing the result he is an independent_contractor the irs considers all relevant facts to determine if an individual is an employee or an independent_contractor under the common_law rules the irs examines all relevant facts the irs generally considers whether there is a right to direct or control how the worker performs the specific task behavioral control there is a right to direct or control how the business aspects of the worker’s activities are conducted financial control and the parties intend to create an employment relationship relationship of the parties if an employer-employee relationship exists the designation of the employee as an independent_contractor is disregarded the corporate form applies to federal and state tax finally provided that corporate formalities are followed and at least one non-tax business_purpose exists the corporate form is generally recognized for both federal and state tax purposes disregarding the corporate entity is an unusual remedy and is applied by most courts only in cases of clear abuse in summary after considering all relevant facts and circumstances-including behavioral control financial control and the relationship of the parties-the irs determines if an independent_contractor relationship exists under the common_law rules and will treat the parties accordingly for federal tax purposes similarly if the irs determines an employment relationship exists the irs will treat the parties as employer and employee contractor he may want to show a copy of this letter to service recipients that are not sure how to make the distinction can contract directly with service recipients as an independent this letter will be made available for public inspection after names addresses and other identifying information have been deleted under the freedom_of_information_act i appreciate the opportunity to assist you with hope this information is helpful if you or may be of further assistance to you please call me or at employment_tax questions and has additional questions or if we id sincerely jerry e holmes chief employment_tax branch office of assistant chief_counsel exempt_organizations employment_tax governmental entities


number release date id office uilc cca_2009022712305264 -------------- from ------------------ sent friday date pm to -------------------- cc ----------------------- subject re penalty if done properly i would think that a tempoary reg would never conflict with an earlier reg because the temporary reg should remove any conflicting portions of the pre-existing reg particular reg in question however the code section belongs to ------- i'm copying one person identified in the code and subject matter directory as responsible for sec_861 i can't speak to the


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc psi plr-112536-01 date date number release date index numbers legend x y d1 dear this letter responds to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election to treat y as a qualified_subchapter_s_subsidiary qsub under sec_1361 of the internal_revenue_code facts according to the information submitted x elected to be an s_corporation effective d1 x intended to treat its wholly owned subsidiary y as a qsub effective d1 however x inadvertently failed to timely file a qsub election for y law analysis sec_1361 defines the term qualified_subchapter_s_subsidiary as a domestic_corporation which is not an ineligible_corporation if percent of the stock of the corporation is owned by an s_corporation and the s_corporation elects to treat the corporation as a qsub in notice_97_4 1997_1_cb_351 the internal_revenue_service prescribed temporary election procedures for an s_corporation to elect qsub treatment for a subsidiary these procedures included use of form_966 corporate dissolution of liquidation to make the qsub election in general the election was effective on the date the form_966 was filed or up to days prior to the filing of the form plr-112536-01 effective date final regulations td 2000_6_irb_498 f_r were published relating to qsubs and other subsidiaries of s_corporations the final regulations provided that qsub elections shall be made by filing the form to be provided for that purpose in the preamble to those final regulations taxpayers were instructed to continue following the instructions in notice_97_4 until a new qsub election form was available on date in notice_2000_58 2000_47_irb_491 the service announced that new form_8869 qualified_subchapter_s_subsidiary election is available for an s_corporation to elect to treat one or more of its eligible subsidiaries as a qsub sec_1_1361-3 provides that the election will be effective on the date specified on form_8869 or on the date the election is filed if no date is specified the effective date specified on the election cannot be more than two months and days prior to the date of filing and cannot be more than months after the date of filing sec_1_1361-3 provides that an extension of time to make a qsub election may be available under the procedures applicable under sec_301_9100-1 and sec_301_9100-3 sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of 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 an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner uses to determine whether to grant an extension of time to make a regulatory election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 conclusion based on the facts presented and representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied accordingly x is plr-112536-01 granted an extension of time to make an election to treat y as a qsub effective d1 until days following the date of this letter the election should be made by filing form_8869 with the appropriate service_center a copy of this letter should be attached to the election 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 is a valid s_corporation or whether y is a valid qsub this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent under a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely paul f kugler associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter


internal_revenue_service department of the treasury p o box index no ben franklin station washington dc number release date telephone number person to contact cc dom p si plr-103657-98 date date re legend this is in response to your date letter and other correspondence in which you requested a ruling on the application of the generation-skipping_transfer_tax on date the settlor created the trust an irrevocable_trust for the lifetime benefit of the beneficiary no additions have been made to the trust after date the trust is administered in state under the terms of the trust while the beneficiary was under the age of twenty-one years the trustees were to pay to the beneficiary so much of the income as they in their discretion determined to be required for her reasonable support comfort and education adding any excess income to principal after the beneficiary attains age twenty-one the trustees are to pay income and principal to her as the trustees deem in her best interest being guided by the standard of living that the settlor has established for her on the beneficiary’s death the remaining trust property will be distributed to the beneficiary’s issue per stirpes if there are no issue the trust property will be distributed to the settlor’s then living descendants if there are no descendants the trust property will be distributed as if the settlor died intestate the property may be held in further trust until any remainder beneficiary attains age twenty-one the settlor designated a and b as co-trustees clause sixth paragraph a of the trust provides that any trustee may resign at any time by giving written notice clause sixth paragraph b provides that on b’s resignation as co-trustee c is to be substituted in b’s place if a dies refuses to act or resigns the then acting co-trustee is to continue to act as sole trustee paragraph b also provides that the co-trustees are to designate upon their appointment a corporation to succeed as trustee when all of the individuals ie a b and c are unable to act if there is no designation the current income_beneficiary will name the successor trustee clause sixth paragraph of the trust provides that if the trustee or co-trustees change the situs of the trust they may appoint either an individual or corporation as trustee the former trustee or co-trustees that made the appointment may remove that individual or corporation and again become trustee or appoint another successor trustee a and b administered the trust as co-trustees until b resigned b’s resignation is evidenced by an instrument dated date c succeeded b as co-trustee c has died a is now the sole trustee of the trust there is no designated successor corporate trustee under applicable state law a trustee is precluded from making any discretionary distributions of either principal or income to or for the benefit of such trustee except to provide for that trustee’s health education maintenance or support as defined in sec_2514 and sec_2041 in addition the trustee is precluded from making any distributions of either principal or income to satisfy any legal support obligation of such trustee the trustee proposes to petition the local court to modify clause sixth paragraph sec_1 and of the trust the modification would affect the appointment of trustees under the modification current individual trustees may appoint their successors they may also appoint an additional trustee that may be a person bank or trust company if there is neither a current trustee or a designated successor trustee then the current income_beneficiary at the time of appointment will designate the successor trustee an appointment of a successor trustee may be revoked by the person who made the appointment at any time before the successor actually assumes the duties of trustee there are to be no more than three co-trustees at one time and no more than one bank or trust company may be a trustee at one time in addition the reformation will modify some of the administrative provisions to reflect the new trustee designation provisions we have been asked to rule that the proposed modifications will not adversely affect the grandfathered status of the trust for purposes of the generation-skipping_transfer_tax applicable law and analysis sec_2601 of the internal_revenue_code provides that a tax is imposed on every generation-skipping_transfer sec_2611 defines the term generation-skipping_transfer to mean a taxable_termination a taxable_distribution or a direct_skip sec_26_2601-1 of the generation-skipping_transfer_tax regulations provides that the provisions of chapter will not apply to any generation-skipping_transfer under a_trust that was irrevocable on date this rule does not apply to a portion of any generation-skipping_transfer under an irrevocable_trust where additions are made to the trust after date in the present case the trust was irrevocable on date and there have been no additions made to the trust after that date there have been no modifications or amendments to the trust agreement since date the proposed modification is administrative in nature and will not result in any change in the quality value or timing of any beneficial_interest in the trust consequently the modification will not affect the exempt status of the trust with respect to the generation-skipping_transfer_tax except as we have specifically ruled herein we express no opinion under the cited provisions or any other provision of the code this ruling letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file we are sending a copy of this letter to the taxpayer sincerely assistant chief_counsel passthroughs and special industries by___________________________ george masnik chief branch


internal_revenue_service number release date index number --------------------------------------- --------------------- -------------------------------------- in re ------------------------- --------------------------------------- ------------------------------ department of the treasury washington dc third party communication date of communication month dd yyyy person to contact -------------------------- id no -------------- telephone number ---------------------- refer reply to cc psi b04 plr-116820-14 date october legend -------------------------------- -------------------------------------------------------- --------------------- --------------------------------------------------------- ------------------------------------ ----------------------------------------------------------------------- grantor spouse grantor trust trust trust -------------------------------------------------------------- date date date date date date date date child taxpayers 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------------------------------------------------------------------------------------------ court ----------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---- ----------------------------------------------------------------------------------- plr-116820-14 -------------------------------------------- ---------------------- ----------------------------------------------------------------------------- county farm agreement of sale --------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- -------------------------------------------------- a v w x y z limited_partnership trustee trustee year -------------------- ---------- ---------------- ----------------- ------------ ------------ ------------ ------------------------- -------------------------------- ------- dear ----------------------- this letter responds to your authorized representative’s letter of date requesting rulings on the gift estate and generation-skipping_transfer gst tax consequences of a proposed transaction the facts and representations submitted are summarized as follows on date grantor established an irrevocable_trust trust for the benefit of himself spouse and his lineal_descendants grantor died on date and spouse died on date the corporate trustee of trust is trustee on date grantor established a revocable_trust trust for the benefit of himself on date grantor amended trust so that income was paid in equal shares to his daughter grantor 1’s spouse spouse and his son child for life in addition on date grantor released his right to further amend or revoke trust on date by court order trust as amended was divided into two irrevocable equal trusts one for the benefit of spouse and her descendants trust and one for the benefit of child and his descendants grantor died on date the corporate trustee of trust is trustee trust and trust and the trust beneficiaries of those trusts taxpayers are the parties requesting this ruling currently the beneficiaries of trust and trust are essentially the same trust provides that the trustees are to pay the net_income for the benefit of grantor 1’s issue share and share alike per stirpes trust terminates twenty-one years after the death of the survivor of grantor 1’s three children trust provides that the trustees are to pay the net_income to spouse’s issue per stirpes trust terminates twenty-one plr-116820-14 years after the death of the last surviving lineal descendant of grantor living at the time of grantor 2’s death trust and trust together own farm in county trust owns y acres and trust owns z acres the acreage in farm owned by trust and trust is generally contiguous however the acreage owned by each trust was acquired at different times so that some of the parcels owned by each trust are land-locked and access to these parcels from a public road is only possible via easements over acreage owned by the other trust the trustees of both trusts have decided it is in the best interest of trust and trust to sell the property in a coordinated sale the real_estate owned by each trust is subject_to various zoning and land use restrictions and is not currently serviced by public water and sewer the property is currently zoned for agricultural and residential use and for public land use farm has been on the market for several years since year the purchaser is limited_partnership which is owned by a who is a lineal descendant of both grantor and grantor and is the trustee of a_trust that is a current beneficiary of trust and a contingent beneficiary of trust a is a licensed real_estate broker and is a developer of residential real_estate in the area where farm is located the agreement of sale was negotiated by trustee of trust and trustee of trust with some input from the beneficiaries the trusts and a the purchaser were represented by separate counsel it is represented that the sale price is dollar_figurex which is consistent with two independent appraisals and recent land sales in the area upon completion of all closings trust will receive w percent of the purchase_price and trust will receive v percent of the purchase_price the sellers’ obligations are conditioned on trust and trust receiving approval of the sale from court the beneficiaries of trust and trust performing certain conditions in the event trust terminates prior to the closing of the sale the beneficiaries of trust and trust approving and ratifying the agreement of sale and the taxpayers receiving a favorable private_letter_ruling trust will terminate on date and trust will terminate at a much later date yet to be determined trust and trust were irrevocable prior to date it is represented that no additions have been made to trust or trust after date you have requested the following rulings the execution and or the carrying out of the terms of the agreement of sale and the exercise of any right obligation or remedy hereunder will not constitute an addition to either trust or trust or cause trust or trust to lose its gst tax exempt status under b a of the tax_reform_act_of_1986 or under plr-116820-14 sec_26_2601-1 of the generation-skipping_transfer_tax regulations and distributions from trust and trust will not be subject_to gst tax under sec_2601 of the internal_revenue_code provided that no additions actual or constructive are otherwise made to trust or trust the entering into the agreement of sale and the carrying out of the terms thereof will not cause any beneficiary of either trust or trust to make or be deemed to have made a taxable gift to any other beneficiary or to a the execution and or the carrying out of the terms of the agreement of sale will not cause any beneficiary to be required to include in his or her taxable_estate trust assets owned by trust or trust unless such assets have been distributed to such person prior to his or her death ruling sec_2601 imposes a tax on each generation skipping transfer under a of the tax_reform_act_of_1986 act the gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 the gst tax does not apply to a transfer from a_trust if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 or hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status in general unless specifically provided otherwise the rules contained in this paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes thus unless specifically noted the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy paragraph sec_26_2601-1 b or c of this section by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the plr-116820-14 time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust sec_26_2601-1 provides that for purposes of this section a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust trustees will seek court approval of the sale of farm trustees will join with all living beneficiaries of trust and trust in the proposed court proceeding the agreement of sale will only be binding on trust and trust if the trusts receive approval from court as part of the proceedings the trustees will petition the court to appoint a guardian and trustee ad litem to represent the interests of minor unborn and unascertained descendants of grantor and grantor in addition the agreement of sale is binding only if trust and trust receive from all beneficiaries of trust and trust ratification and approval of the agreement of sale as part of the court approval process court must determine that the agreement of sale is fair and reasonable which determination includes the determination that the price reflects a fair_market_value and that the other terms of the sale are reasonable in this case trust and trust were irrevocable prior to date therefore trust and trust are currently exempt from gst tax the agreement of sale and sale of farm is binding on trust and trust only if court approves the sale the execution and or the carrying out of the terms of the agreement of sale and the sale of farm are administrative in nature and will not shift a beneficial_interest in trust or trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to entering into the agreement of sale or the sale of farm further execution of the agreement of sale and the sale of farm does not extend the time for vesting of any beneficial_interest in trust or trust beyond the period provided for in the original trusts plr-116820-14 based on the facts submitted and the representations made we conclude that the execution and or the carrying out of the terms of the agreement of sale and the exercise of any right obligation or remedy thereunder will not constitute an addition to either trust or trust or cause trust or trust to lose its gst tax exempt status under b a of the tax_reform_act_of_1986 or under sec_26_2601-1 and distributions from trust and trust will not be subject_to gst tax under sec_2601 provided that no additions actual or constructive are otherwise made to trust or trust ruling sec_2501 imposes a tax for each calendar_year on the transfer of property by gift by an individual sec_2511 provides that the tax imposed by sec_2501 applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2512 provides that if a gift is made in property the value thereof at the date of the gift shall be considered the amount_of_the_gift sec_2512 provides that where property is transferred for less than adequate_and_full_consideration in money or money’s worth then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift and shall be included in computing the amount of the gifts made during the calendar_year sec_25_2512-8 of the gift_tax regulations provides that transfers reached by the gift_tax are not confined to those only which being without a valuable consideration accord with the common_law concept of gifts but embrace as well sales exchanges and other dispositions of property for a consideration to the extent that the value of the property transferred by the donor exceeds the value in money_or_money's_worth of the consideration given therefor however a sale exchange or other transfer of property made in the ordinary course of business a transaction which is bona_fide at arm's length and free from any donative_intent will be considered as made for an adequate_consideration in money_or_money's_worth trust and propose to sell acreage in farm it is represented that the trustees have obtained two independent appraisals on the value of farm and that the sales_price is consistent with the appraisals and other sales of land in the area the agreement of sale has been negotiated at arm’s length by the corporate trustees of trust and trust the beneficiaries of both trusts must consent to the sale the trusts and a the purchaser were represented by separate counsel to secure approval of court the trustees will have to demonstrate that the agreement of sale is fair reasonable and plr-116820-14 that the terms are arm’s length the trustees have a fiduciary duty to act in the best interests of all of the beneficiaries based on the facts submitted and the representations made and provided court approves the agreement of sale and finds the agreement of sale is fair reasonable and that the terms are arm’s length we conclude that the entering into the agreement of sale and the carrying out of the terms thereof will not cause any beneficiary of either trust or trust to make or be deemed to have made a taxable gift to any other beneficiary or to a ruling sec_2033 provides that the value of the gross_estate includes the value of all property to the extent of the interest therein of the decedent at the time of his death sec_2035 provides that if the decedent transferred by trust or otherwise an interest in property or relinquished a power with respect to any property during the 3-year period ending on the date of the decedent's death and the value of the property or interest therein would have been included in the gross_estate under sec_2036 sec_2037 sec_2038 or sec_2042 if the transferred interest or relinquished power had been retained by the decedent on the date of death the value of the gross_estate shall include the value of any property or interest therein that would have been so included sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_consideration in money_or_money's_worth by trust or otherwise under which the decedent has retained for his life or for any period not ascertainable without reference to the decedent's death or for any period which does not in fact end before the decedent's death - the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2037 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise if the possession or enjoyment thereof can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property and the value of the reversionary_interest immediately before the death of the decedent exceed sec_5 percent of the value of the property sec_2038 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at plr-116820-14 any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of the decedent's death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power to alter amend revoke or terminate or where any such power is relinquished during the 3-year period ending on the date of the decedent's death in order for sec_2035 through to apply a decedent must have made a transfer of property or any interest therein except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth under which the decedent retained an interest in or power over the income or corpus of the transferred property in this case the corporate trustees of trust and trust propose to sell farm to limited_partnership owned by a in exchange for dollar_figurex the acreage in farm is an asset of each trust the beneficiaries are not transferring assets to trust trust or any other trust accordingly the beneficiaries are not transferors for purposes of sec_2036 sec_2037 or sec_2038 based on the facts submitted and the representations made we conclude that the execution and or the carrying out of the terms of the agreement of sale will not cause any beneficiary to be required to include in his or her taxable_estate trust assets owned by trust or trust unless such assets have been distributed to such person prior to his or her death 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 the rulings in this letter pertaining to the federal estate and or generation-skipping_transfer_tax apply only to the extent that the relevant sections of the internal_revenue_code are in effect during the period at issue plr-116820-14 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely _____________________________ lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs special industries enclosures 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 b01 plr-132795-06 date november -------------------------- ------------------------------- ------------------------------------------ ------------------------------------------ legend x -------------------------------------------------- y -------------------------------------------------- z -------------------------------------------------- trust state dear -------------- this responds to a letter dated date submitted on behalf of x y and z by their authorized representatives requesting entity classification rulings under sec_7701 and sec_7704 of the internal_revenue_code the information submitted states that x is a life_insurance_company licensed in states and the district of columbia to provide various life_insurance products annuities mutual funds and other investment products y a wholly owned subsidiary of x is a life_insurance and annuity company that provides a variety of life_insurance products annuities and other investment products to individuals and businesses in all states and the district of columbia -------------------- plr-132795-06 trust is an open-end management investment_company organized under the laws of state the beneficial interests in trust’s property consist of transferable shares shares in multiple segregated portfolios of assets including portfolio z each with separate investments the portfolios support x’s and y’s variable_contracts shares of the portfolios may only be purchased by domestic life_insurance_companies either directly or through separate_accounts of such companies x has nine separate_accounts and y has four separate_accounts premiums received by x and y are allocated to their respective separate_accounts collectively the accounts of x and y own all of the shares of the portfolios and have the right to purchase additional shares or have shares redeemed at any time contract holders may specify in which separate_account the premium is to be invested the benefits x and y pay to the contract holder are determined by reference to the investment return associated with and the market_value of the relevant portfolio supporting the variable_contract however the benefits under the variable_contracts can vary significantly from the value of the shares in the portfolios especially where a contract holder dies before his or her life expectancy the contract holder is typically entitled to a minimum payment regardless of the portfolio’s performance typically a variable_contract cannot be redeemed within a specified period without a penalty nor sold at face value furthermore the shares in the portfolios are owned by the insurance_company issuing the variable_contract for federal_income_tax purposes the contract holder only has claims against the insurance_company issuing the variable_contract and not against the income gains losses or distributions of the portfolios each portfolio is currently a regulated_investment_company ric within the meaning of sec_851 z proposes to elect to be treated as a partnership z requests a ruling that it will be classified as a partnership and not a publicly_traded_partnership x and y make the following representations trust is a business_trust that has never held itself out to be a state law corporation each portfolio is currently a separate ric as defined in sec_851 z will have at least two members x and y investing through their separate_accounts and will elect to be treated as a partnership for federal tax purposes if shares are sold to other insurance_companies the shares will not be held by more than domestic life_insurance_companies if shares are sold to other insurance_companies the shares will only be issued to separate_accounts of domestic life_insurance_companies x and y are and will be treated as the owners of the shares in the portfolios for federal_income_tax purposes the assets of the separate_accounts will be adequately diversified within the meaning of sec_817 and sec_1_817-5 of the income_tax regulations allocations of taxable_income gain loss deductions and credits of the portfolios will be made in accordance with sec_704 and c and except as required by sec_704 plr-132795-06 each holder of a share will be allocated its share of each portfolio’s income or loss which will be composed of a proportionate share of each item of the portfolio’s income or loss public access to z is only available through the purchase of a variable_contract the shares are not and will not be traded on an established_securities_market the shares are not and will not be regularly quoted by any person such as a broker or dealer making a market in the shares no person regularly makes available and will not make available to the public including customers or subscribers bid or offer quotes with respect to the shares or stands ready or will stand ready to effect buy or sell transactions at the quoted prices for itself or on behalf of others no holder of shares has or will have a readily available regular and ongoing opportunity to sell or exchange the shares through a public means of obtaining or providing information of offers to buy sell or exchange shares there is no plan or intention for the redemption of shares by z to be combined with the issuance of shares in z to a new partner partnership ruling sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes sec_301_7701-3 provides that unless it elects otherwise a domestic eligible_entity is classified as a partnership if it has two or more members x and y represent that z will have at least two members and will elect pursuant to sec_301_7701-3 to be classified as a partnership provided z ha sec_2 or more members and makes the entity classification election to be classified as a partnership z will be properly classified as a partnership for federal tax purposes publicly_traded_partnership ruling sec_7704 provides that except as provided in sec_7704 a publicly_traded_partnership will be treated as a corporation sec_7704 provides that the term publicly_traded_partnership means any partnership if interests in such partnership are traded on an established_securities_market and interests in such partnership are readily_tradable on a secondary market or the substantial equivalent thereof sec_1_7704-1 provides that for purposes of sec_7704 and sec_1_7704-1 an interest in a partnership includes a any interest in the capital or profits of the partnership including the right to partnership_distributions and b any financial plr-132795-06 instrument or contract the value of which is determined in whole or in part by reference to the partnership including the amount of partnership_distributions the value of partnership assets or the results of partnership operations sec_1_7704-1 provides that for purposes of sec_7704 and sec_1_7704-1 a transfer of an interest in a partnership means a transfer in any form including a redemption by the partnership or the entering into of a financial_instrument or contract described in sec_1_7704-1 sec_1_7704-1 provides that for purposes of sec_7704 and sec_1_7704-1 interests in a partnership that are not traded on an established_securities_market within the meaning of sec_7704 and sec_1_7704-1 are readily_tradable on a secondary market or the substantial equivalent thereof if taking into account all of the facts and circumstances the partners are readily able to buy sell or exchange their partnership interests in a manner that is comparable economically to trading on an established_securities_market sec_1_7704-1 provides that for purposes of sec_1_7704-1 interests in a partnership are readily_tradable on a secondary market or the substantial equivalent thereof if i interests in the partnership are regularly quoted by any person such as a broker or dealer making a market in the interests ii any person regularly makes available to the public including customers or subscribers bid or offer quotes with respect to interests in the partnership and stands ready to effect buy or sell transactions at the quoted prices for itself or on behalf of others iii the holder of an interest in the partnership has a readily available regular and ongoing opportunity to sell or exchange the interest through a public means of obtaining or providing information of offers to buy sell or exchange interests in the partnership or iv prospective buyers and sellers otherwise have the opportunity to buy sell or exchange interests in the partnership in a time frame and with the regularity and continuity that is comparable to that described in the other provisions of sec_1_7704-1 sec_1_7704-1 provides that for purposes of sec_7704 and sec_1_7704-1 interests in a partnership are not traded on an established_securities_market within the meaning of sec_1_7704-1 and are not readily_tradable on a secondary market or the substantial equivalent thereof within the meaning of sec_1_7704-1 even if interests in the partnership are traded or readily_tradable in a manner described in sec_1_7704-1 or c unless the partnership participates in the establishment of the market or the inclusion of its interests thereon or the partnership recognizes any transfers made on the market by i redeeming the transferor partner in the case of a redemption or repurchase by the partnership or ii admitting the transferee as a partner or otherwise recognizing any rights of the transferee such as a right of the transferee to receive partnership_distributions directly or indirectly or to acquire an interest in the capital or profits of the partnership plr-132795-06 the shares sold by x to the segregated_asset accounts of other insurance_companies are interests in the capital or profits of the portfolios therefore the shares are partnership interests for purposes of sec_7704 see sec_1_7704-1 the sale of shares to the segregated_asset accounts of other insurance_companies does not fall within the definition of trading on an established_securities_market as defined in sec_7704 and sec_1_7704-1 additionally shares may only be sold to the segregated_asset accounts of other insurance_companies and i are not regularly quoted by any person such as a broker or dealer making a market in the interests ii no person regularly makes available to the public including customers or subscribers bid or offer quotes with respect to the shares and stands ready to effect buy or sell transactions at the quoted prices for itself or on behalf of others iii the unit holder does not have a readily available regular and ongoing opportunity to sell or exchange the interest through a public means of obtaining or providing information of offers to buy sell or exchange interests in the partnership or iv prospective buyers and sellers do not otherwise have the opportunity to buy sell or exchange shares in a time frame and with the regularity and continuity that is comparable to that described in the other provisions of sec_1_7704-1 the shares are not traded on an established_securities_market and the shares are not readily_tradable on a secondary market or substantial equivalent thereof therefore based solely on the information submitted and the representations made we conclude that after z elects to be classified as a partnership z will not be a publicly_traded_partnership except as specifically set forth above no opinion is expressed or implied concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent plr-132795-06 pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to z’s authorized representatives sincerely dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes