index number control number tam-106393-99 cc dom corp b1 number release date internal_revenue_service national_office technical_advice_memorandum district director’s office northern california district date date taxpayer’s name taxpayer’s address taxpayer identification no year involved no conference held legend corporation shareholder a lead underwriter co-managing underwriter shareholder b shareholder c shareholder d year year date i date ii date iii date iv date v date vi date vii date viii date ix date x date xi date xii date xiii d e f n o p q r s t u v w x y z pp qq uu ww xx yy issue when shareholder a exchanged its corporation series a voting convertible preferred_stock series a stock for cash and corporation common_stock should the cash ie n cents per share be taxable under sec_356 or should it be taxable under sec_356 because it had the effect of the distribution of a dividend conclusion upon shareholder a’s exchange of its series a stock for common_stock and cash shareholder a’s receipt of the cash ie n cents per series a stock share was taxable to the extent of the gain as gain under sec_356 because shareholder a’s stock interest in corporation was meaningfully reduced when the effects of the entire transaction including the ipo are take into account see sec_302 and b facts in year corporation issued for cash p million shares of series a stock approximately uu of the series a stock q million shares was issued to shareholder a approximately qq r million shares of the series a stock was issued to shareholder c the remainder of the series a stock s ie t shares was issued to management including shareholder d around the same time corporation acquired certain businesses and assets from shareholder b in exchange for cash an assumption_of_liabilities and the issuance to shareholder b of nonvoting redeemable preferred_stock preferred_stock at the time of this initial stock issuance corporation issued only the series a stock and the preferred_stock no stock denominated common_stock was issued initially under its terms each share of series a stock was convertible into one share of common_stock at the option of the shareholder in addition series a stock was subject_to automatic conversion into common_stock upon consummation of a public stock offering series a stock had certain special class voting rights but in general voted together with the common_stock on an as-if-converted basis ie both series a stock and the common_stock had one vote per share the series a stock was entitled to receive non-cumulative dividends of d cents per share or if greater an amount equal to that paid on other shares of stock during most of its existence however corporation has not paid any dividends on liquidation series a stock was entitled to receive a preferential payment and then participated together with common_stock on a pro_rata basis although no common_stock was issued initially corporation did issue options to purchase common_stock at the beginning of year there were approximately f million shares of common_stock outstanding and options to purchase additional shares of common_stock none of which stock or options were held by shareholder a on date ix there were ww shares of common_stock outstanding in year a series of steps took place that significantly changed the capital structure of corporation corporation began planning an ipo in the spring of year and by the summer of year had decided to take a number of actions directed toward facilitating the ipo first it simplified its capital structure by removing stock preferences that would have inhibited its ability to accomplish the ipo corporation exchanged its common_stock one share per series a stock share plus n cents cash per series a stock share in exchange the exchange for all shares of the series a stock outstanding the n cents per share was the appraised value of the series a stock preferences shareholder a participated in the exchange and the cash it received presents the issue addressed in this technical_advice to simplify its capital structure corporation also redeemed for cash all of the preferred_stock held by shareholder b a second objective relating to the ipo concerned underwriter’s advice received by corporation that any excess cash held by corporation would not be given adequate value in the ipo thus corporation distributed an o cents per share dividend to all of its common_stock shareholders including those who had received common_stock in the exchange in addition the distributions to the series a stock owners and preferred_stock owners were done in part to support this second objective of reducing excess cash on date xi pursuant to a date x resolution corporation accomplished a two for three reverse_stock_split in which the common_stock shareholders received two shares of common_stock in exchange for three common_stock shares previously held finally on date xiii corporation carried out the planned ipo that the exchange redemption of the preferred_stock two for three reverse_stock_split and ipo were all part of an integrated_plan is well established by the facts an attachment to the date i board meeting minutes reveals that ipo planning was already well underway this planning continued at the date ii board meeting by the date iii and date iv board meetings there was already discussion of a variety of alternatives for restructuring the company’s balance_sheet at the date v board meeting there was discussion of prior contacts with underwriters and the minimum acceptable ipo parameters also discussed was a possible purchase by corporation of the series a stock from shareholder c the final plan was put in motion on date vi when corporation sent a letter to all corporation shareholders announcing a proposal to take certain actions to facilitate corporation’s upcoming ipo these actions were the exchange the redemption of the remainder of the preferred_stock owned by shareholder b and a dividend of o cents per share on all common_stock shares including those issued in the exchange the shareholders were urged by the board to approve the plan as the board did as of date vii the shareholders did so effective date ix the series a stock owners and corporation also executed an exchange_agreement for the series a stock exchange effective date ix the corporation board on date viii approved having an ipo before the end of the year and authorized the selection of the lead underwriter and co-managing underwriter at the date x corporation board meeting the two for three reverse_stock_split was authorized whereby all holders of corporation common_stock received two common shares for each three common shares held finally on date xii the corporation board approved the final pricing and number of shares of corporation common_stock to be sold on date xiii the next day there were pp million common_stock shares issued in the ipo shareholder a exchanged q million series a stock shares for q million common_stock shares plus nearly u million dollars in cash the taxability of which is in issue shareholder a reduced its number of common_stock shares to z million due to the two for three reverse_stock_split immediately prior to the exchange shareholder a had x of the corporation vote after the ipo shareholder a had xx of the corporation vote immediately prior to the exchange shareholder a owned stock its series a stock possessing y of the overall value of all corporation stock after the ipo shareholder a’s percentage of overall value had dropped to xx before this series of integrated transactions shareholder a could control corporation by itself after these integrated series of transactions shareholder a could not solely control corporation but rather had to join with one or more other corporation shareholders in order to effectuate corporate action there were at least two other substantial corporation shareholders shareholder c that controlled over yy of the corporation vote and shareholder d who owned stock possessing close to v of the corporation vote but also had significant influence with other corporation shareholders as chairman of the board ceo and president an example of this new reality was that shareholder a had three board members on the five member board before these transactions but had only two thereafter in addition the percentage of the value of corporation which shareholder a’s stock possessed fell from above to xx which is below and constituted a drop of over in the value percentage it previously owned taken together shareholder a’s interest in corporation was meaningfully reduced as a result of the integrated series of transactions applicable law sec_354 of the internal_revenue_code provides in general that no gain_or_loss is recognized if stock in a corporation which is a_party_to_a_reorganization is exchanged in pursuance of the plan_of_reorganization solely for stock in that same corporation or in another corporation which is a party to the reorganization sec_368 provides that the term reorganization means among other things a recapitalization sec_356 provides that property not qualifying for nonrecognition treatment under sec_354 is taxed to the extent of gain on the exchange sec_356 a provides that where the exchange has the effect of the distribution of a dividend the recognized gain will be taxed as a dividend to the recipient to the extent of the recipient’s ratable share of the post date undistributed_earnings and profits of the corporation any excess gain is taxable as gain from the exchange of property sec_302 provides that a redemption satisfying the requirements of sec_302 is treated as a distribution in exchange for stock sec_302 provides that other redemptions are taxed as distributions under sec_301 sec_302 states that sec_302 applies if the redemption is not essentially_equivalent_to_a_dividend analysis the issue presented in this technical_advice is the proper tax treatment of cash received by shareholder a when it exchanged its series a stock for cash and common_stock on date ix this exchange was one part of a larger series of planned transactions culminating in a corporation ipo on date xiii these transactions encompassed an exchange by the shareholders including shareholder a owning corporation series a stock of that stock for cash and corporation common_stock a redemption of all the corporation preferred_stock from the single holder thereof shareholder b a cash distribution of o cents per share to all common shareholders including those receiving common_stock issued in exchange for the series a stock a two for three reverse_stock_split and finally a corporation ipo of pp million shares of corporation common_stock as a result of this series of transactions shareholder a’s corporation voting percentage fell from x to xx that is from above to below therefore shareholder a had to join with one or more other shareholders if it wished to exercise control_over corporation whereas prior to the transactions it could control corporation on its own for example after the transactions shareholder a’s board membership fell from three to two seats on the five seat board the percentage of the value of corporation stock held by shareholder a fell as a result of these series of planned transactions from y to xx shareholder a’s ownership_interest in corporation was meaningfully reduced as a result of this series of planned transactions the exchange by the series a stock owners including shareholder a of their series a stock for cash plus common_stock was a recapitalization within the meaning of sec_368 the gain realized by shareholder a on this exchange is not recognized to the extent of the value of the corporation common_stock see sec_354 however it is taxable to the extent of the cash received ie n cents for each series a stock share exchanged taxability of that cash is determined under sec_356 the cash is taxable as gain to the extent of gain on the exchange as long as sec_356 is applicable sec_356 a is not applicable if sec_356 a would treat the gain recognized due to the receipt of this cash as a dividend to the extent of the recipient shareholder’s here shareholder a’s ratable share of the post date undistributed_earnings and profits however sec_356 applies only if the receipt of the cash has the effect of the distribution of a dividend in determining whether the receipt of cash or other_property not qualifying for nonrecognition under sec_354 has the effect of the distribution of a dividend it is proper to analogize to sec_302 especially as to single entity reorganizations such as the recapitalization present in this case see revrul_84_114 1984_2_cb_90 revrul_93_62 1993_2_cb_118 furthermore in applying sec_302 to a reorganization such as the recapitalization in this case it is also appropriate to compare the corporation stock ownership of the shareholder receiving the cash here shareholder a at the start of the planned series of transactions and that shareholder’s stock interest in corporation at the end of the series see 213_f2d_914 6th cir see revrul_55_745 1955_2_cb_223 revrul_75_447 1in determination the percentage value of the corporation stock held by shareholder a before the transaction we have assumed that the common_stock had a fair_market_value of e dollars per share the price at which it was then valued by corporation for purposes of granting stock_options and that the series a stock had a fair_market_value of e dollars plus n cents per share the value of the consideration it received in the exchange c b when that comparison is made in this case shareholder a’s stock interest in corporation underwent a meaningful reduction in that shareholder a lost its ability to control corporation by itself and had thereafter to join with one or more other shareholders of corporation in order to take actions moreover it lost its controlling position on corporation’s board it went from three seats to two seats on a five person board furthermore the percentage of the overall value of corporation represented by shareholder a’s stock dropped from y to xx since only one class of stock ie common_stock was outstanding after this series of transactions shareholder a’s share of dividend and liquidation rights also had a meaningful reduction as a result shareholder a would have qualified for exchange treatment on the receipt of the cash if this had been a redemption rather than a recapitalization see sec_302 which provides for sec_302 exchange treatment where a redemption is not essentially_equivalent_to_a_dividend 397_us_301 rehearing denied 397_us_1071 1970_1_cb_62 held that sec_302 applies where the redemption causes a meaningful reduction in shareholder interest as exists in this case in this regard see revrul_75_502 1975_2_cb_111 where a shift of stock ownership from to was viewed as meaningful because it significantly altered a stockholder’s ability to control a corporation since the shareholder could no longer control the corporation by himself alone at least as much can be said about the x to xx vote percentage drop and the y to xx value percentage drop in this case applying the redemption rules of sec_302 by analogy the receipt of cash in this case did not have the effect of the distribution of a dividend under sec_356 hence the taxability of the cash is determined under sec_356 rather than under sec_356 and is taxable as realized and recognized gain under sec_1001 to the extent of the gain on the exchange a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 provides that it may not be used or cited as precedent


t c summary opinion united_states tax_court thomas f hale petitioner v commissioner of internal revenue respondent docket no 5099-o0s filed date thomas f hale pro_se s mark barnes for respondent couvillion special_trial_judge this case was heard pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority t unless otherwise indicated section references are to the internal_revenue_code in effect for the year at issue all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency in federal_income_tax of dollar_figure and a penalty under sec_6662 in the amount of dollar_figure with respect to petitioner's tax_year after concessions by the parties the issues for decision are whether petitioner under sec_1211 has established his entitlement to a deduction of dollar_figure as a long- term capital_loss and whether petitioner is liable for the penalty under sec_6662 some of the facts were stipulated those facts with the exhibits annexed thereto are so found and are made part hereof by reference at the time the petition was filed petitioner's legal residence was pocatello idaho petitioner was a professor of european history at idaho state university at pocatello idaho petitioner is also an attorney and was a member of the bars of the states of idaho and oregon he was admitted to practice before various courts however petitioner was engaged only minimally in the practice of law at trial petitioner conceded the disallowance in the notice_of_deficiency of dollar_figure of miscellaneous_itemized_deductions relating to a payment of dollar_figure by petitioner for settlement of litigation that had been instituted against him by a credit_union additionally at trial the parties reached a basis of settlement in connection with dollar_figure in rental expenses claimed by petitioner on schedule e supplemental income and loss of his return on schedule d capital_gains_and_losses of his federal_income_tax return petitioner reported a long-term_capital_loss of dollar_figure from the sale of real_estate located at lava idaho approximately miles from pocatello the pertinent information on the return relative to this transaction was as follows date acquired date sold sales_price dollar_figure cost or other basis dollar_figure loss dollar_figure on the return petitioner claimed a loss of dollar_figure pursuant to the limitation of sec_1211 in the notice_of_deficiency respondent disallowed the claimed dollar_figure long-term_capital_loss for the reason that the property was not used in a trade_or_business or held_for_the_production_of_income the subject property consisted of two adjoining lots at lava idaho on which was situated a building that originally was a residence but which petitioner contends he used on a part-time basis in connection with his limited law practice at trial petitioner readily acknowledged that his claimed basis of dollar_figure for the property was incorrect petitioner presented documentation showing his acquisition of the property on date for dollar_figure he contends that he incurred additional costs over the years totaling dollar_figure for improvements to the property at trial petitioner presented several receipts invoices and contracts purporting to relate to improvements to the property which petitioner contended substantiated dollar_figure for improvements thus petitioner took the position at trial that his adjusted_basis in the property was dollar_figure for the reasons stated hereinafter the court need not address whether the documentation establishes the dollar_figure claimed by petitioner for these improvements following his acquisition of the property petitioner and his wife divorced in date petitioner's former spouse executed a quitclaim_deed in favor of petitioner for her interest in the property also during petitioner entered into a transaction with an individual peter walker burns mr burns in which petitioner conveyed the subject property to mr burns for what petitioner testified was payment of an indebtedness that petitioner owed to mr burns an attorney for certain legal services mr burns had provided to petitioner however petitioner contends that he was given an option to repurchase the property from mr burns although an option contract or agreement was never prepared or executed by petitioner and mr burns petitioner executed a promissory note dated date in favor of mr burns in the principal_amount of dollar_figure bearing percent per annum interest and payable in monthly installments of dollar_figure on the sixth day of each month until date no evidence was presented at trial to show whether petitioner ever made any payments on this note petitioner contends however that this note evidenced or constituted an option in his favor and presumably upon payment of the note or an election by petitioner to exercise the option mr burns would convey title to the property to petitioner on date petitioner executed a document wherein he relinguished his option to purchase the property from mr burns that document makes no reference to the dollar_figure promissory note however petitioner contends that when he relinguished his option to purchase the property in that relinguishment constituted a sale of the property to mr burns in which the consideration or selling_price was the dollar_figure note it is on this set of facts that petitioner reported the transaction as the sale of a capital_asset on his income_tax return acknowledging at trial that the claimed basis was in error and that the basis should have been dollar_figure comprising the dollar_figure paid in and dollar_figure in improvements thus petitioner contends he realized the claimed long-term_capital_loss in petitioner acknowledged that after he sold the property to mr burns in he no longer used the property as as the court understands petitioner's testimony the consideration paid_by mr burns was dollar_figure evidenced by a cancellation of the dollar_figure note there is no evidence that the dollar_figure note was returned to petitioner he had in the past although he looked after the property for mr burns sec_1221 provides for purposes of this subtitle the term capital_asset means property held by the taxpayer whether or not connected with his trade_or_business but does not include-- stock_in_trade of the taxpayer property used in his trade_or_business of a character_subject_to_depreciation a copyright accounts or notes receivable acquired in the ordinary course of business a publication of the united_states government xk k sec_1222 provides the term 'long-term capital gain' means gain from the sale_or_exchange of a capital_asset emphasis added there was no sale_or_exchange of any property by petitioner during the title to the property discussed above had been transferred sold or conveyed by petitioner to mr burns in what occurred during between petitioner and mr burns was the relinguishment by petitioner of what petitioner contended was an option for purchase of the property that option was predicated on a promissory note of dollar_figure that petitioner had executed in favor of mr burns during there is no evidence that petitioner paid any amounts on this note nor is there any evidence that mr burns paid any amount to petitioner for relinquishment of the option the court concludes that petitioner did not engage ina sale_or_exchange during nor did petitioner engage in any other transaction with mr burns during that resulted in the realization of either gain_or_loss respondent therefore is sustained on this issue respondent determined that petitioner is liable for the penalty under sec_6662 for negligence or disregard of rules or regulations under sec_6662 b sec_6662 provides that if it is applicable to any portion of an underpayment in taxes there shall be added to the tax an amount equal to percent of the portion of the underpayment to which sec_6662 applies under sec_6664 no penalty shall be imposed under sec_6662 with respect to any portion of an underpayment if it is shown that there was a reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion sec_6662 provides that sec_6662 shall apply to any underpayment attributable to negligence or disregard of rules or regulations sec_6662 provides that the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws and the term disregard includes any careless reckless or intentional disregard of rules or regulations negligence is the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances see 85_tc_934 it is well established that the taxpayer bears the burden_of_proof on this issue see 58_tc_757 in the notice_of_deficiency respondent determined a deficiency based on three adjustments to petitioner's tax_return for at trial petitioner conceded one of the adjustments and the parties reached a basis of settlement for another adjustment petitioner presented no evidence as to these two adjustments showing that he had reasonable_cause for the underpayment relating thereto the other adjustment related to a claimed capital_loss discussed in detail above the court finds that the underpayment as to this adjustment was also due to a careless reckless or an intentional disregard of rules or regulations respondent therefore is sustained on the entire amount of petitioner's underpayment with respect to the penalty under sec_6662 reviewed and adopted as the report of the small_tax_case division decision will be entered under rule


t c summary opinion united_states tax_court d lloyd and betty thomas petitioners v commissioner of internal revenue respondent docket no 3672-00s filed date d lloyd and betty thomas pro sese brlizabeth owen for respondent armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time that the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority ' all subsequent section references are to the internal_revenue_code in effect for the taxable_year in issue and all rule references are to the tax_court rules_of_practice and procedure - - respondent determined a deficiency in petitioners’ federal_income_tax for in the amount of dollar_figure after concessions by the parties ’ the issues for decision are as follows whether petitioners may exclude from gross_income disability benefits received by petitioner d lloyd thomas we hold that petitioners may exclude such benefits whether petitioners received interest on an overpayment of income_tax for we hold that petitioners received such interest background some of the facts have been stipulated and they are so found petitioners resided in copperas cove texas at the time that their petition was filed with the court at all relevant times petitioners utilized the cash_receipts_and_disbursements_method of accounting in computing their taxable_income see sec_446 petitioners concede that in they were credited with interest on overpayments of income_tax for and in the amounts of dollar_figure dollar_figure and dollar_figure respectively as determined by respondent in the notice_of_deficiency respondent concedes that the deficiency determined in the notice_of_deficiency dollar_figure is overstated because of a computational error and that the correct amount of the deficiency is dollar_figure the parties agree that adjustments to petitioners’ ira deduction and schedule a deductions are computational matters the resolution of which depends on our disposition of the two disputed issues identified above a disability benefits petitioner d lloyd thomas petitioner was employed by the texas department of criminal justice as an associate clinical psychologist from date through date in or about date petitioner suffered a herniated disk petitioner’s injury was sufficiently severe as to require bed rest and home confinement for a continuous period of time that extended through date during the first months of his 6-month absence from work petitioner utilized his accumulated sick leave and annual leave after exhausting his leave petitioner began receiving disability benefits for the period from april through date petitioner received disability benefits in the amount of dollar_figure petitioner received disability benefits pursuant to a plan of disability insurance that was sponsored by his employer however the premiums for such insurance were paid solely by petitioner with after-tax_dollars in this regard petitioner specifically elected in date not to pay the premiums for disability insurance with pre-tax dollars pursuant to premium conversion this election remained in effect throughout petitioners did not report on their federal_income_tax return the disability benefits received by petitioner in in the notice_of_deficiency respondent determined that such benefits were includable in petitioners’ gross_income for the year in issue b interest_income petitioners overpaid their income_tax for after a portion of the overpayment was apparently paid to another federal_agency see sec_6402 a balance of dollar_figure remained as a credit in petitioners’ account of this amount dollar_figure was subsequently applied against petitioners’ federal_income_tax liability for thereby leaving a balance of dollar_figure in this regard petitioners received a notice from respondent dated date explaining how respondent applied the overpayment this notice stated in part as follows how we applied your overpayment amount of overpaid tax on your return dollar_figure amount of interest you earned on overpayment dollar_figure total amount due you dollar_figure total amount applied dollar_figure amount you will receive as a refund dollar_figure any interest due you will be added on or about date respondent issued a refund check to petitioners in the amount of dollar_figure this amount consisted of tax in the amount of dollar_figure and interest in the amount of dollar_figure respondent’s transcript of petitioner’s account for shows that petitioners were credited with interest on the overpayment for as follows continued - - petitioners reported no interest_income on their federal_income_tax return respondent determined that petitioners received interest in in the amount of dollar_figure on their overpayment of income_tax for discussion a disability benefits as a general_rule sec_104 excludes from an employee's gross_income amounts received through accident_or_health_insurance for personal injuries or sickness however the section provides an exception for amounts received by an employee to the extent such amounts either are paid_by the employer or are attributable to employer contributions that were not includable in the employee's gross_income sec_105 coordinates with sec_104 rabideau v commissioner tcmemo_1997_230 as a general_rule sec_105 provides that amounts received by an employee through continued date amount dollar_figure dollar_figure dollar_figure dollar_figure see 34_tc_407 disability_income is received through accident_or_health_insurance for personal injuries or sickness within the meaning of sec_104 see also sec_105 for purposes of sec_104 and sec_105 amounts received under an accident_or_health_plan for employees are treated as amounts received through accident_or_health_insurance chernik v commissioner tcmemo_1999_313 -- - accident_or_health_insurance for personal injuries or sickness shall be included in gross_income to the extent such amounts are either paid_by the employer or are attributable to contributions by the employer that were not included in the employee's gross_income at trial we had the opportunity to observe petitioner evaluate his demeanor and assess his credibility we found petitioner to be a credible witness and we have no reason to question his veracity petitioner's testimony provides the evidentiary basis for our finding that petitioner specifically elected in date not to pay the premiums for his disability insurance with pre-tax dollars pursuant to premium conversion on brief respondent states as follows the determinative factual issue in this case is whether the premiums were contributed by petitioner on a pre-tax or after-tax basis if they were paid out of pre-tax monies as respondent contends then the disability benefits received by petitioner would be taxable if on the other hand the disability insurance premiums were paid out of after-tax_dollars as petitioners contend then the disability benefits received by petitioner would not be taxable in view of our finding that petitioner paid the premiums for his disability insurance with after-tax_dollars we hold that the disability benefits received by petitioner in are excludable from gross_income for that year sec_104 accordingly respondent’s determination to the contrary is not sustained b interest_income petitioners admitted at trial that they received a refund check from respondent in and that such check pertained to the taxable_year however petitioners contend that they did not receive any interest in this regard petitioners rely on that part of the respondent’s notice dated date stating amount of interest you earned on overpayment sdollar_figure according to petitioners this statement demonstrates that they neither received nor were credited with any interest on their overpayment of income_tax we disagree petitioners read the notice dated date myopically that notice clearly states that in addition to the dollar_figure of tax that petitioners would receive as a refund any interest due you will be added in that regard the record clearly demonstrates that respondent did in fact add interest to petitioners’ refund specifically dollar_figure which was part of the dollar_figure check that was issued on or about date accordingly we hold that petitioners failed to report interest_income in the amount of dollar_figure respondent’s determination is sustained reviewed and adopted as the report of the small_tax_case division --- - in order to give effect to our disposition of the disputed issues as well as the parties’ concessions decision will be entered under rule


internal_revenue_service number release date index number --------------------------------- ------------------------------------------ ------------------- ------------------------------------- in re --------------------------------------------------- --------------------------------------------------- ------------------------------ department of the treasury washington dc person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc tege eoeg teb plr-122422-04 date date ------------------------------------------------------------------------------------------ -------------------- ---------------------------------------------- ------------------------------------------------------------ legend issuer ------------------------------------------------------------------------------------------------------ state allocating ------------ municipality date date year a b c d dear ------------------ ---------------------------- --------------------------- ------------------- ------------------ --------------- -------------- --------- plr-122422-04 this is in response to your ruling_request on behalf of the issuer for an extension of time pursuant to ' of the procedure and administration regulations to file form_8328 carryforward election of unused private_activity_bond volume_cap to make a carryforward election under ' f of the internal_revenue_code of dollar_figurea in unused year private_activity_bond volume_cap facts and representations the issuer makes the following representations the issuer is a body politic and corporate of the state authorized under state law to issue bonds for the purpose of financing single and multi-family housing in the state according to state law the allocating authority may allocate private_activity_bond volume_cap and home rule authorities may assign all or part of their private_activity_bond volume_cap to the issuer in year the issuer requested year private_activity_bond volume_cap from the allocating authority for the purpose of issuing qualified_mortgage single family and multi-family housing bonds on date the allocating authority timely allocated dollar_figureb in volume_cap to the issuer and requested that the issuer carry forward any amount of the dollar_figureb that the issuer did not use in year at that time the issuer expected to need at least dollar_figureb plus other volume_cap already allocated to it to finance single family housing also in year the issuer was assigned dollar_figurec in year volume_cap by municipality a home rule authority in the state the resolution assigning the volume_cap provides that the assigned volume_cap must be used to finance affordable housing documentation surrounding the resolution indicates that the assignment was for a particular multi-family project when on date the issuer timely filed its form_8328 to carry forward unused year volume_cap it failed to include the dollar_figureb that it had been allocated by the allocating authority and most of the dollar_figurec exactly dollar_figured that it had been assigned by municipality the issuer excluded the dollar_figureb of the unused private_activity_bond volume_cap because it did not realize that the allocating authority had approved its allocation request the allocating authority’s approval was sent to the issuer but because it was attached to another document the issuer did not see the approval until after it had filed the form_8328 the dollar_figured was excluded due to a typographical error in the aggregate the issuer had received dollar_figurea in year volume_cap that it did not include on its form_8328 when the issuer discovered that the dollar_figurea had not been included in the form_8328 it filed this letter_ruling request concurrent with the filing of this request the issuer filed a new form_8328 that includes the dollar_figurea in its year unused volume_cap carryforward in its new form_8328 the issuer allocated the dollar_figurea in year unused volume_cap in the same manner it would have allocated the dollar_figurea had it been included in the form_8328 that was filed on date that is dollar_figureb was allocated to single family housing and dollar_figured was allocated to multi-family housing prior to the issuer’s submission of this ruling_request the plr-122422-04 internal_revenue_service did not discover the issuer’s failure to include dollar_figurea in unused volume_cap in the form_8328 filed on date law and analysis sec_103 provides that except as otherwise provided in sec_103 gross sec_146 provides that if an issuing authority s volume_cap for any sec_146 provides that a private_activity_bond issued as part of an issue income does not include interest on any state_or_local_bond sec_103 provides in part that ' a shall not apply to any private_activity_bond that is not a qualified_bond within the meaning of ' generally under ' e of the code a private_activity_bond is not a qualified_bond unless the bond meets the volume_cap requirements of ' meets the volume_cap requirements if the aggregate face_amount of the private_activity_bonds issued pursuant to such issue when added to the aggregate face_amount of tax- exempt private_activity_bonds previously issued by the issuing authority during the calendar_year does not exceed such authority s volume_cap for the calendar_year calendar_year after exceeds the aggregate amount of tax-exempt private_activity_bonds issued during the calendar_year by the authority the authority may elect to treat all or any portion of the excess as a carryforward for one or more carryforward purposes sec_146 requires the issuing authority to identify the purpose for which the carryforward is elected and specify the portion of the carryforward which is to be used for that purpose sec_146 defines acarryforward purpose to mean four different purposes including issuing qualified_residential_rental_project bonds and issuing qualified_mortgage bonds or mortgage credit certificates under ' f any election including any identification and specification contained therein once made shall be irrevocable center ogden ut under notice_89_12 1989_1_cb_633 form_8328 must be filed by the earlier of february of the calendar_year following the year in which the excess_amount arises or the date_of_issue of bonds issued pursuant to the carryforward election sec_301_9100-1 of the procedure and administration regulations provides in part that the commissioner of internal revenue has discretion to grant a reasonable extension of time to make a regulatory election defined in ' b as an election whose due_date is prescribed by regulation or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i the election is made by filing form_8328 with the internal_revenue_service sec_301_9100-3 provides in part that the interests of the sec_301_9100-3 provides that requests for extensions of time for sec_301_9100-3 provides in part that generally a taxpayer is deemed plr-122422-04 regulatory elections that do not meet the requirements for automatic extensions in ' such as this request must be made under the rules of ' requests for relief will be granted if the taxpayer provides evidence establishing to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that the grant of relief will not prejudice the interests of the government to have acted reasonably and in good_faith if the taxpayer requests relief under that section before the failure to make the regulatory election is discovered by the irs sec_301_9100-3 provides however that the taxpayer does not act in good_faith if it uses hindsight in requesting relief if specific facts have changed since the due_date for making the election that make the election advantageous to a taxpayer the irs will not ordinarily grant relief in such a case the irs will grant relief only when the taxpayer provides strong_proof that the taxpayer’s decision to seek relief did not involve hindsight government are prejudiced if granting relief would result in a taxpayer having a lower tax_liability than if the election had been made timely taking into account the time_value_of_money cap before the irs moreover the issuer did not use hindsight in requesting relief accordingly we find that the issuer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion under the facts and circumstances of this case we conclude that the issuer acted reasonably and in good_faith and that the grant of relief will not prejudice the interests of the government issuer is granted an extension of days from the date of this letter to file form_8328 to carry forward an additional dollar_figurea in year unused volume_cap dollar_figureb of which is for qualified_mortgage bonds or mortgage credit certificates and dollar_figured of which is for qualified_residential_rental_project bonds concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter including whether any such aspect or item meets the requirements of and this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer in this case the issuer discovered its failure to carry forward dollar_figurea in year volume except as expressly provided herein no opinion is expressed or implied the rulings contained in this letter are based upon information and plr-122422-04 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 upon examination sincerely yours assistant chief_counsel exempt_organizations employment_tax government entities by _____________________________ rebecca l harrigal chief tax exempt bonds branch ---------------------------- ----------------------------------------------------- --------------------- ------------------------------------------------------------ --------------------------------- ---------------------- ------------------------------ --------------------------------------------------- --------------------------------------------------- ------------------------------


internal_revenue_service department of the treasury index numbers 1015-dollar_figure 2601-dollar_figure washington dc number release date person to contact telephone number refer reply to cc dom p si 4-plr-103986-00 date date re legend a b child a child b child c child c1 child c2 child c3 trust i trust j date dear this is in response to your letter dated date and prior correspondence submitted on behalf of the trustees and trust beneficiaries requesting income_tax and generation-skipping_transfer_tax rulings concerning the merger of identical trusts a and b both deceased had three children child a child b and child c on date trust i and trust j were created under the terms of trust i as the result of certain contingencies separate trusts were created for the benefit of child c2 trust i- c2 and child c3 trust i-c3 in addition separate trusts were created from trust j for the benefit of child c2 trust j-c2 and child c3 trust j-c3 the terms of trust i-c2 and trust j-c2 are identical and the trustees propose to merge trust i-c2 into trust j- c2 the trustees intend to petition the appropriate state court to determine that each trust proposed to be merged is identical and ii order the consolidation of the trusts upon receipt of a favorable private_letter_ruling it is represented that there have been no additions to the subject trusts constructive or otherwise after date plr-103986-00 the following rulings have been requested the trusts were irrevocable on date and are not subject_to the generation-skipping_transfer_tax by reason of b a of the tax_reform_act_of_1986 the merger will not constitute an addition to the surviving trust nor cause a change in the substance of the surviving trust that will cause the surviving trust to lose its exempt status under sec_26_2601-1 of the generation-skipping_transfer_tax regulations the merger does not constitute a gift by the trust beneficiaries for purposes of sec_2511 of the internal_revenue_code neither the merger nor the distribution of assets to the surviving trust will result in recognition of gain_or_loss to any trust or the beneficiary of any trust assets of the merged trusts will have the same basis and holding periods under sec_1015 and sec_1223 in the surviving trust afer the merger as they did prior to the merger ruling requests sec_2501 imposes a gift_tax on the transfer of property by gift sec_2511 provides that the gift_tax shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2601 imposes a tax on every generation-skipping_transfer section b a of the act and sec_26_2601-1 provide that the generation-skipping_transfer_tax shall not apply to any generation-skipping_transfer under a_trust that was irrevocable on date but only to the extent that such transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added sec_26_2601-1 provides that if an addition is made after date to an irrevocable_trust that is otherwise exempted from the application of chapter by b a of the act a pro_rata portion of subsequent distributions from and terminations of interests in property held in the trust is subject_to the provisions of chapter in general any modification of an irrevocable_trust that results in a change in the quality value or timing of any interest in the trust will cause the trust to lose exempt status in the present situation after the merger there will be no change in the dispositive provisions with respect to the property previously held in each particular plr-103986-00 trust the trustees will hold the same property after the merger and the interests of all beneficiaries will be unchanged the surviving trust will terminate at the same time as provided with respect to each separate trust prior to the merger thus the proposed merger of the trusts as described will not effect the quality value or timing of any beneficial_interest under the original trusts accordingly we conclude that based on the representations made all the trusts were irrevocable on date and are not subject_to the generation-skipping_transfer_tax by reason of b a of the act further we conclude that the mergers as described will not constitute an addition to any surviving trust and will not otherwise cause any surviving trust to lose exempt status under sec_26_2601-1 lastly we conclude that the mergers do not constitute gifts by the trust beneficiaries for purposes of sec_2511 ruling_request sec_4 and sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis over the amount_realized sec_1001 provides that except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that generally the gain_or_loss realized from a conversion of property into cash or from an exchange of property for other_property differing materially either in_kind or extent is treated as income or as loss sustained an exchange of property results in the realization of gain_or_loss under sec_1001 if the properties exchanged are materially different 499_us_554 there is a material difference when the exchanged properties embody legal entitlements different in_kind or extent or if they confer different rights and powers cottage savings u s pincite in this case the merger of trust i-c2 into trust j-c2 surviving trust will not constitute a sale_or_other_disposition for purposes of sec_1001 the interests of the beneficiaries before and after the mergers remain the same because each trust has the same beneficiaries and identical terms the exchanged properties are not materially different because they do not embody legal entitlements that are different in_kind or confer different rights and powers we conclude that neither the merger nor the distribution of assets to the surviving trust will result in recognition of gain_or_loss to any trust or the beneficiary of any trust sec_1015 provides that if property is acquired after date by a transfer in trust other than by a transfer in trust by gift bequest or devise the basis is the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on the transfer under the plr-103986-00 law applicable to the year in which the transfer is made sec_1_1015-2 provides that in the case of property acquired after date by transfer in trust other than by transfer in trust by gift bequest or devise the basis_of_property so acquired is the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on the transfer under the law applicable to the year in which the transfer was made if the taxpayer acquired the property by transfer in trust this basis applies whether the property be in the hands of the trustee or the beneficiary and whether acquired prior to termination of the trust and distribution of the property or thereafter sec_1223 of the code provides that in determining the period for which the taxpayer has held property however acquired there shall be included in the period for which the property was held by any other person if under chapter such property has for the purpose of determining gain_or_loss from a sale_or_exchange the same basis in whole or in part in the taxpayer’s hands as it would have in the hands of such other person we conclude that the basis of the assets in the surviving trust will be same as the basis of those assets in the original trusts before the merger accordingly we conclude that the assets in the surviving trust after the proposed merger in this case will have the same holding periods as they had prior to the merger except as we have ruled under the cited provisions of the code we express no opinion about the tax consequences of the proposed transaction under those provisions or under any other provisions of the code 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 this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours assistant chief_counsel passthroughs and special industries by robert honigman acting assistant to the branch chief enclosure copy for purposes


department of the treasury internal_revenue_service washington d c number release date uil date conex-152428-02 cc psi i am responding to your inquiry dated date on behalf of the constituents in your congressional district who own and operate mobile_machinery you are concerned that a proposed change in tax regulations will adversely affect these businesses the tax rule you are referring to is a notice of proposed rulemaking on the definition of a highway vehicle for federal excise_tax purposes this proposed rule appeared in the federal_register on date copy enclosed i appreciate your concern in this matter we will consider your comments before we finalize the proposed rule if you have any questions please contact me at sincerely associate chief_counsel passthroughs and special industries by richard a kocak chief branch enclosure


t c memo united_states tax_court damian gerard and leigh h gerard petitioners v commissioner of internal revenue respondent peter w hobler and katherine a hobler petitioners v commissioner of internal revenue respondent docket nos filed date richard d lageson and brenda l talent for petitioners michael w bitner and steven w labounty for respondent memorandum findings_of_fact and opinion thornton judge in these consolidated cases respondent determined deficiencies in petitioners’ federal income taxes as follows petitioners peter and katherine hobler damian and leigh gerard deficiency dollar_figure big_number in the course of a family shareholder dispute bill maritz who was chairman and chief_executive_officer of maritz inc retaliated against his in-laws katherine hobler katherine and damian gerard damian by terminating their professional relationships with the corporation katherine and damian asserted claims with respect to these actions to settle these claims maritz inc paid dollar_figure to katherine and dollar_figure to damian after concessions the issue for decision is what amounts if any of these settlement payments are excludable from petitioners’ gross incomes pursuant to sec_104 as compensation_for personal injuries findings_of_fact the parties have stipulated some facts which we incorporate herein along with associated exhibits when they petitioned this court petitioners peter and katherine hobler resided in jackson wyoming petitioners damian and leigh gerard resided in st louis missouri unless otherwise indicated all section references are to the internal_revenue_code for the year at issue all rule references are to the tax_court rules_of_practice and procedure a corporate and family background maritz inc provides sales motivation programs and travel services its corporate headquarters are in fenton missouri at all relevant times bill maritz was chairman and chief_executive_officer of maritz inc before the stock redemptions described below bill maritz and his children collectively the maritz family owned half the voting shares of maritz inc the other half was owned by bill maritz’s sister jean hobler jean along with her husband wells hobler and their children peter christopher and leigh collectively the hobler family in damian married leigh in katherine married peter b katherine’s history with maritz inc in before marrying peter katherine began working for maritz inc as an internal auditor highly motivated and well regarded within the company she received consistently favorable reviews and advanced rapidly by date she had risen to the position of vice president director corporate accounting of maritz travel co a subsidiary of maritz inc and was receiving an annual salary of dollar_figure at all relevant times while employed at maritz inc katherine was an at-will employee ie she had no employment contract at no time did katherine or damian own any voting shares of maritz inc in their individual capacities c damian’s business history in damian began employment with first capitol printing arts inc first capitol a print shop that produces short-run two-color prints by date he had acquired one-third of the first capitol stock and was sales manager by date he had become president of first capitol in date he became sole owner of first capitol before the soon-to-be-described events of date damian would visit maritz inc each day and walk the halls soliciting jobs to bid on typically he would bid on one to three maritz inc jobs per week first capitol had no written contract to provide services to maritz inc damian got work from maritz inc only if he had the low bid in the first half of damian successfully solicited about dollar_figure of business from maritz inc representing less than percent of first capitol’s gross_receipts d shareholder dispute in a dispute arose between bill maritz and his sister jean regarding the family business negotiations commenced for maritz inc to redeem the hobler family voting shares the parties sharply disagreed on the redemption price on date kenneth suelthaus suelthaus the attorney representing the hobler family met with millard backerman backerman the attorney representing maritz inc suelthaus presented a preliminary independent appraisal of the hobler family’s maritz inc voting shares and stated that the hobler family was going to play hardball by asserting their rights as voting shareholders and electing their own nominees to the maritz inc board_of directors learning of these developments bill maritz was vexed in a date letter to his brother-in-law wells hobler he stated based on the news of your family’s disruptive and greedy plans which were passed on to millard backerman by ken suelthaus i no longer think of you and jean and your family as friends of maritz inc or of me and my family or of maritz management maritz people or of the maritz board_of directors since ken suelthaus emphasized to millard that all members of your family are fully in support of the actions you are planning please inform kathy katherine hobler that her employment at maritz will be terminated and please tell damian gerard that he will no longer be welcome to call on maritz inc in a date letter to the maritz inc board_of directors and members of the maritz family bill maritz stated that he was going to respond to the new tough approach of the hoblers in an even stronger manner by terminating katherine’s employment and first capitol’s vendor relationship with maritz inc on date at a special meeting of maritz inc vice presidents and corporate officers bill maritz declared that the hobler family was the enemy out to destroy maritz inc and that consequently katherine’s employment would be terminated and damian would no longer be in good standing to call on maritz inc katherine’s supervisor then summoned her to his office and informed her that maritz inc was terminating her employment because of the shareholder dispute about the same time damian received a message from maritz inc that the vendor customer relationship between maritz inc and first capitol was terminated and that all work in progress should be returned e assertion of katherine’s and damian’s claims katherine and damian immediately retained suelthaus to represent them in asserting claims against maritz inc on or about date during a meeting focused primarily on the redemption of the hobler family shares suelthaus discussed with backerman the recent events concerning katherine and damian suelthaus asserted claims for severance benefits on katherine’s behalf and for tortious interference with a business relationship on damian’s behalf he stated that these claims would need to be resolved before any agreement regarding the redemption could ultimately be reached f proposed corporate resolutions in a date letter to the maritz inc board_of directors jean hobler protested the actions taken by bill maritz against her daughter-in-law katherine and her son-in-law damian she stated i am shocked that bill’s response to a business situation is to inflict pain on my children does a chief_executive_officer have authority and is it proper corporate policy to exact retribution against shareholders with whom he disagrees the board_of directors will have to deal with the issues raised by these actions at a date annual shareholders meeting the hobler family elected three members of their choosing including ralph lobdell to the 7-member maritz inc board_of directors that same day at a meeting of the maritz inc board_of directors ralph lobdell introduced three resolutions one resolution called for reinstating katherine in her former position with the corporation and for compensating her for lost wages and benefits as well as for any emotional and or physical damages she may have suffered as a result of her termination in amounts to be determined by a committee of independent directors another resolution called for reinstating first capitol as a supplier to maritz inc and for compensating first capitol for lost profits on the cancelled orders and any other damages if any it may have suffered the other resolution called for a committee to review the termination of the vendor customer relationship between first capitol and maritz inc which it characterized as first capitol’s largest customer as well as the termination of katherine’s employment with maritz inc the board rejected each resolution by a four-to-three vote g personal effects on katherine and damian katherine’s termination from maritz inc resulted in dramatic changes in her personality she went from being a positive energetic decisive person to someone who for months after her termination could not sleep get out of bed eat or make even small decisions she also suffered embarrassment from the reporting of her termination in the newspaper and local business journal similarly the termination of damian’s professional relationship with maritz inc caused him shock and embarrassment and adversely affected his relationships with his business partners and customers h continued negotiations throughout the remainder of and into the beginning of the redemption negotiations continued in one meeting in the fall of peter hobler the designated representative of the hobler family described emotional damages to katherine and damian resulting from bill maritz’s actions and suelthaus asserted tort claims for emotional damage on katherine’s and damian’s behalf i tentative global agreement on date the parties reached a tentative global agreement on the redemption price of the hobler family shares and on the settlement of katherine’s and damian’s claims pursuant to this tentative agreement which was contingent on approval by the maritz inc board_of directors maritz inc would pay dollar_figure for the release of katherine’s and damian’s collective claims subsequently katherine and damian agreed that katherine would receive dollar_figure and damian would receive dollar_figure j suelthaus letters asserting claims backerman later told suelthaus that notwithstanding the tentative settlement agreement maritz inc could not resolve katherine’s and damian’s claims until suelthaus asserted them in writing consequently in a date letter to henry stolar the general counsel and senior vice president of maritz inc suelthaus asserted claims on katherine’s behalf as follows on or about date ms hobler katherine was terminated from her position as an officer of maritz travel company without reasonable prior notice entirely without cause and with the intent to injure her ms hobler was injured by the actions of maritz inc and we believe that she is entitled to compensatory_damages for wrongful termination of employment defamation infliction of emotional distress emotional pain suffering inconvenience mental anguish loss of enjoyment of life and other applicable claims arising out of and or related to the above event it is our intention to prepare a petition to be filed in a court of competent jurisdiction to seek legal redress for the personal damages suffered by ms hobler as a result of the outrageous conduct of maritz inc through its duly authorized agent in a date letter to henry stolar suelthaus asserted claims on damian’s behalf as follows on or about date maritz inc terminated its vendor customer and other relationships with mr gerard damian and his employer first capitol printing arts inc without reasonable prior notice and entirely without cause and with the intent to injure mr gerard mr gerard was injured by the actions of maritz inc and we believe that he is entitled to compensatory_damages for intentional interference with his employment relationship defamation infliction of emotional distress emotional pain suffering inconvenience mental anguish loss of enjoyment of life and other applicable claims arising out of and or related to the above event it is our intention to prepare a petition to be filed in a court of competent jurisdiction to seek legal redress for the personal damages sustained by mr gerard as a result of the outrageous conduct of maritz inc through its duly authorized agent k final settlement agreement on date a settlement agreement subject_to the approval of the maritz inc board_of directors was signed by bill maritz in his capacity as chairman and chief_executive_officer of maritz inc and in his individual capacity and by other members of the maritz and hobler families including katherine and damian pursuant to the settlement agreement the parties agreed that maritz inc would redeem the hobler family voting shares for about dollar_figure million and would settle any and all claims of katherine and damian including any claims arising from the termination of the vendor customer relationship between maritz inc and katherine damian or first capitol for dollar_figure to be paid to the persons and in the amounts set forth on schedule iii schedule iii to the settlement agreement sec dollar_figure of the settlement agreement wherein maritz inc is referred to as maritz provides in relevant part upon receipt of the sum of dollar_figure to be paid_by maritz to the persons and in the amounts set forth on schedule iii hereto and for other good and valuable consideration the receipt of which hereby is acknowledged the sellers jean maritz hobler wells a hobler katherine a hobler leigh hobler gerard and damian gerard the releasing parties and each of them hereby release and forever discharge each member of the william e maritz family maritz and each past present and future officer director shareholder employee and agent of maritz collectively the released parties from any and all manner of claims demands damages losses expenses causes of action debts liabilities controversies judgments and suits of every kind and nature whatsoever foreseen unforeseen or unforeseeable known or unknown resulting or to result now known or which may hereafter be discovered which the releasing parties and each of them now or in the future may have or hold or at any time heretofore had or held against the released parties or any of them resulting from or arising out of or in connection with or based on any facts causes matters or things existing from the beginning of the world to the time of consummation of the initial closing including by way of enumeration and not in limitation hereof all causes matters or things arising out of or in connection with a continued describes the payments to be made pursuant to this provision as follows a to katherine a hobler for personal damages as described in correspondence dated date from sellers’ attorney suelthaus to the general counsel of maritz the sum of dollar_figure b to damian gerard for personal damages as described in correspondence dated date from sellers’ attorney suelthaus to the general counsel of maritz the sum of dollar_figure section dollar_figure of the settlement agreement provides that the sellers shall cause first capitol to execute a mutual release with maritz inc as executed on date and signed by damian in his capacity as president of first capitol the mutual release provided that first capitol and maritz inc agreed to release all claims against each other including all claims in connection with the termination of any and all vendor customer and other relationships between the maritz released parties or any of them and first capitol on date the maritz inc board_of directors considered authorized and approved the settlement agreement signed on the previous day continued katherine a hobler’s employment with and termination of such employment by maritz and b the termination of any and all vendor customer and other relationships between maritz and damian gerard and any entity with which he was is or hereafter may be affiliated including without limitation first capitol printing arts inc l tax consistency letter a letter dated date addressed to peter hobler and signed by david fleisher the chief financial officer of maritz inc states that it is understood by maritz inc that the settlement payments to katherine and damian are and for income_tax purposes shall be treated as payments in settlement of claims for personal damages and therefore do not require reporting on form_1099 or any other applicable information reporting form m settlement payments tax reporting and examination on date katherine and damian received checks from maritz inc in amounts of dollar_figure and dollar_figure respectively maritz inc issued no form_1099 to katherine or damian petitioners did not report the settlement payments on their respective joint federal_income_tax returns on date respondent commenced examination of petitioners’ federal_income_tax returns on date by separate notices of deficiency respondent determined that the settlement payments were includable in petitioners’ respective taxable incomes for opinion petitioners argue that the amounts that katherine and damian received pursuant to the settlement agreement with maritz inc were entirely on account of personal injuries within the meaning of sec_104 and so are excludable from income petitioners bear the burden_of_proof see rule a i general principles except as otherwise provided in subtitle a of the internal_revenue_code gross_income means income from all sources sec_61 this statutory provision is construed broadly unlike statutory exclusions from income which are construed narrowly see 515_us_323 sec_104 excludes from gross_income the amount of any damages received whether by suit or agreement and whether as lump sums or as periodic_payments on account of personal injuries or sickness this provision excludes from gross_income only amounts that are received both through prosecution or settlement of an action based upon tort or tort type rights and on account of personal injuries or sickness commissioner v schleier supra pincite 105_tc_396 respondent’s examination of petitioners’ returns commenced before date consequently sec_7491 which in some circumstances may place the burden_of_proof on the commissioner has no application here see internal_revenue_service restructuring and reform act of publaw_105_206 sec c 112_stat_727 affd 121_f3d_393 8th cir for the taxable_year at issue personal injuries include both physical and nonphysical injuries see commissioner v schleier supra pincite n if amounts are received pursuant to a settlement agreement the nature of the claim that was the actual basis for settlement and not the validity of the claim governs whether such amounts are excludable from gross_income under sec_104 see 504_us_229 151_f3d_855 8th cir 58_tc_32 t he critical question is in lieu of what was the settlement amount_paid bagley v commissioner supra pincite this determination is factual id ii were the underlying causes of action based on tort or tort type rights to satisfy the first schleier requirement the taxpayer must prove the existence of a claim based upon tort or tort type rights see commissioner v schleier supra pincite for this purpose claims must be bona_fide but need not be valid or sustainable see mayberry v united_states supra pincite n 35_f3d_93 2d cir robinson the small_business job protection act of sbjpa publaw_104_188 sec 110_stat_1838 amended sec_104 by limiting the exclusion_from_gross_income to inter alia damages received on account of personal physical injuries or physical sickness this amendment however does not apply to amounts received before date see sbjpa sec d 110_stat_1839 therefore the sbjpa amendment is inapplicable to the instant case v commissioner 102_tc_116 affd in part revd in part on another issue and remanded 70_f3d_34 5th cir state law controls whether the nature of the claim is a tort or tort type right federal_law controls the federal tax consequences pertaining to such interests and rights see 317_us_154 87_tc_1294 affd 848_f2d_81 6th cir as reflected in the date suelthaus letters which are cross-referenced in schedule iii of the settlement agreement which in turn is cross-referenced in section dollar_figure of the settlement agreement katherine and damian asserted that their professional relationships with maritz inc were each terminated with intent to injure and sought compensatory_damages with respect to a variety of claims these letters assert in identical language certain common claims on katherine’s and damian’s behalf namely claims for compensatory_damages for defamation infliction of emotional distress emotional pain suffering inconvenience mental anguish loss of enjoyment of life and other applicable claims the date suelthaus letter asserts on katherine’s behalf an additional claim for wrongful termination of employment the date suelthaus letter asserts on damian’s behalf an additional claim of intentional interference with his employment relationship respondent acknowledges on reply brief that the amounts katherine and damian received from maritz inc were paid for the ‘personal damages’ stated in suelthaus’ date letters to henry stolar respondent further concedes that missouri recognizes ‘intentional infliction of emotional distress’ as a personal injury tort-like cause of action respondent does not dispute that katherine’s and damian’s other common claims asserted in the suelthaus letters ie the claims for defamation infliction of emotional distress emotional pain suffering inconvenience mental anguish and loss of enjoyment of life are also based on personal injury torts we also find that katherine’s claim for wrongful discharge from employment constituted a bona_fide tort claim katherine was an at-will employee ie she had no employment contract historically under missouri law an employer could generally discharge an at-will employee with or without cause see johnson v mcdonnell douglas corp s w 2d mo a number of missouri appellate decisions however have recognized that an at-will employee may have a cause of action in tort for damages for wrongful discharge where the discharge is in violation of public policy boyle v vista eyewear inc s w 2d mo ct app see also lynch v blanke baer bowey krimko inc s w 2d mo ct app we need not decide whether katherine would have been able to sustain a claim for wrongful discharge since it is the nature of the claim and not its validity that matters for present purposes see eg mayberry v united_states supra pincite n we conclude that katherine asserted a bona_fide tort claim for wrongful discharge and that maritz inc recognized it as such similarly damian’s claim for interference with his employment relationship falls within a larger category of claims for tortious interference with a business relationship such tort claims are recognized under missouri law see 536_f2d_1233 8th cir fischer spuhl herzwurm associates inc v forrest t jones co s w 2d mo in sum we conclude that the first element of schleier is met with respect to the various claims asserted on katherine’s noting that it had neither expressly defined nor adopted the exception the missouri supreme court in luethans v wash univ s w 2d n mo stated that for purposes of that opinion we assume that the public policy exception to the at-will employment doctrine exists millard backerman the attorney who represented maritz inc in the settlement negotiations testified that he believed that he made inquiries at his law firm during the negotiations as to whether an at-will employee could have a cause of action for wrongful discharge in missouri and was told there is that possibility on some kind of a specialized tort action and damian’s behalf in the suelthaus letters as incorporated by cross-reference in the settlement agreement iii were the payments received on account of personal injuries or sickness to satisfy the second element of the schleier test the taxpayer must show that the payments were received on account of personal injuries or sickness see sec_104 commissioner v schleier u s pincite for this purpose each element of a tort settlement must be examined to determine whether there is a direct causal link between the tort and a personal injury commissioner v schleier supra pincite a the allocation of the settlement proceeds between katherine and damian respondent contends that because maritz inc initially agreed to pay a lump sum of dollar_figure to discharge both katherine’s and damian’s claims and the hobler family later decided upon the allocation between katherine and damian it is impossible to attribute the necessary ‘direct causal link’ between this lump sum and the alleged personal injuries suffered we disagree the tentative agreement to provide a lump-sum amount to be divided between katherine and damian was contingent upon approval by the maritz inc board_of directors before the agreement was approved backerman insisted on suelthaus’ asserting katherine’s and damian’s respective claims in writing which he did the final settlement agreement as approved by the maritz inc board_of directors expressly provided for dollar_figure to be paid to katherine and dollar_figure to be paid to damian in settlement of their respective claims as asserted in the suelthaus letters on these facts the manner in which the allocation between katherine and damian was reached is not determinative of the existence or absence of a causal link between the payments to each and personal injuries suffered by each b the effect of the characterization of the settlement proceeds as being for personal damages petitioners contend that the settlement agreement expressly allocates the settlement payments to katherine’s and damian’s claims for personal injuries noting that schedule iii of the settlement agreement refers to the settlement payments to katherine and damian as being for personal damages as does the date suelthaus letters and the so-called tax consistency letter we disagree with petitioners’ contention in the first instance we are unconvinced that maritz inc would have understood the term personal damages as used in these various documents to be synonymous with tort type personal injuries we believe a more reliable indicator of maritz inc ’s intent is found in section dollar_figure of the settlement agreement which expressly indicates that the payments to katherine and damian would discharge all manner of claims that might arise from the termination of their professional relationships with maritz inc even if we were to assume however for sake of argument that by using the term personal damages the parties to the settlement agreement meant to expressly allocate the settlement proceeds exclusively to tort type personal injuries we still would not find such an allocation dispositive here for the reasons described below an express allocation in a settlement agreement will generally be followed if the parties have entered into the agreement in an adversarial context at arm’s length and in good_faith such an express allocation is not necessarily determinative however if other facts indicate that the payment was intended by the parties to be for a different purpose bagley v commissioner t c pincite absent an express allocation in the settlement agreement the most important consideration is the payor’s intent in making the payment 88_tc_834 affd without published opinion 845_f2d_1013 3d cir sec dollar_figure of the settlement agreement provides that upon receipt of the sum of dollar_figure to be paid_by maritz to the persons and in the amounts set forth on schedule iii hereto the parties will release and discharge all manner of claims in connection with or based on any facts causes matters or things existing from the beginning of the world including all causes matters or things arising out of or in connection with the termination of katherine’s and damian’s professional relationships with maritz inc in key respects the circumstances here are similar to those in lefleur v commissioner tcmemo_1997_312 in lefleur the taxpayer received a lump-sum settlement payment that covered both tortlike personal damages and other damages the settlement agreement allocated percent of the proceeds to tortlike personal damages id the evidence indicated that although the underlying litigation was adversarial by the time the settlement agreement was reached the parties were no longer adversaries id because the payor was unconcerned with the allocation of the settlement proceeds as between tortlike personal injuries and other injuries the taxpayer in effect was able to unilaterally allocate the proceeds in an attempt to maximize tax advantages for themselves id consequently this court refused to blindly accept the parties’ allocation of settlement proceeds where the allocation is patently inconsistent with the realities of the underlying claims id see also bagley v commissioner supra pincite robinson v commissioner t c pincite burditt v commissioner tcmemo_1999_117 hess v commissioner tcmemo_1998_240 the characterization of the payment in a settlement agreement or other executed document is not always dispositive for example when the record proves the characterization inconsistent with the realities of the settlement in the instant case as in lefleur v commissioner supra the evidence does not suggest that the parties had any adversarial interests in characterizing the settlement payments as being for personal damages on the basis of all the evidence it appears that the personal damages characterization occurred after the parties had reached agreement in principle on the settlement clearly petitioners had tax motivations for characterizing the payments as being for personal injuries the evidence strongly suggests that maritz inc was unconcerned with how the payments were allocated so long as all potential claims were discharged in sum we are unconvinced that the mere use of the term personal damages in various documents as described above establishes that maritz inc intended the settlement payments to discharge exclusively claims for personal injuries or sickness consequently we look to all the evidence to determine the nature of the underlying claims for which the payments were made and the intent of maritz inc in making the payments millard backerman testified that he thought the lion’s share of the tax consistency letter was drafted by katherine’s and damian’s attorney kenneth suelthaus petitioners seek to counter this testimony with testimony by david fleisher former chief financial officer of maritz inc that the tax consistency letter was drafted by our lawyers we find backerman’s testimony more credible in this regard particularly in light of the fact that backerman was maritz inc ’s attorney in the settlement negotiations c the underlying claim sec_1 katherine’s and damian’s claims for personal injuries on the basis of all the evidence we believe that bill maritz’s actions caused katherine and damian to suffer personal injuries in particular katherine’s termination from maritz inc caused her acute emotional distress and resulted in dramatic changes in her personality the termination of damian’s professional relationship with maritz inc also caused him emotional distress and damaged his professional reputation such claims were asserted on katherine’s and damian’s behalf in the settlement negotiations with maritz inc we believe that maritz inc took these claims seriously and intended the settlement payments at least in part to discharge such claims accordingly we find that the settlement payments were received at least in part through settlement of tort-based claims on account of personal injuries or sickness to that extent the settlement payments are excludable from income pursuant to sec_104 as amounts received based upon tort rights and on account of personal injuries see eg united_states v burke u s pincite n recognizing that sec_104 covers damages for injuries affecting emotions reputation or character and traditional harms associated with personal injury include pain and suffering emotional distress and harm to reputation threlkeld v commissioner t c pincite holding that compensatory_damages received for malicious prosecution including compensation_for injuries to professional reputation were excludable under sec_104 gross v commissioner tcmemo_2000_342 holding that lump-sum settlement payment covering claim for defamation was excludable under sec_104 burditt v commissioner supra holding that settlement proceeds paid to settle a claim for mental anguish were excludable under sec_104 noel v commissioner tcmemo_1997_113 holding that settlement proceeds attributable to a claim for tortious interference with contractual rights and prospective business advantages were excludable under sec_104 for the reasons described below however we are unpersuaded that katherine and damian received the settlement payments exclusively on account of personal injuries or sickness katherine’s claims for economic injuries on or about date immediately after maritz inc terminated katherine’s employment suelthaus met with backerman and asserted a claim for severance benefits on katherine’s behalf about weeks later the hobler family through one of their newly elected maritz inc board members introduced a resolution to reinstate katherine in her former position and to compensate her for lost wages and benefits as well as for any emotional and or physical damages she may have suffered as a result of her termination clearly then at least initially claims were asserted on katherine’s behalf for economic injuries as well as for emotional and physical damages there is no suggestion in the record that maritz inc ever received any affirmative indication that katherine had abandoned her previously asserted claims for economic injuries particularly in light of the assertion on katherine’s behalf in the date suelthaus letter of a claim for wrongful discharge from employment we are convinced that maritz inc intended the settlement payment to katherine to discharge her previously asserted and never-withdrawn claims for economic injuries as well as her claims for personal injuries damian’s and first capitol’s claims for economic injuries at the meeting between suelthaus and backerman on or about date suelthaus asserted a claim on damian’s behalf for tortious interference with a business relationship about weeks later the hobler family through one of their newly elected maritz inc board members introduced a resolution to reinstate first capitol as a supplier to maritz inc and to compensate it for lost profits on the cancelled orders and any other damages if any it may have suffered no resolution was introduced to compensate damian for any separate injuries he may have suffered personal or otherwise we believe at that early juncture in the negotiations the claims asserted on behalf of damian individually were and would have been perceived by maritz inc as being part and parcel of the claims for economic injuries asserted on behalf of first capitol of which damian was a significant owner the record contains no suggestion that maritz inc ever received any affirmative indication that damian or first capitol had abandoned their previously asserted claims for such economic injuries to the contrary section dollar_figure of the settlement agreement expressly states that the settlement payment to damian was in discharge of any claims arising from the termination of any and all vendor customer and other relationships between maritz and damian gerard and first capitol printing arts inc section dollar_figure of the settlement agreement required first capitol for no apparent consideration beyond the dollar_figure settlement payment to damian to execute a release of any claims against maritz inc on date damian executed such a release in his capacity of president of first capitol we believe these circumstances show that the dollar_figure payment to damian was intended to discharge economic injury claims previously asserted on behalf of first capitol as well as related economic injuries and personal injuries asserted by damian in his individual capacity allocation of the settlement payments as just discussed we are convinced that the settlement payments to katherine and damian were on account of both personal injuries and economic injuriesdollar_figure the record does not suggest that maritz inc was ever presented with empirical evidence as to the extent of either katherine’s or damian’s personal or economic injuriesdollar_figure the record is clear however that maritz inc took seriously the various claims that suelthaus asserted on katherine’s and damian’s behalf believed that katherine and damian would litigate these claims if they were not settled and made the settlement payments to discharge all such claims for personal and economic injuries alikedollar_figure in these circumstances on the basis of all the evidence we do not believe that any part of the payments to katherine and damian was in redemption of maritz inc stock the redemption agreement was only for maritz inc voting_stock katherine owned only nonvoting_stock damian owned no maritz inc stock in his individual capacity in his testimony backerman made clear that maritz inc viewed the payments it made to discharge katherine’s and damian’s claims as being separate from the payments it made to redeem the hobler voting_stock we note that before her termination katherine was earning a dollar_figure salary as a corporate officer of maritz inc and that damian did dollar_figure worth of business with the corporation over a 6-month period the record does not suggest however any direct correlation between these figures and the amounts of the settlement payments backerman testified that maritz inc took seriously the claims asserted by suelthaus on katherine’s and damian’s behalf he testified that maritz inc should not have and did not come to a resolution of the stock_redemption issue without also clearing up these asserted claims such as they were and it continued we use our best judgment to allocate the settlement payments see 98_tc_1 burditt v commissioner tcmemo_1999_117 goeden v commissioner tcmemo_1998_18 noel v commissioner tcmemo_1997_113 see also 39_f2d_540 2d cir 59_tc_634 on the basis of the whole record and bearing against petitioners who have the burden_of_proof we conclude that neither personal injury claims nor economic injury claims predominated in the calculus of maritz inc ’s reasons for making the settlement payments but rather that both types of claims weighed equally without distinction between katherine’s and damian’s claims accordingly we conclude and hold that one-half of katherine’s and damian’s respective settlement payments are excludable from gross_income under sec_104 continued would not have made sense for the company to be paying many millions of dollars to the hoblers for redemption of their stock that they could use to pursue claims in court he testified that maritz inc certainly felt there was a possibility that katherine and damian would proceed to litigation unless their claims were settled he testified that katherine and damian were making demands and in the overall it was just time to get this matter behind us he testified that maritz inc did settle those claims and they would not have settled those claims if they thought they were totally worthless we regard backerman’s testimony as especially creditable given that he was the attorney who negotiated the redemption agreement and settlement payments on behalf of maritz inc we also note that he was called as respondent’s witness we have considered all arguments the parties have raised arguments not addressed herein we have concluded are irrelevant or without merit to reflect the foregoing and the parties’ concessions decisions will be entered under rule