t c memo united_states tax_court constance h briley petitioner v commissioner of internal revenue respondent docket no filed date charles i cate for petitioner shari a salu for respondent memorandum findings_of_fact and opinion jacobs judge this matter is before us with respect to respondent’s denial of petitioner’s request for spousal relief from joint_and_several_liability under section for and years involved 1unless otherwise indicated all section references are to the internal continued findings_of_fact some of the facts have been stipulated and are so found the stipulated facts are incorporated in our findings petitioner resided in virginia when she timely filed her petition i petitioner’s and mr briley’s backgrounds petitioner married mr briley in they were married during the years involved and although they separated in they remained married as of the date of trial petitioner and mr briley filed their and form sec_1040 u s individual_income_tax_return as married_filing_jointly petitioner and mr briley both worked during the years involved holding a degree in industrial psychology petitioner was employed as a recruiter and human resources department generalist mr briley was the president of briley builders inc briley builders a virginia s_corporation established in which built and renovated residential homes mr briley was the company’s only employee it engaged subcontractors to perform the construction work although briley builders never issued stock petitioner believed she and mr briley were each shareholders of the company although she now believes mr briley wa sec_1 continued revenue code as amended and in effect at all relevant times all dollar amounts are rounded to the nearest dollar the sole shareholder petitioner based her original belief on mr briley’s representations to her again on the basis of his representations petitioner believed she was an officer of briley builders however she never participated in the company’s business and had no signature_authority over its bank accounts briley builders’ records were kept in the marital home but petitioner never sought to look at them petitioner and mr briley kept their finances separate petitioner deposited her wages of dollar_figure in and dollar_figure in in her separate bank account briley builders’ receipts were deposited in accounts controlled by mr briley petitioner and mr briley divided responsibility for their household expenses petitioner paid the utility expenses from her bank account while mr briley paid the family’s grocery bills and the mortgage on the marital home using briley builders’ bank accounts petitioner and mr briley purchased a marital home in for dollar_figure they used dollar_figure from the sale of their prior residence as a downpayment and financed the balance at the time of trial the home was encumbered by at least two liens the first was a mortgage held by chase bank and had an outstanding balance of dollar_figure as of date the second was a home equity loan held by usaa federal savings bank and had an outstanding balance of dollar_figure as of date and at trial petitioner introduced a deed_of_trust in favor of her father-in-law it was dated date but it was not signed and notarized until date just over a month after the internal_revenue_service irs issued a notice_of_deficiency to petitioner and mr briley with respect to the underlying tax matter see infra pp the deed_of_trust states that it was made to secure a dollar_figure loan from petitioner’s father-in-law which was evidenced by a note the note was not introduced at trial petitioner was not making payments on the usaa home equity loan or the alleged note as of the date of trial ii petitioner’s and mr briley’s underlying tax matter we now turn to the underlying matter which generated petitioner’s request for spousal relief in briley builders paid dollar_figure for a residential property in washington d c which the company renovated and rehabilitated during and in the property was sold for dollar_figure mr briley engaged norman shaft of the tax_return preparation firm jackson hewitt to prepare briley builders’ and forms 1120s u s income_tax return for an s_corporation as well as petitioner’s and mr briley’s joint tax_return for a year not before the court and as briley builders was an s_corporation the amounts reported on its forms 1120s passed through to its shareholders and were reported on petitioner and mr briley’s joint form sec_1040 briley builders did not capitalize its rehabilitation and construction costs of dollar_figure as required by sec_263a instead it improperly treated such costs as currently deductible expenses because of this improper deduction as well as other deductions briley builders reported a net_operating_loss nol of dollar_figure for which respondent disallowed see infra pp the company carried this nol to and petitioner and mr briley’s joint form_1040 reported adjusted_gross_income of dollar_figure no tax due and a refund of dollar_figure on briley builders’ form_1120s the company reported total income of dollar_figure and ordinary business income of dollar_figure an nol carryforward was erroneously reported on petitioner and mr briley’s joint form_1040 as a result petitioner and mr briley’s joint form_1040 reported adjusted_gross_income of dollar_figure and tax owed of dollar_figure on briley builders’ form_1120s the company reported total income of dollar_figure and an ordinary business loss of dollar_figure an nol carryforward was erroneously reported on petitioner and mr briley’s joint form_1040 a sec_2petitioner and mr briley filed a joint form 1040x amended u s individual_income_tax_return for the amended tax_return also sought a dollar_figure refund a result petitioner and mr briley’s joint form_1040 reported adjusted_gross_income of dollar_figure no taxable_income and tax owed of dollar_figure briley builders’ forms 1120s were signed by mr briley as the company’s president and by mr shaft as the return preparer petitioner provided her forms w-2 wage and tax statement for and she signed the form sec_1040 but did not review them iii the underlying tax_court case respondent determined deficiencies in income_tax and penalties against petitioner and mr briley with respect to their and tax years on date respondent issued a notice_of_deficiency with respect to those determinations attached to the notice_of_deficiency was form 4549-a income_tax discrepancy adjustments stating that briley builders had improperly carried forward the alleged nol to and which in turn improperly offset other income on petitioner and mr briley’s income_tax returns the form 4549-a further stated that briley builders had failed to substantiate substantial amounts of deductions claimed on its and forms 1120s petitioner and mr briley mailed a petition to this court on date which was filed on date and assigned docket no the matter was submitted to the court for decision on a fully stipulated basis on date petitioner and mr briley represented themselves on date the court rendered its opinion in briley v commissioner tcmemo_2014_114 vacated and remanded 662_fedappx_305 4th cir a decision was entered on date as follows year deficiency dollar_figure big_number penalty sec_6662 dollar_figure big_number petitioner and mr briley appealed the court’s decision to the court_of_appeals for the fourth circuit on date the court_of_appeals vacated this court’s decision finding that the petition filed in the tax_court was untimely and remanded the case to the court with instructions to dismiss the petition for lack of jurisdiction we vacated our decision and dismissed the case for lack of jurisdiction on date pursuant to the dismissal of the case respondent assessed the following deficiencies in income_tax and penalties against petitioner and mr briley year deficiency dollar_figure big_number penalty sec_6662 dollar_figure big_number iv petitioner and mr briley’s divorce proceedings as the underlying case proceeded through this court mr briley assaulted two police officers and was sentenced to six years in prison in petitioner separated from mr briley and initiated divorce proceedings at an unspecified time before date a property settlement agreement property settlement was drafted with respect to the marital assets the property settlement provided that t he wife agrees to relinquish any and all claim title and interest in the husband’s stock ownership of briley builders inc and j b b enterprises inc both virginia corporations in which he is the stockholder the settlement agreement disposed of the marital home as follows the parties own the marital residence as tenants_by_the_entirety the property is subject_to a first and second deed_of_trust and may be subject_to further tax_liens from the irs arising from liability for unpaid income taxes from and the husband agrees to convey all of his right title and interest in the property through his execution and delivery of a quit claim deed of even date with the date of this agreement the wife shall have the sole right to live in this property from the date of this agreement she shall continue to be solely responsible for the payment of all of the mortgage payment real_estate_taxes insurance and maintenance_expenses the husband hereby relinquishes all of his title and interest in said property arising from his marital status as the husband she the wife further indemnifies the husband for any and all liability arising under the first and second deeds of trust secured against this property the property settlement did not mention petitioner’s father-in-law’s deed_of_trust mr briley signed the property settlement before a notary public on date on the same date mr briley signed and had notarized a quitclaim_deed conveying the marital home to petitioner petitioner did not sign the property settlement it remained unexecuted as of the date of trial the property settlement and the quitclaim_deed state that the transfer of the marital home was a result of the divorce proceedings however petitioner introduced a document stating that the marital home was transferred to her as a result of a lawsuit by the two police officers whom mr briley had assaulted in a letter sent to the irs as part of petitioner’s request for innocent spouse relief petitioner’s attorney mr cate stated in mr briley was incarcerated after being convicted of assaulting a police officer and was sentenced to six years in prison mrs briley sought legal counsel to obtain a divorce however because her limited funds caused by the loss of her husband’s income mrs briley was unable to go forward with the divorce at the same time the injured police officer threatened to sue mr briley for the damages he had sustained and because the only asset available to satisfy a judgment against mr briley was the couple’s home her attorney advised mrs briley to have title to the property transferred to her which she did it is important to note that this asset transfer was in no way a fraud on the irs mrs briley was still fully liable for taxes as a joint signatory on all tax returns and the real_estate to which she now held exclusive title was just as exposed to irs collection efforts as it was before the transfer in fact since no lien had been filed the transfer actually protected the interest of the irs over a potential superior judgment lien in favor of the police officer when asked about the discrepancy as to the reason the marital residence was transferred petitioner stated that mr cate must have misunderstood what i was explaining to him ultimately mr briley’s liability insurance carrier paid the judgment obtained by the injured police officers v petitioner’s innocent spouse request on date respondent received petitioner’s timely filed form_8857 request for innocent spouse relief for and through attached to form_8857 was a letter drafted by mr cate explaining petitioner’s request on date petitioner submitted a form 433-a collection information statement for wage earners and self-employed individuals wherein she stated that her house’s current market_value was dollar_figure there were current loans outstanding of dollar_figure and her equity in the house was dollar_figure petitioner submitted a second form 433-a on date wherein she stated that the house’s current market_value was dollar_figure and there were current loans outstanding of dollar_figure because of the formula used by form 433-a petitioner was deemed to have no equity in the home petitioner was unable to explain the 3in calculating the values of personal assets form 433-a directs the filer to enter an asset’s current market_value multiply that amount by and then continued discrepancy between the two forms 433-a nor did she claim any change_in_circumstances between the filing dates of the two forms nor did she address the fact that neither form 433-a reflected the amounts evidenced in the two bank loans and the deed_of_trust see supra pp on date respondent issued a final_determination denying petitioner relief under sec_6015 c and f the determination_letter stated that it would not be unfair to hold petitioner liable for the understatement_of_tax on the joint and income_tax returns because petitioner knew or had reason to know of the items causing the tax debt opinion i introduction to relief from joint_and_several_liability in general married taxpayers who file a joint federal_income_tax return are jointly and severally liable for the tax reported or reportable on the tax_return sec_6013 but under limited circumstances set forth in sec_6015 a spouse who has made a joint_return may elect to seek relief from joint_and_several continued subtract the outstanding loan balance to establish the asset’s total value thus petitioner entered the market_value of the home dollar_figure and multiplied that amount by resulting in a product of dollar_figure subtracting the loan balance of dollar_figure resulted in a value of dollar_figure pursuant to the form’s instructions petitioner reported her equity in the home as zero liability petitioner seeks such spousal relief under subsections b and f of sec_6015 ii sec_6015 relief a introduction sec_6015 provides that a taxpayer will be relieved of liability for an understatement_of_tax if a a joint_return was made for the taxable_year in question b on such return there is an understatement_of_tax attributable to erroneous items of the nonrequesting spouse c the requesting spouse establishes that in signing the return he or she did not know and had no reason to know that there was such understatement d taking into account all the facts and circumstances it would be inequitable to hold the requesting spouse liable for the deficiency attributable to the understatement and e the requesting spouse elects to invoke the benefits of subsection b within two years after the date the secretary has begun collection actions with respect to the requesting spouse the requirements of sec_6015 are conjunctive failure to satisfy any one precludes relief 119_tc_306 aff’d 101_fedappx_34 6th cir and the requesting spouse bears the burden of proving entitlement to sec_6015 relief id pincite respondent concedes that petitioner satisfies the requirements of sec_6015 b and e petitioner and mr briley filed joint tax returns for the years involved the understatements are attributable to mr briley and she sought relief within the two-year collection limitations_period but asserts that she does not meet the requirements of subparagraphs c the requesting spouse must establish that he she did not know and had no reason to know of the understatement_of_tax on the return sec_4 and d it would be inequitable to hold the requesting spouse liable for the deficiency b sec_6015 reason to know sec_6015 requires that the spouse requesting relief must establish that he she did not know and had no reason to know of the understatement_of_tax on the return a taxpayer who signs a return is generally charged with constructive knowledge of its contents in establishing that a taxpayer had no reason to know the taxpayer must show that she was unaware of the circumstances that gave rise to the error and not merely unaware of the tax consequences sec_6015 does not protect a spouse who turns a blind eye to the requirement in sec_6015 is virtually identical to the same requirement of former sec_6013 therefore cases interpreting former sec_6013 remain instructive to our analysis doyel v commissioner tcmemo_2004_35 wl at facts readily available to her 132_tc_203 citations omitted an individual has reason to know of the understatement if a reasonably prudent taxpayer in her position at the time she signed the return could be expected to know that the return contained the understatement 121_tc_73 see sec_1_6015-2 income_tax regs consequently the requesting spouse has a duty_of inquiry with respect to the income_tax return filed 114_tc_276 abrogated on other grounds by 132_tc_203 the duty_of inquiry is subjective focusing on the individual seeking relief id pincite smith v commissioner tcmemo_2009_237 factors to be considered in making this determination are the requesting spouse’s level of education the requesting spouse’s involvement in the family’s business and financial affairs the presence of expenditures that appear lavish or unusual when compared to the family’s past levels of income standard of living and spending patterns and the culpable spouse’s evasiveness and deceit concerning the couple’s finances see 992_f2d_1256 2d cir aff’g tcmemo_1992_228 butler v commissioner t c pincite we believe petitioner had reason to know of the understatement_of_tax on her and mr briley’s joint form_1040 for each of the years involved petitioner was college educated even a cursory review of each year’s tax_return would have revealed that the return reported a large negative income and caused a reasonably prudent individual in the shoes of petitioner to question the accuracy of the negative income admittedly much of the negative income in and arises from nol carryforwards and petitioner does not have a financial education see wang v commissioner tcmemo_2014_206 at citing 595_f3d_338 6th cir aff’g t c memo but having a sophisticated financial education is not necessary to understand petitioner’s and mr briley’s joint tax returns petitioner testified she was sure briley builders made money from through including each of the years involved yet in briley builders reported a large loss resulting in petitioner’s and mr briley’s joint form_1040 reporting an income of dollar_figure as a reasonably prudent taxpayer petitioner had a duty to question mr briley or mr shaft as to how an ostensibly profitable company such as briley builders could lose so much money see 112_f3d_1258 5th cir tax returns setting forth ‘dramatic deductions’ will generally put a reasonable taxpayer on notice that further investigation is warranted aff’g in part rev’g in part tcmemo_1995_572 levin v commissioner tcmemo_1987_67 explaining that the spouse requesting relief had a duty to inquire about large deductions reported on the face of the joint tax_return and could not escape her responsibilities by ignoring the contents of the return when signing aside from petitioner’s testimony that mr briley misrepresented her ownership_interest and position as an officer in briley builders there is nothing in the record to indicate that mr briley was deceitful or evasive with respect to his and petitioner’s personal finances thus petitioner cannot escape her responsibility to be informed of the contents of the joint tax_return consequently we find that petitioner had reason to know of the understatements on each of the returns for the years involved within the meaning of sec_6015 we thus hold that petitioner is not entitled to the requested relief from joint_and_several_liability under sec_6015 iii sec_6015 equitable relief sec_6015 provides equitable relief under procedures prescribed by the secretary if taking into account all the facts and circumstances it is inequitable to hold the individual liable for any unpaid tax or deficiency and relief is not available to the requesting spouse under subsection b or c the requesting spouse has the burden of proving that he she is entitled to relief alt v commissioner t c pincite we apply a de novo scope and standard of review in reviewing the requesting spouse’s prayer for relief porter v commissioner t c pincite the commissioner published revproc_2013_34 2013_43_irb_397 outlining factors the irs normally considers in deciding whether sec_6015 relief should be granted revproc_2013_34 sec_4 i r b pincite sets forth a three-step procedure to be followed by the irs in evaluating spousal requests for relief section dollar_figure lists seven threshold conditions which must be met section dollar_figure lists circumstances in which the irs will make streamlined relief determinations and section dollar_figure sets forth nonexclusive factors that the irs will consider in determining whether equitable relief should be granted because it would be inequitable to hold a requesting spouse jointly and severally liable 5while this court is not bound by irs revenue procedures we often look to them for guidance hollimon v commissioner tcmemo_2015_157 at see 136_tc_432 a threshold conditions the first step of the three-step procedure consists of seven threshold conditions found in revproc_2013_34 sec_4 i r b pincite that must be met the requesting spouse filed a joint_return for the taxable_year for which he she seeks relief relief is not available under sec_6015 or c the claim is timely filed no assets were fraudulently transferred between the spouses the nonrequesting spouse did not transfer disqualified assets as that term is defined by sec_6015 to the requesting spouse if the nonrequesting spouse did transfer such a disqualified_asset relief is only available to the extent the income_tax_liability exceeds the value of the disqualified assets no knowledge of the filing of a fraudulent return and liability is attributable in full or in part to an item of the nonrequesting spouse if the liability is partially attributable to the requesting spouse then relief can only be considered for the portion of the liability attributable to the nonrequesting spouse nonetheless the irs will consider granting relief regardless of whether the understatement deficiency or underpayment is attributable in full or in part to the requesting spouse if any of the following exceptions apply a attribution solely due to the operation of community_property law b nominal ownership by the requesting spouse c misappropriation of funds by the nonrequesting spouse d abuse of the requesting spouse by the nonrequesting spouse which prevented him her from challenging the treatment of any items on the return or questioning the payment of any balance due reported on the return or e fraud committed by the nonrequesting spouse respondent asserts that petitioner fails to meet condition no fraudulent transfer of assets and condition no transfer of disqualified assets fraudulent transfer on brief respondent states that the transfer of an asset with the intention of avoiding tax qualifies as an asset that was transferred as part of a fraudulent scheme respondent thus implies that mr briley and petitioner transferred the marital home with the intention of defrauding the irs sec_1_6015-1 income_tax regs provides that a fraudulent scheme includes a scheme to defraud the service or another third party and we have previously found a fraudulent scheme exists when spouses transfer property with the intent to hide the transfer see chen v commissioner tcmemo_2006_160 wl at but the record in this case contains no evidence to support a position that petitioner concealed from or misrepresented to the irs facts concerning the transfer of the marital home from the irs see 317_us_492 91_tc_874 hence on the basis of the record in this case with regard to petitioner’s eligibility for spousal relief under sec_6015 we hold that assets were not fraudulently transferred between spouses condition disqualified assets sec_6015 defines a disqualified_asset in general to be a ny property or right to property transferred to an individual making the election under this subsection with respect to a joint_return by the other individual filing such joint_return if the principal purpose of the transfer was the avoidance of tax or payment of tax sec_6015 provides the following presumption with respect to classifying assets as disqualified for purposes of clause i except as provided in subclause ii any transfer which is made after the date which i sec_1 year before the date on which the first letter of proposed deficiency which allows the taxpayer an opportunity for administrative review in the internal_revenue_service office of appeals is sent shall be presumed to have as its principal purpose the avoidance of tax or payment of tax sec_6015 provides subclause i shall not apply to any transfer pursuant to a decree of divorce or separate_maintenance or a written instrument incident to such a decree or to any transfer which an individual establishes did not have as its principal purpose the avoidance of tax or payment of tax we agree with respondent’s assertion that the marital home constitutes a disqualified_asset in this regard we are mindful that the quitclaim_deed transferring the property to petitioner from mr briley was entered into on date well after respondent issued the notice_of_deficiency in the underlying matter petitioner has not demonstrated that she falls under the exception of sec_6015 as of the date of trial petitioner remained married to mr briley hence there is no divorce decree petitioner provided the court with the date property settlement between her and mr briley but she never signed it petitioner alleges that she had valid nontax purposes for the transfer of the marital home but her credibility in this regard is eroded by her shifting statements petitioner introduced a letter from her divorce attorney mr scholar stating that the deed transferring the marital home to her was filed pursuant to the terms of an unexecuted property settlement but on the basis of the statements in mr cate’s letter to the irs that the marital home was transferred to petitioner to protect the home from judgment in a lawsuit against mr briley related to his assault case we question the veracity of the statements made in mr scholar’s letter moreover we are concerned by the shifting value of the marital home reported on the forms 433-a petitioner submitted to the irs which affects the question of whether the income_tax_liability exceeded the value of the home and if so to what extent and finally we are skeptical as to the bona fides of the alleged note giving rise to the lien against the house set forth in petitioner’s father-in-law’s deed_of_trust in sum we hold that condition no transfer of disqualified assets occurred was not met b equitable relief factors revproc_2013_34 sec_4 i r b pincite provides a list of nonexclusive factors to be weighed by the commissioner in making a decision they include a marital status ie do the spouses remain together b economic hardship c knowledge or reason to know of the understatement by the requesting spouse d legal_obligation arising from a divorce decree or other binding agreement e significant benefit gained by the requesting spouse f compliance with income_tax laws and g mental or physical health at the time of filing the request for relief no single factor is determinative and all factors are considered and weighted appropriately kellam v commissioner tcmemo_2013_186 at the parties agree that factors a b d and g are neutral accordingly we limit our inquiry to factors c knowledge or reason to know of the understatement by the requesting spouse e significant benefit gained by the requesting spouse and f compliance with income_tax laws knowledge or reason to know under this factor we examine whether the requesting spouse knew or had reason to know that there was an understatement or deficiency on the joint income_tax return or knew or had reason to know that the nonrequesting spouse would not or could not pay a reported but unpaid tax_liability see revproc_2013_34 sec_4 c ii i r b pincite the factors enunciated in the revenue_procedure are essentially the same as those relied upon by sec_6015 as discussed supra pp petitioner had reason to know of the understatements of tax this factor weighs against relief significant benefit under this factor we consider whether the requesting spouse received a significant benefit beyond normal support from not paying the unpaid income_tax_liability revproc_2013_34 sec_4 e i r b pincite normal 6there was no underpayment_of_tax reported on the joint_return for either of the years involved support is measured by the circumstances of the particular parties porter v commissioner t c pincite this factor will weigh in favor of relief only if the nonrequesting spouse significantly benefited from not paying the unpaid tax or understatement and the requesting spouse had little or no benefit or the nonrequesting spouse enjoyed the benefit to the requesting spouse’s detriment id as examples the revenue_procedure points to lavish lifestyles such as owning luxury assets and taking expensive vacations respondent presented no evidence of such exorbitant spending and we do not believe that this factor tilts one way or the other in favor of granting or denying relief we therefore accept petitioner’s invitation to consider this factor neutral compliance with income_tax laws because petitioner remained married to mr briley and filed separate returns after the years involved we consider whether she was in compliance with the tax laws for tax years after see revproc_2013_34 sec_4 f iii i r b pincite petitioner failed to file an income_tax return with respect to petitioner offers no explanation as to why she failed to file a tax_return for that year this factor weighs against relief c conclusion after considering all of the facts and circumstances we find two factors weighing against relief with the remaining factors neutral we thus conclude that it would not be inequitable to hold petitioner liable for the payment of tax in this matter to reflect the foregoing decision will be entered for respondent


internal_revenue_service p o box cincinnati oh release number release date date date legend p state q dollars amount r dollars amount dear department of the treasury employer_identification_number contact person - id number contact telephone number uil you asked for advance approval of changes in and expansion of your scholarship program under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax our determination we approved your procedures for awarding scholarships based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding scholarships meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable also awards made under these procedures are scholarship or fellowship grants and are not taxable to the recipients if they use them for qualified_tuition_and_related_expenses subject_to the limitations provide in code sec_117 description of your request your letter indicates you are seeking advance approval to change and expand your scholarship program in addition to awarding scholarships to students enrolled at select military high schools you will provide college tuition scholarships for college-bound seniors involved in junior rotc programs who are enrolled in public schools in p you are changing the criteria for selecting scholarship recipients in addition to students who are the children of fallen heroes and students who are the children of veterans with service-related disability you will include students whose parent or guardian is a veteran with significant service-related disability minimum as well as students with letter catalog number 58263t a parent or guardian who is an active_service member with multiple or extended military deployments the meaning of fallen hero includes a parent or guardian who was killed while on active military duty as well as a parent or guardian who died as a result of a service-related disability regardless of whether such parent was on active_duty at the time of death the amount of each scholarship will vary but may be up to q dollars per recipient each academic year the amount for non-boarding students will be r dollars while scholarships are renewable renewal is not guaranteed you reserve the right to discontinue a scholarship or the scholarship program for any reason scholarship recipients will be selected based upon demonstrated financial need and academic performance as well as the input of school personnel scholarship recipients are nominated by the schools and selected by your scholarship selection committee the scholarship selection committee is comprised of your directors and officers and any other individuals selected by your directors and officers the schools are required to monitor the academic and behavioral performance of scholarship recipients and to report it at the end of each semester should a scholarship recipient's academic and or behavioral performance not satisfy your standards it will be placed on probation the following semester and if there is no improvement during the probationary period the scholarship will be terminated an archive of scholarship recipients will be maintained including the names addresses purposes awarded amounts and manner of selection of the scholarship you represent that you will complete the following arrange to receive and review grantee reports annually and upon completion of the purpose for which the grant was awarded investigate diversion of funds from their intended purposes take all reasonable and appropriate steps to recover the diverted funds ensure other grant funds held by a grantee are used for their intended purposes and withhold further payments to grantees until you obtain grantees’ assurances that future diversions will not occur and that grantees will take extraordinary precautions to prevent future diversion from occurring you represent that you will maintain the following all records relating to individual grants including information obtained to evaluate grantees identify a grantee is a disqualified_person establish the amount and purpose of each grant and establish that you undertook the supervision and investigation of grants described above basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure e the foundation awards the grant on an objective and nondiscriminatory basis letter catalog number 58263t the irs approves in advance the procedure for awarding the grant the grant is a scholarship or fellowship subject_to the provisions of code sec_117 the grant is to be used for study at an educational_organization described in code sec_170 other conditions that apply to this determination this determination only covers the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don’t differ significantly from those described in your original request this determination applies only to you it may not be cited as a precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes to your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot award grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary we've sent a copy of this letter to your representative as indicated in your power_of_attorney please keep a copy of this letter in your records if you have questions please contact the person listed at the top of this letter sincerely jeffrey cooper director exempt_organizations rulings and agreements letter catalog number 58263t


internal_revenue_service number release date index number -------------------------------------- ----------------------- ----------------------------- ------------- -------------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-133215-06 date october x ------------------------------------------------------------------------------------------------------- ------------------------ trust ------------------------------------------------------------------------------------------------------- ------------------------ this responds to a letter dated date and subsequent correspondence ---------------------- ---------------------- d1 d2 dear ------ ----------- submitted on behalf of x by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code to be treated as an s_corporation effective d1 on d2 trust purchased shares of x stock trust is represented as being eligible to be an electing_small_business_trust esbt as of d2 however the trustee of trust failed to make an esbt election x’s s_corporation_election terminated on d2 by tax_avoidance or retroactive tax planning x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation x represents that the failure_to_file the esbt election for trust was not motivated the information submitted states that x was incorporated and made an election plr-133215-06 sec_1361 of the code provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 defines an esbt sec_1361 provides that except as provided in sec_1362 an esbt means any trust if i such trust does not have as a beneficiary any person other than i an individual ii an estate iii an organization described in sec_170 or or iv an organization described in sec_170 which holds a contingent_interest in such trust and is not a pcb ii no interest in such trust was acquired by purchase and iii an election under sec_1361 applies to such trust sec_1361 provides that an election under sec_1361 shall be made by the trustee sec_1_1361-1 provides that the trustee of an esbt must make the esbt election by signing and filing with the service_center where the s_corporation files its income_tax return a statement that meets the requirements of sec_1_1361-1 sec_1362 provides that a in general an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation and b any termination under sec_1362 shall be effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary plr-133215-06 based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on d2 and that the termination was inadvertent within the meaning of sec_1362 we further hold that pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d2 and thereafter provided x’s s_corporation_election was valid and provided that the election was not otherwise terminated under sec_1361 trust will be treated as an esbt from d2 and thereafter the shareholders of x must include their pro-rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 if x or its shareholders fail to treat themselves as described above this ruling is null and void this ruling is conditioned upon the trustee of trust filing an appropriately completed esbt election effective d2 and trust the beneficiaries of the trust and any other affected_shareholders of x filing any amended returns necessary to conform to this letter specifically trust and its beneficiaries must file amended returns consistent with the treatment of trust as an esbt effective d2 the esbt elections and any amended returns must be filed within days following the date of this letter and a copy of this letter should be attached to any such elections or returns except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code in particular we express no opinion on whether trust is otherwise eligible to be an esbt this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s authorized representative enclosures copy of this letter copy for sec_6110 purposes sincerely bradford r poston senior counsel branch office of the associate chief_counsel passthroughs special industries


interna revenue service_department of the treasury index number washington oc person to contact telephone number refer reply to cc dom fi p plr date dec legend corporation department commission state x city a date date date provision provision provision i this is in response to a letter dated date requesting a ruling concerning the exclusion of income of the corporation from gross_income under code code that ruling will be addressed in of the internal revenue corporation also has requested a ruling under sec_141 of the pursuant to section a separate response c b of rev_proc corporation is facts a state infrastructure bank under a federal pilot program established under the national highway system designation act of became law on november commission that governs department and supervises public the highway act which corporation acts on behalf of p l plr-105055-98 according to the application submitted by transportation in state x the department to the federal highway administration and the federal transit administration on date undertaken under the state x infrastructure program is the inter- modal center located in city a in numerous road bridge and inter-modal transportation projects at various locations throughout state x in addition corporation is involved the initial project to be section of the highway act authorizes the secretary of under the highway act transportation to establish state infrastructure banks and multistate infrastructure banks by entering into cooperative agreements with states certain federal highway and transit funds to separate_accounts to be held by the infrastructure bank loans or provide other assistance to a public or private entity to pay costs of projects eligible for assistance under state x was selected to participate in the pilot state infrastructure program under the highway act an infrastructure bank may make a state is allowed to transfer on date the department was created by provision as part of the under provision in charge of the commission the commission has authority over executive department of the state is all state transportation programs and facilities as provided by law including but not limited to bridges highways aviation railroads mass transportation ports and waterborne commerce provision gives the commission the authority to locate relocate establish acquire construct maintain control and as provided by law to operate develop or fund public facilities as part of any state transportation program such as but not limited to aviation and waterborne commerce mass transportation railroads ports the department under the laws of state x the commission comprises six members the commission is given authority to supervise highways and appointed by the governor with the advice and consent of the state senate bridges that are constructed improved and maintained through the use of state and federal funds to prescribe rules and regulations fixing the duties of all persons employed by the state highways and transportation commission to aid county engineers and other officials of civil subdivisions in establishing gradients and alignments and preparing suitable systems for maintenance of highways and bridges to prepare standard plans specifications and estimates for all state highways and for the repair and improvement of highways and bridges by civil subdivisions as well as construction of bridges to promote highway improvement throughout and to construct under its own direction and supervision state x all roads culverts or bridges for the plr-105055-98 on date the commission authorized the formation of corporation to act as the infrastructure bank for state x corporation is under the laws of state x incorporation corporation is organized for the following purposes a nonprofit public benefit corporation organized according to the articles of to benefit and carry out the purposes of the commission by providing or assisting in the provision of establishment acquisition development promotion planning design construction improvement acquisition maintenance or operation of transportation projects facilities equipment and systems in state x the funding to cooperate with the commission toward the continued economic social industrial cultural and commercial growth of state x safety and general welfare of the citizens of state x by providing financing and other assistance to public and private entities carrying out or proposing to carry out transportation projects in state x act in the public interest and promote the health to issue revenue bonds and refunding revenue bonds for the purposes set forth herein to secure and obtain to the extent authorized by law rights-of-way for transportation projects to perform functions normally undertaken by the commission and its staff thus reducing the burdens and demands on limited funds available to the commission the corporation has no members or shareholders as such the board consists of seven members all of whom must be its business and affairs are managed by a self-perpetuating board_of directors approved by the commission groups group consists of three employees of the department the chief engineer the chief operating officer and the director of multimodal operations in the field of business or finance group consists of two current members of the commission group consists of two at-large members with knowledge the directors are divided into three the bylaws of the corporation provide that no part of the net_earnings or other assets of the corporation inure to the benefit of or are distributable to private person having directly or indirectly any personal or private interest in the activities of the corporation except that the corporation is authorized to pay reasonable_compensation for any director officer contributor or other plr-105055 services rendered and to make payments and distributions to further the purposes of the corporation i the board has adopted amendments to the articles of incorporation and bylaws to provide that upon dissolution of the corporation and after payment of all debts and satisfaction of all liabilities and obligations of the corporation any remaining assets of the corporation are distributed to the commission if then in existence and if not in existence then to state x law_and analysis sec_115 provides that gross_income does not include income derived from any public_utility or the exercise of any essential_governmental_function and accruing to a state or political_subdivision of a state when determining if sec_115 applies the service considers all the facts and circumstances relating to the organization to determine whether the organization performs an essential_governmental_function and whether the income of the organization accrues to a state or a political_subdivision of the state revrul_90_74 1990_2_cb_34 concerns an organization formed operated and funded by political subdivisions to pool their casualty risks and other risks arising from their obligations concerning public liability workers’ compensation or employees’ health obligations the ruling states that the income of such an organization is excluded from gross_income under sec_115 so long as private interests do not participate in the organization or benefit more than incidentally from the organization employees of the insurance coverage obtained by the member political subdivisions was deemed incidental to the public benefit the benefit to the revrul_77_261 1977_2_cb_45 holds that income from a fund established under a written declaration of trust by a state for the temporary investment of positive cash balances of a state and its political subdivisions is excludable from gross_income under sec_115 of the code positive cash balances by a state or political_subdivision in order to receive some yield on the funds until needed to meet expenses is a necessary incident of the power of the state or political_subdivision to collect taxes and raise revenue the ruling reasons that the investment of corporation acts on behalf of commission in facilitating the construction improvement maintenance and repair of highways bridges and roads throughout state x involved in several inter-modal transportation projects throughout in addition corporation is the state corporation performs an essential_governmental_function within the meaning of and revrul_77_261 the based upon rev_rul of the code sec_115 plr-105055-98 corporation is organized as a non-profit corporation under the every corporation as defined in sec_7701 a laws of state x subject_to taxation under subtitle a tax_return regardless of whether it has taxable_income and regardless of its gross_income file income_tax returns pursuant to accordingly corporation will be required to is required to file an income sec_6012 except as specifically ruled upon above no opinion is expressed or implied as described above under any other provision of the internal_revenue_code to the federal tax consequences of the transaction this ruling is directed only to the taxpayer who requested it sec_6110 cited as precedent attorney currently on file we are sending a copy of this ruling letter to your authorized representative in accordance with the provisions of of the code provides that it may not be used or a power of sincerely assistant chief_counsel financial institutions and products py lhe wm senate alice m bennett chief branch enclosures copy of letter for sec_6110 purposes


department of the treasury internal_revenue_service washington d c date jul contact person id number telephone number fax numbers employer_identification_number legend a b c d dear sir or madam this is in reply to your request for rulings that the establishment and operation of a wholly- owned subsidiary will not jeopardize your exempt status under sec_501 of the internal_revenue_code and will not result in tax_liability under sec_511 of the code facts a owns and operates two kidney dialysis centers a has been recognized as exempt from federal_income_tax under sec_501 of the code and as other than a private_foundation under sec_509 a and i70 b a iii of the code a concluded that it can better serve its service area by expanding its facilities to provide a third kidney dialysis center in structuring the new dialysis center a is aware that such a center could be established by local physicians as a for-profit entity unrelated to a which action would be detrimental to a in order to encourage the physicians to continue the rendition of services at a’s centers and to encourage the physicians to travel to the new center for the purpose of providing required nephrology services a and the physicians have formed a general_partnership to own and operate the new dialysis center to be known as b a has established a wholly-owned for-profit subsidiary known as c to hold its partnership_interest four local physicians providing nephrology services at a’s kidney centers have established a for-profit corporation known as d to hold their partnership interests none of the physicians serve as board members of either c or a and d have formed b to operate the new dialysis center a has funded to the extent of similarly the physicians have funded d c and d have ownership interests in percent of the required initial capital_contribution to b to the extent of percent of the required initial capital of b 35h b proportional and equa in value to their respective contributions as provided in the partnership_agreement all income and losses and distributions of cash_flow are distributed among the partners in proportion to their ownership interests has separate and independent management from a the board_of directors of consists of six community leaders three of the directors are also directors of a while the remaining three directors have no affiliation with a the partnership_agreement of b provides the following all decisions with respect to the management and control of the partnership are required to be approved by a seventy-five percent vote of the partners accordingly the governing documents may only be amended with the approval of both partners section dollar_figure partnership_agreement c as managing partner section dollar_figure of the partnership_agreement is charged with conducting the day to day affairs of the partnership section dollar_figure of the partnership_agreement further provides that shall have the unilateral right of approval or disapproval with respect to any proposed action of the partnership where c reasonably believes that a proposed action or inaction may negatively affect the qualification of a as a tax exempt entity under sec_501 c of the code paragraph dollar_figure of the partnership_agreement provides that the dialysis center shall be open to all residents of the community without regard to the ability to pay it being the intent that b shall serve the needs of the community in the same manner and to the same extent as a c's board_of directors consists of three community leaders who are members of a‘s board_of directors and three members who are community leaders having experience with exempt entity matters and who do not engage on business transactions or have any affiliation of any nature with a b has entered into an employee_leasing agreement with a pursuant to which a provides skilled employees to b facility for the purpose of providing kidney dialysis services pursuant to the employee_leasing agreement b shall pay a an amount equal to the total costs incurred by a plus an administrative fee equal to five percent of the amount so determined agreement is five years provided however that either party may terminate the agreement upon ninety days prior written notice the term of the requested ruling sec_1 that c’s earnings will not be considered as unrelated_business_income attributable to a that the operations of c will not jeopardize a’s status as an organization described in sec_501 of the code that the dividends received by a from c will not constitute unrelated_business_taxable_income law and analysis sec_501 c of the code provides in part for an exemption from federa income_tax for corporations organized and operated exclusively for charitable scientific or educational_purposes provided no part of the corporation's net_income inures to the benefit of any private_shareholder_or_individual sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations described in sec_501 of the code sec_513 of the code defines the term unrelated_trade_or_business to mean in the case of any organization subject_to the tax imposed by sec_511 any trade_or_business the conduct of which is not substantially related aside from the need of such organization for funds to the exercise of performance by the organization of the purpose or function that constitutes the basis for exemption under sec_501 sec_512 of the code excludes dividends and interest from the calculation of unrelated_business_taxable_income sec_1 c -1 d of the income_tax regulations provides that the term charitable is used in sec_501 of the code in its generally accepted legal sense the providing of medical_care to the community without regard to the ability to pay has long been recognized as a charitable purpose sec_1 c -1 c of the regulations provides that an organization will be regarded it engages primarily in activities as operated exclusively for one or more exempt purposes only if which accomplish one or more of such exempt purposes specified in sec_501 c an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose for federal_income_tax purposes a parent_corporation and its subsidiary are separate taxable entities so long as the purposes for which the subsidiary is incorporated are the equivalent of business activities or the subsidiary subsequently carries on business activities 319_us_436 431_f2d_227 5th cir that is where a corporation is organized with the bona_fide intention that it will have some real and substantial business function its existence may not generally be disregarded for tax purposes britt f 2d pincite however where the parent_corporation so controls the affairs of the subsidiary that it is merely an instrumentality of the parent the corporate entity of the subsidiary may be disregarded krivo industrial supply co v national distillers and chemical corp 438_f2d_1098 5th cir w fletcher cyclopedia of the law of private corporations section dollar_figure perm ed an organization recognized exempt under sec_501 c can hold ail of the stock in a for-profit subsidiary where the subsidiary is formed for a bona_fide business_purpose and is not conclusion bee a mere instrumentality of the parent and where the parent does not actively participate in the day to day management of the subsidiary accordingly a can own ail the stock in without jeopardizing its exempt status under sec_501 of the code therefore a will continue to qualify as an organization described in sec_501 c of the code folowing the formation and funding of as a general_partner of b because a will continue to operate exclusively for charitable purposes furthermore a’s principal activity will continue to be the providing of kidney dialysis services to the community thus a remains an organization described in sec_509 and sec_170 of the code furthermore the activities of c and the income derived from its activities will not be attributable to a for purposes of determining a’s tax exempt status under sec_501 c of the code dividends_paid by c will not jeopardize the exempt status of a and will not be taxable_income to a because the dividends are excluded under sec_512 of the code therefore we rule as follows ruling sec_1 c’s earnings will not be considered as unrelated_business_income attributable to a the operations of will not jeopardize a's status as an organization described in sec_501 of the code the dividends received by a from c will not constitute unrelated_business_taxable_income this ruling is directed only to the organization that requested it sec_6110 j of the code provides that it may not be used or cited as precedent the rulings in this letter only apply the specifically indicated sections of the code and regulations to the facts that you have represented in this letter we do not rule on the applicability of any other sections of the code and regulations to your case because this letter could help resolve any future questions about your income_tax responsibility please keep a copy of this ruling in your permanent records sincerely marvin f ‘e tander marvin friedlander chief exempt_organizations technical branch


t c memo united_states tax_court bernard r shepherd and desiree shepherd petitioners v commissioner of internal revenue respondent docket no filed date bernard r shepherd and desiree shepherd pro sese kristina l rico for respondent memorandum findings_of_fact and opinion ruwe judge respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax the issue for decision is whether petitioners are entitled to exclude from gross_income under sec_108 b discharge_of_indebtedness income of dollar_figure findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time the petition was filed petitioners resided in new jersey in date petitioners’ credit card company capital one bank usa n a capital one referred petitioners’ delinquent account to an outside collection agency the principal loan balance due on petitioners’ capital one account at the time of the referral was dollar_figure petitioners entered into a settlement agreement with the outside collection agency agreeing to settle their capital one loan balance for dollar_figure petitioners made payments totaling dollar_figure from march to date the outside collection agency then notified capital one that petitioners had paid the full amount required by the settlement agreement capital one coded petitioners’ account as settled in full and discharged the remaining liability on date 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure in date capital one issued to mr shepherd a form 1099-c cancellation of debt showing that dollar_figure of indebtedness had been canceled on date petitioners did not report the dollar_figure as income on their joint federal_income_tax return the parties did not dispute the fair market values of the following of petitioners’ assets immediately before petitioners’ discharge asset fair_market_value cash cars computers household goods tools jewelry clothing books life_insurance investments boat total dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure likewise the parties did not dispute the amounts of the following of petitioners’ liabilities liability amount principal_residence mortgage beach house mortgage dollar_figure dollar_figure real_estate_taxes credit card debt car debt utilities loan from new jersey public employees retirement_system miscellaneous bills total dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure the parties disagree about the values of three assets which are not included in the above lists during petitioners owned a house in mullica hill new jersey principal_residence and a house in brigantine new jersey beach house petitioners continued to own these houses at the time of trial in the parties disagree about the values of these two houses they also disagree about the value of mr shepherd’s pension in the new jersey public employees retirement_system pers opinion the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving that the determinations are in error rule a 290_us_111 income_from_discharge_of_indebtedness is included within the broad definition of income sec_61 sec_108 provides certain exceptions to sec_61 sec_108 excludes discharge_of_indebtedness income from gross_income if the discharge occurs when the taxpayer is insolvent the amount of income excluded under sec_108 shall not exceed the amount by which the taxpayer is insolvent sec_108 the term insolvent means the excess of liabilities over the fair_market_value of assets sec_108 whether a taxpayer is insolvent and the amount by which the taxpayer is insolvent is determined on the basis of the taxpayer’s assets and liabilities immediately before the discharge id respondent acknowledges that petitioners correctly listed the fair market values of most of their assets and liabilities petitioners and respondent dispute whether petitioners met their burden of proving the fair market values of the beach house and the principal_residence which were petitioners’ largest assets additionally petitioners and respondent dispute whether mr shepherd’s pension is an asset for purposes of determining whether petitioners are insolvent under sec_108 burden_of_proof regarding the fair market values of the beach house and the principal_residence the burden of proving insolvency under sec_108 is on petitioners bressi v commissioner tcmemo_1991_651 tax ct memo lexis at citing rule a and 290_us_111 aff’d without published opinion 989_f2d_486 3d cir therefore petitioners have the burden of proving the fair_market_value of all their assets immediately before the discharge see sec_108 beach house respondent argues that petitioners have not met their burden of proving the fair_market_value of their beach house immediately before the discharge petitioners contend they offered sufficient evidence to prove that the fair_market_value of the beach house was approximately dollar_figure to support the fair_market_value of their beach house petitioners offered into evidence a civil_action stipulation of settlement settlement between petitioners and the city of brigantine the settlement provides that the value of the beach house for local property_tax purposes is dollar_figure for the tax_year petitioners signed the settlement on date 2in some cases the burden_of_proof with respect to relevant factual issues may shift to the commissioner under sec_7491 however petitioners have not argued that the burden_of_proof should shift to respondent nor have they produced credible_evidence as required by sec_7491 therefore we hold that the burden_of_proof does not shift to respondent 3at trial mr shepherd testified that petitioners purchased the beach house in for dollar_figure petitioners offered into evidence a wells fargo monthly mortgage statement for the beach house loan showing the unpaid principal balance of dollar_figure on date this court has held previously that a value placed upon property for the purpose of local taxation unsupported by other evidence cannot be accepted as determinative of fair_market_value for federal_income_tax purposes in the absence of evidence of the method used in arriving at that valuation 61_tc_424 n see gilmartin v commissioner tcmemo_1973_ tax ct memo lexi sec_40 at bishop v commissioner tcmemo_1962_146 tax ct memo lexi sec_163 at the settlement does not describe the beach house nor the method used to determine the value of the beach house additionally the settlement shows the beach house’s valuation for tax purposes for whereas petitioners’ debt was discharged on date as a result we find that the settlement is not convincing evidence of the fair_market_value of the beach house immediately before petitioners’ discharge at trial mr shepherd testified that in his opinion the value of the beach house immediately before the discharge was approximately dollar_figure mr shepherd’s valuation testimony was allegedly based on comparable sales that he assembled for the purpose of a property_tax appeal apparently this was for the tax_year which was at least two years after the discharge on date while comparable sales can be persuasive evidence of fair_market_value see 763_f2d_891 7th cir petitioners neither offered into evidence nor described in detail the comparable sales or their dates in order to corroborate mr shepherd’s testimony the court would need to review the comparable sales to determine whether a proper valuation methodology was used and that the comparable sales occurred in close proximity to the date of discharge as a result we find that mr shepherd’s testimony is not convincing evidence of the fair_market_value of the beach house immediately before petitioners’ discharge accordingly we find that petitioners did not meet their burden of proving the fair_market_value of the beach house immediately before the discharge principal_residence respondent argues that petitioners have not met their burden of proving the fair_market_value of the principal_residence immediately before the discharge petitioners contend they offered sufficient evidence to prove that the fair_market_value of the principal_residence was dollar_figure immediately before the discharge 4at trial mr shepherd testified that petitioners obtained a dollar_figure mortgage on the principal_residence in mr shepherd further testified that in the approximate appraised value of the principal_residence was dollar_figure petitioners offered into evidence a chase monthly mortgage statement showing the unpaid principal balance on the principal_residence loan was dollar_figure on date petitioners offered the following evidence to support their valuation a letter dated date from chase home finance llc chase showing the value of the principal_residence and a final preliminary tax bill tax bill petitioners applied for a loan modification for the principal_residence through the federal home affordable modification program hamp as part of chase’s review to determine whether petitioners’ loan qualified for a hamp modification chase had to value petitioners’ principal_residence in a letter chase informed petitioners that an exterior broker price opinion appraisal was used to value the property as of date at dollar_figure sec_108 requires that the fair_market_value of a taxpayer’s assets be determined immediately before the discharge chase determined the fair_market_value of the principal_residence as of date almost three years after the date of petitioners’ discharge furthermore the letter from chase does not describe the property nor explain even briefly the methodology used to determine its value we find that chase’s valuation of the principal_residence as of date is not 5the letter from chase does not explain what exterior broker price opinion appraisal means 6we take judicial_notice of the large downturn in national residential real_estate values that occurred after date convincing evidence of the fair_market_value of the principal_residence immediately before petitioners’ discharge petitioners offered into evidence a tax bill they received for their principal_residence the tax bill shows a net taxable value of dollar_figure for petitioners’ principal_residence the tax bill does not describe the property in detail nor the methodology used in determining the tax value as we noted earlier a value placed upon property for local taxation purposes is not determinative of fair_market_value of the property for federal_income_tax purposes in the absence of evidence of the method used in arriving at that valuation see pierce v commissioner t c pincite n gilmartin v commissioner tax ct memo lexi sec_40 at bishop v commissioner tax ct memo lexi sec_163 at furthermore in new jersey the assessed value of property is generally not equivalent to the fair_market_value of the property see city of passaic v passaic cnty bd of taxation a 2d there has been general agreement for over a century that individual property valuations and assessments have been and are marred by the grossest inequities in fact the statutory framework for property assessments in new jersey specifically contemplates that the assessed value of a property for tax purposes will not be equivalent to the fair_market_value of the property see n j stat ann sec_54 west each county tax administrator must annually determine the ratio or percentage of true value at which the real_property of each taxing district is in fact assessed id sec_54 the director of the division of taxation must determine the ratio of aggregate assessed to aggregate true valuation of real_estate of each taxing district we find that the tax bill is not convincing evidence of the fair_market_value of the principal_residence we further find that petitioners have not met their burden of proving the fair market values of the principal_residence and the beach house immediately before the discharge accordingly petitioners have failed to establish that they were insolvent as defined in sec_108 mr shepherd’s pension we have previously found that petitioners were not insolvent as defined in sec_108 because they failed to meet their burden of proving the fair market values of the beach house and the principal_residence nevertheless we will discuss whether mr shepherd’s pension is an asset because the parties have discussed this issue extensively petitioners contend that mr shepherd’s pension is not an asset for purposes of determining insolvency under sec_108 respondent disagrees mr shepherd is employed by gloucester township and is a contributing member of pers on date mr shepherd obtained a dollar_figure loan from pers against his pension mr shepherd testified that this amount was the maximum he could borrow from pers on date mr shepherd made his first of monthly loan repayments of dollar_figure to pers mr shepherd continued making contributions to his pension after he received the loan petitioners classified mr shepherd’s loan from pers as a liability under sec_108 we note that it is wholly inconsistent to show a loan as a liability if the loan is fully secured_by collateral and the collateral is not listed as an asset by including the loan and not the underlying collateral petitioners are presenting themselves as more insolvent than the reality of the matter for consistency purposes petitioners must either remove the loan as a liability or include the collateral that secures the loan as an asset the term insolvent means the excess of liabilities over the fair_market_value of assets sec_108 this court has held that the word assets as used in the definition of the term insolvent for sec_108 includes assets exempt from the claims of creditors under applicable state law 116_tc_87 we reasoned that if a debtor’s assets including assets exempt from the claims of creditors under state law exceed liabilities then the debtor has the ability to pay a tax on income from the discharge_of_indebtedness id pincite mr shepherd’s pension is exempt from claims of creditors under new jersey state law see n j stat ann sec_25 west supp under the court’s holding in carlson mr shepherd’s pension will not escape classification as an asset under sec_108 solely because of its exemption from claims of creditors mr shepherd had the ability to withdraw some portion of his pension on the date of petitioners’ discharge a member of pers may borrow from the retirement_system an amount equal to not more than of the amount of his accumulated deductions n j stat ann sec_43 15a-34 west supp a member of pers may have more than one loan outstanding at any time see id mr shepherd continued making contributions to his pension with pers every pay_period from the date he received the loan from pers to the date of petitioners’ discharge additionally during this period mr shepherd made monthly loan repayments of dollar_figure to pers in other words mr shepherd’s loan balance with pers decreased from the date he obtained the loan to the date of petitioners’ discharge while his accumulated_contributions to his pension increased over that period therefore we note that mr shepherd’s outstanding loan balance on the date of petitioners’ discharge must have been less than of his accumulated_contributions to his pension as a result mr shepherd had the right to immediately withdraw some portion of his accumulated_contributions as a loan from his pension with pers immediately before petitioners’ discharge_of_indebtedness we find that the portion of mr shepherd’s pension that could have been withdrawn as a loan from pers is an asset for purposes of insolvency under sec_108 petitioners did not provide any evidence of mr shepherd’s accumulated_contributions to the pension immediately before the discharge therefore we are unable to determine what portion of mr shepherd’s pension could have been withdrawn as a loan accordingly we find that petitioners have not met their burden of proving the fair_market_value of the portion of mr shepherd’s pension that constitutes an asset conclusion sec_108 requires that a taxpayer establish the fair_market_value for all of his assets and liabilities in order to make a determination of insolvency if we were to accept petitioners’ valuation of their houses and exclude from liabilities the loan from pers petitioners would be approximately dollar_figure insolvent however 7therefore it is unnecessary for us to decide whether mr shepherd’s entire pension constitutes an asset under sec_108 petitioners have not met their burden of proving the fair market values of the beach house the principal_residence and mr shepherd’s pension since petitioners have not established they were insolvent as defined in sec_108 petitioners are not entitled to exclude their discharge_of_indebtedness income from gross_income under sec_108 in reaching our decision we have considered all arguments made by the parties and to the extent not mentioned or addressed they are irrelevant or without merit to reflect the foregoing decision will be entered for respondent


department of the treasury internal_revenue_service washington d c date number release date cc intl br1 wta-n-103742-00 uilc internal_revenue_service national_office technical assistance memorandum for group manager tax_treaty group op in i t lb from elizabeth u karzon branch chief cc intl br1 subject certification of limited_liability companies this technical assistance responds to your memorandum of date in which you requested the views of the office of the associate chief_counsel international in connection with a question posed to you by the certification unit of the philadelphia service_center psc issue whether the psc may certify that a single-owner limited_liability_company llc that is disregarded for federal_income_tax purposes as an entity separate from its owner is a resident_of_the_united_states that is therefore entitled to benefits under a bilateral income_tax treaty to which the united_states is a party conclusion because a single-owner llc that is disregarded as an entity separate from its owner is not a person nor is it liable to tax the psc may not certify that the llc is a resident_of_the_united_states however the psc may certify that the single owner of the llc is a resident_of_the_united_states which should suffice to establish that income derived by the llc in the treaty country is being derived by a resident_of_the_united_states and is entitled to treaty benefits wta-n-103742-00 facts the bilateral income_tax treaties to which the united_states is a party generally provide reduced withholding rates and other treaty benefits only to residents of the united_states or residents of the other country that is a party to the treaty our treaty partners often require u s persons who wish to claim benefits under a treaty to obtain certification from the irs that they are residents of the united_states requests for treaty certification are processed by the psc where appropriate the psc certifies on a form_6166 that to the best of its knowledge the person requesting certification is a resident_of_the_united_states see i r m part i handbook see also publication the psc has procedures in place for certifying that entities that are treated as corporations or partnerships for federal_income_tax purposes are residents of the united_states single-owner llcs that are disregarded as entities separate from their owners for u s federal_income_tax purposes are typically not disregarded by our treaty partners for purposes of their tax systems when such an llc receives income from a treaty country our treaty partners may view the income as being derived by the llc itself and not by its single owner accordingly some of our treaty partners assume that their domestic tax law classification of the entity requires that for treaty purposes the llc certify that it is a resident_of_the_united_states the psc has requested advice as to how to handle these requests for certification law and analysis pursuant to sec_301_7701-3 an llc with a single owner can elect to be classified for federal_income_tax purposes as an association and thus a corporation or to be disregarded as an entity separate from its owner it may not elect to be classified as a partnership a default rule provides that a single-owner llc that fails to make an election will be disregarded as an entity separate from its owner sec_301 b ii if a single-owner llc is disregarded its activities are treated in the same manner as a sole_proprietorship branch or division of the owner sec_301 a the income of an llc that is disregarded for federal_income_tax purposes is included on the federal_income_tax return of the llc’s single owner under the bilateral income_tax treaties to which the united_states is a party a resident_of_the_united_states must first be a person thus the united_states model_income_tax_convention provides that the term resident of a contracting state means any person who under the laws of that state is liable to tax therein by reason of his domicile residence citizenship place of management wta-n-103742-00 place of incorporation or any other criterion of a similar nature u s model art under the u s model the term person includes an individual an estate a_trust a partnership a company and any other body of persons see u s model art a as noted above because single-owner llcs are disregarded as entities separate from their owners for federal_income_tax purposes they are not persons for purposes of u s income_tax treaties further because the income of a single- owner llc is taxable in the hands of the single owner and not in the hands of the llc the llc even if it were a disregarded person is not liable to tax within the meaning of our u s income_tax treaties thus the psc cannot certify that the llc is a resident_of_the_united_states however the psc can certify that the single owner of the disregarded llc is a resident_of_the_united_states in our view such certification suffices to establish that for income_tax treaty purposes the income derived by the llc from the treaty country is being derived by a resident_of_the_united_states the single owner of the llc see temp sec_1_894-1t d we recommend that procedures be developed for certifying that the single owner of a disregarded llc or of any other single-owner entity that is disregarded for federal_income_tax purposes pursuant to sec_301_7701-3 is a resident_of_the_united_states and that therefore any income derived by the disregarded llc should be considered to be derived by a resident_of_the_united_states an explanatory statement should be prepared for our treaty partners and an announcement should be published in the internal_revenue_bulletin please call if you have any further questions elizabeth u karzon branch chief cc intl br1


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp 4-plr-106142-03 date date legend acquiring target shareholder a a b c d e f g state x business a plr-106142-03 dear this letter responds to your date request for rulings on certain federal_income_tax consequences of a proposed transaction the information submitted in such request and subsequent correspondence is summarized below the rulings contained in this letter are based on facts 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 summary of facts target is a state x sub-chapter s_corporation and is a holding_company whose principal asset is the stock of acquiring target has one class of common_stock owned a by shareholder a and b by persons related to shareholder a persons unrelated to shareholder a own the remaining c of target stock acquiring is a closely_held_corporation engaged in business a target owns d of acquiring stock and shareholder a owns e of acquiring stock persons related to shareholder a own f of acquiring stock persons unrelated to shareholder a own the remaining g of acquiring stock proposed transaction for what have been represented to be valid business reasons acquiring proposes the following transaction the proposed transaction i certain target shareholders will make a cash contribution to target in exchange for additional target stock target will use the cash to pay off existing debt ii pursuant to an agreement of merger and state x law target will merge with and into acquiring pursuant to a plan executed under state x law solely in consideration for newly issued acquiring common_stock the merger target’s former shareholders will receive the newly issued acquiring common_stock in proportion to the number of shares of target they previously held acquiring will cancel the acquiring common_stock formerly held by target no fractional shares of acquiring stock will be issued target shareholders who are entitled to receive a fractional share interest of acquiring common_stock will receive cash for such fractional interest iii acquiring will cancel the acquiring common_stock that target formerly held plr-106142-03 representations the taxpayer has made the following representations in connection with the proposed transaction a the fair_market_value of the acquiring stock and other consideration received by each target shareholder will approximately equal the fair_market_value of the target stock surrendered in the exchange b there is no plan or intention by the target shareholders who own percent or more of the target stock and to the best knowledge of target management there is no plan or intention on the part of the remaining target shareholders to sell exchange or otherwise dispose_of a number of shares of acquiring stock received in the transaction that would reduce the target shareholders’ ownership of acquiring stock to a number of shares having a value as of the date of the transaction of less than percent of the value of all of the formerly outstanding target stock as of the same date for purposes of this representation shares of target stock exchanged for cash or other_property surrendered by dissenters or exchanged for cash in lieu of fractional shares of acquiring stock will be treated as outstanding target stock on the date of the transaction moreover shares of target stock and shares of acquiring stock held by target shareholders and otherwise sold redeemed or disposed of before or after the transaction will be considered in making this representation c acquiring has no plan or intention to reacquire any of its stock issued in the transaction d acquiring has no plan or intention to sell or otherwise dispose_of any of the target assets acquired in the transaction except for dispositions made in the ordinary course of business or transfers described in sec_368 e the target liabilities assumed by acquiring and the liabilities to which the transferred target assets are subject were incurred by target in the ordinary course of its business f following the transaction acquiring will continue the historic_business of target or use a significant portion of target’s historic_business_assets in a business g acquiring target and target shareholders will pay their respective expenses if any incurred in connection with the transaction h there is no intercorporate indebtedness existing between target and acquiring that was issued acquired or will be settled at a discount i no two parties to the transaction are investment companies as defined in plr-106142-03 sec_368 and iv j target is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 k the fair_market_value of the assets of target transferred to acquiring will equal or exceed the sum of the liabilities assumed by acquiring plus the amount of liabilities if any to which the transferred assets are subject l the basis of the assets of target transferred to acquiring will equal or exceed the sum of the liabilities assumed by acquiring plus the amount of liabilities if any to which the transferred assets are subject m the payment of cash in lieu of fractional acquiring stock is solely for the purpose of avoiding the expense and inconvenience to acquiring of issuing fractional shares and does not represent separately bargained-for consideration the total cash consideration to be paid to the target shareholders instead of issuing fractional shares of acquiring stock will not exceed one percent of the total consideration that will be issued in the transaction to the target shareholders in exchange for their shares of target stock the fractional share interests of each target shareholder will be aggregated and no target shareholder will receive cash in an amount equal to or greater than the value of one full share of acquiring stock n none of the compensation received by any target shareholder-employees will be separate consideration for or allocable to any of their shares of target stock none of the shares of acquiring stock received by any shareholder-employees will be separate consideration for or allocable to any employment agreement and the compensation paid to any shareholder-employees will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm’s-length for similar services o acquiring will pay or assume only those expenses of target that are solely and directly related to the transaction in accordance with the guidelines established in revrul_73_54 1973_1_cb_187 rulings based solely on the information and representations submitted with the ruling_request we rule as follows provided the merger qualifies as a statutory merger under state x law the acquisition by acquiring of target solely in exchange for acquiring common_stock will qualify as a reorganization within the meaning of sec_368 of the internal_revenue_code acquiring and target will each be a_party_to_a_reorganization within the plr-106142-03 meaning of sec_368 no gain_or_loss will be recognized by target upon the transfer of its assets to acquiring in exchange for acquiring common_stock sec_361 no gain_or_loss will be recognized by target on the distribution of the acquiring stock received to its shareholders sec_361 no gain_or_loss will be recognized to those target shareholders who receive solely acquiring common_stock including any fractional shares in exchange for their target common_stock sec_354 the basis of the acquiring common_stock received by target shareholders will in each instance be the same as the basis of the target common_stock surrendered in exchange therefor sec_358 the holding_period of the acquiring common_stock received by target shareholders will in each instance include the period during which the target stock surrendered in exchange therefor were held provided the target shares were held as a capital_asset on the date of the exchange sec_1223 no gain_or_loss will be recognized by acquiring on receipt of target assets in exchange for acquiring common_stock sec_1032 where cash is received by a target shareholder in lieu of a fractional share interest in acquiring stock the cash payment will be treated as received by such shareholder as a distribution in redemption of the fractional share interest subject_to the provisions and limitations of sec_302 revproc_77_41 1977_2_cb_574 caveats we express no opinion on the federal_income_tax treatment of the proposed transaction under any other provision of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered in the above rulings procedural statements this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant plr-106142-03 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer_representative sincerely _________________________ richard k passales senior counsel branch office of associate chief_counsel corporate cc


internal_revenue_service number release date index number -------------------------------------- ------------------------ ------------------------------------------ --------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-157507-06 date may ---------------------------------------------- --------------------------- ------------------------- legend x ---------------------------------- p ---------------------------------- d1 d2 d3 ----------------- d4 dear -------------- --------------------- ------------------ this responds to the letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts effective d2 on d3 p a partnership became a shareholder of x in d4 the termination of the s election was discovered and subsequently steps were taken so that x is a small_business_corporation x was incorporated on d1 x made an election to be treated as an s_corporation x and its shareholders agree to make any adjustments consistent with the plr-157507-06 treatment of x as an s_corporation as may be required by the secretary with respect to the period specified by sec_1362 law and analysis which an election under sec_1362 is in effect sec_1361 defines an s_corporation as a small_business_corporation for sec_1361 defines a small_business_corporation as a domestic sec_1362 provides that an election under sec_1362 shall be corporation which is not an ineligible_corporation which does not a have more than shareholders b have as a shareholder a person other than an estate and a_trust described in subsection c or an organization described in subsection c who is not an individual c have a nonresident_alien as a shareholder and d have more than class of stock terminated whenever at any time on or after the 1st day of the taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides in part that if an election under sec_1362 by any corporation was terminated under sec_1362 the secretary determines that the circumstances resulting in the termination were inadvertent no later than a reasonable period of time after the discovery of the circumstances resulting in the termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which the termination occurred and each person who was a shareholder in such corporation at any time during the period of inadvertent termination of the s election agrees to makes such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the termination the corporation is treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and representation made we conclude that x’s election to be treated as an s_corporation terminated on d3 we also conclude that the termination constituted an inadvertent termination within the meaning of sec_1362 under the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d3 and thereafter provided that x’s s_corporation_election is not otherwise terminated under sec_1362 plr-157507-06 except as expressly provided herein no opinion is expressed or implied as to the federal tax consequences of the facts described above under any other provision of the code in particular no opinion is expressed as to whether x is an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter will be sent to x’s authorized representative sincerely dianna k miosi chief branch office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes