internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b09 plr-162067-02 date date legend grantor_trust agreement date child trust child trust child trust trustee trustee date year year date plr-162067-02 family x family y trust company state date patriarch x patriarch y date probate_court state date measuring life measuring life measuring life measuring life measuring life measuring life date trustee dear sirs this letter responds to your letter dated date and prior correspondence requesting rulings under sec_2036 sec_2038 sec_2041 and sec_2601 of the internal_revenue_code grantor executed trust agreement on date date is prior to date trust agreement creates a series of irrevocable trusts for the grantor’s children child trust child trust and child trust trust agreement names trustee as the initial family trustee and trustee as the initial independent_trustee trust is not the subject of this private_letter_ruling request this private_letter_ruling addresses trust and trust plr-162067-02 the trustees represent that additions were made to the trusts after date grantor was the beneficiary of two trusts created on date not the subject of this private_letter_ruling each of which provided him with a power to appoint the property during his life the powers to appoint the property were not general powers as that term is defined in sec_2041 date is prior to date it has been represented that each of these trusts were irrevocable as that term is defined in sec_26_2601-1 of the generation-skipping_transfer_tax regulations in year and year grantor exercised the power_of_appointment provided in each trust by appointing assets from each trust to trust the trustees further represent that all other transfers to trust and trust after date qualified for the gift_tax annual exclusion under sec_2503 accordingly all gifts to the trust prior to date were deemed to have a zero inclusion_ratio for generation-skipping_transfer_tax purposes under sec_2642 then in effect with respect to all gifts to the trusts made after date a portion of the donor’s and the donor’s spouse when applicable generation-skipping_transfer_tax_exemption was allocated in an amount sufficient to give both trusts an inclusion_ratio of zero for generation-skipping_transfer_tax purposes article of the trust agreement provides the dispositive provisions of the trusts the trustees without the necessity of physical segregation shall divide the initial trust property into equal parts one part each for child child and child each of the parts shall constitute the corpus of a separate and distinct trust for the primary benefit of each child of grantor the child for whom the trust benefit shall be referred to as the beneficiary of that particular separate trust sec_1 of the trust agreement provides that any part or all of the net_income and or corpus of a_trust may at any time or times in the sole discretion of the independent_trustee of the trust be distributed to or for the benefit of a the beneficiary of the separate trust and or b any one or more of those of the lineal_descendants of the beneficiary who are then living even though not presently living including those whose parent or parents are then living when distributions are made to more than one person the amounts or proportions received by each need not necessarily be equal and shall be in the sole discretion of the independent_trustee sec_1 of the trust agreement provides that in dividing up the assets of a separate trust on its termination as provided in sec_1 b of the trust agreement each share representing a child of the trust’s beneficiary shall be charged with the total amount of the fair_market_value on the date of each of all distributions pursuant to sec_1 and or sec_1 a that have been made to or for the benefit of the child or to any of the child’s descendants a at any time or times subsequent to the child attaining twenty-three years of age and b at any time or times prior thereto but only to the extent the distributions were designated by the independent_trustee as having been made to assist the child to marry to acquire a home or to support his or her family and each share representing a lineal descendant of a deceased child of the beneficiary shall be charged with the descendant’s proportionate share of the total amount that would plr-162067-02 have been charged against the share of the deceased child under this section had the child not died as well as with the total amount of all such distributions that have been made to the descendant at any time or times after the child’s death sec_1 of the trust agreement provides that at any time after the execution of trust agreement the beneficiary of the trust shall have the power by written instrument approved in writing by the then independent_trustee of the trust if the beneficiary is then under the age of fifty and delivered to one of the then trustees on or before the effective date of the appointment set forth in the instrument that must be during the continuance of the trust but may relate to a specified event such as the time of the child’s death to appoint any part or all of the net assets contained in the separate trust on the effective date to or among or for the benefit of any one or more of grantor’s father’s lineal_descendants in any amounts or proportions provided however that the power shall not be exercisable to any extent for the benefit of the grantor of such beneficiary of the beneficiary’s estate of the beneficiary’s creditors or the creditors of the beneficiary’s estate any appointment under the power may be made for any present future vested or contingent estate s either outright or in trust and if in trust with one or more such persons as beneficiaries and with the trustee s the dispositive and administrative provisions the newly created powers of appointment and with or without lawful spendthrift provisions all as specified in the instrument of appointment either directly or by reference to a separate trust instrument even one previously created by another sec_1 of the trust agreement provides for the distribution of the assets of a_trust after a beneficiary’s death sec_1 a provides that as of the time of the death of the beneficiary of a separate trust all of the net assets then contained in its separate undistributed_income account if any to the extent not effectively appointed under sec_1 of the trust agreement shall be distributed to those of the beneficiary’s lineal_descendants who are then living per stirpes all of the beneficiary’s children however shall be deemed to be then deceased and provided further that if there are no lineal_descendants of the beneficiary then living other than those of the first generation the disposition of whatever assets are then contained in the separate undistributed_income account shall instead be governed in all respects by sec_1 b sec_1 b provides that as of the end of the sixtieth day after the first anniversary of the death of the beneficiary of the separate trust the trust shall terminate and all of its then remaining net assets to the extent not effectively appointed under sec_1 shall be distributed as follows to those of the beneficiary’s lineal_descendants who are then living per stirpes or if there be none then living to those of the beneficiary’s parents’ lineal_descendants who are lineal_descendants of the grantor and who are then living per stirpes provided however that if there shall then be in existence a_trust for any designated distributee his or her entire share shall be transferred and added to the corpus of the trust and thereafter held managed and disposed of in the same manner as the corpus to which the share is added and provided further that if there shall then be no trust in existence for the primary benefit of any designated descendant his or her share shall continue in trust as the corpus of a plr-162067-02 separate and distinct trust of which the descendant shall be the primary beneficiary the provisions of each separate trust being set forth in sec_1 of the trust agreement sec_3_1 of the trust agreement provides that all other provisions to the contrary notwithstanding each and every trust coming into existence either directly or indirectly or by the exercise of any power contained herein shall unless earlier terminated terminate on the day prior to the expiration of twenty-one years after the death of the last survivor of those now living persons whose names appear in the instrument other than as witnesses and notaries and those of their respective lineal_descendants who were living on date prior to date when certain other family trusts were created sec_4 of the trust agreement provides in part that the absolute right and power at any time s with or without cause to remove any then acting family trustee of a particular trust or trusts is given to the first in order of the following-listed persons indicated as having removal rights with respect to the particular trust involved who is not then deceased or incapacitated a grantor as to each and every trust b grantor’s spouse as to each and every trust c the then beneficiary or beneficiaries as that term is used in sec_1 of the trust acting by majority vote if there be more than one each beneficiary being entitled to one vote furthermore the then acting family trustee of each separate trust shall have the right and power at any time or times to remove by the foregoing procedure the then acting independent_trustee of that separate trust provided the family trustee sets forth in the notice of removal some reasonable_cause for the removal such as that repeated administrative or investment errors are being made by the trustee a personality conflict has arisen with the trustee or the trust officer assigned that the trustee’s fees are not competitive or that the trust would be more conveniently administered in another city or the trustee’s services are bing adversely affected by age health or unavailability sec_4 of the trust agreement provides that in the event of any vacancy at any time or times occurring in the office of the independent_trustee with respect to any trust whether caused by resignation removal incapacity death or otherwise the vacancy in office shall be promptly filled by a bank or trust company that is located in some state or country that recognizes trusts that has trust powers and that has a combined capital and surplus in excess of dollar_figure no substantial portion of which is directly or indirectly owned by grantor or any beneficiary hereunder or by an individual who is sui juris who is experienced in business and finance or who is an attorney experienced in the trust and tax fields and who is neither the grantor nor a beneficiary nor related to the grantor or to any beneficiary in any of the following classifications spouse ancestor lineal descendant brother or sister nor an employee of the grantor or of any beneficiary or of any corporation firm or partnership in which the grantor or any beneficiary is an executive or has stock or other holdings that are significant from the viewpoint of control the selection and appointment of the successor independent_trustee shall be made in the following order of preference a by the then acting family trustee of the trust or if there is none b by the person then having the right under sec_4 to remove a family trustee with respect to the plr-162067-02 affected trust or if there is no person then having the right c by the then beneficiary or beneficiaries as that term is used in sec_4 of the trust agreement of the trust acting by majority vote if there be more than one each beneficiary being entitled to one vote the vote to be case by written ballot signed by the beneficiary and for these purposes if a beneficiary is not then sui juris his or her parent spouse or legally appointed guardian in that order of preference shall take such action in his or her place and stead unless the appointment is made by the original family trustee the successor independent_trustee shall not be an individual but must be a bank or trust company furthermore upon the death or incapacity of the original family trustee if the then acting independent_trustee is an individual he or she shall be deemed to have resigned and a properly qualified bank or trust company shall be appointed as successor independent_trustee of the trust in the manner provided in this section sec_4 of the trust agreement provides that in the event of any vacancy at any time occurring in the office of family trustee with respect to any trust whether caused by resignation removal incapacity death or otherwise the person then and subsequently at any specific point in time involved having the right under sec_4 to remove a family trustee of the trust may at any subsequent time select and appoint an individual who is sui juris and who has attained at least twenty-five years of age including the person making the appointment to fill the vacancy in office but in the absence of or until an appointment is made the independent_trustee of the trust shall act alone as the sole trustee of the trust whenever under the provisions of the instrument one or more separate trusts are created out of the assets of a then existing trust the then acting trustee s of the existing trust shall automatically be the initial trustee s of the new separate trust s on date family x and family y entered into a participation_agreement and later filed the articles of association for trust company a limited banking association in state as part of that agreement the initial participants adopted bylaws to provide for the orderly management of trust company trust company was formed to provide specialized services to individuals and families facing the same challenges in trust management as family x and family y the bylaws and participation_agreement were amended and restated on date additional modifications have been proposed that are the subject of this private_letter_ruling request excerpts from the bylaws and participation_agreement in this letter reflect the date modifications and the proposed modifications trust company initially had two classes of shares class a and class b each of which represent fifty percent of the total voting power of all trust company’s outstanding shares family x owns all of the class a shares and family y owns all of the class b shares the class a shares were initially issued to and are still held by two trusts not the subject of this letter_ruling whose grantor and beneficiaries are members_of_family x and whose trustees are unrelated to members_of_family y the class b shares were initially issued to a voting_trust of which eleven trusts for the benefit of the members_of_family y are the beneficial owners grantor and grantor are members_of_family x plr-162067-02 on date the articles of association of trust company were amended to authorize the issuance of shares of class e stock the class e stock will have no voting rights except as set forth in sec_4 b of the bylaws and participation_agreement relating to the authorization of additional class e shares and the amendment of the restrictions on transfer of ownership of the class e shares under the amendment class a shares may only be transferred to class a permitted transferees class b shares may only be transferred to class b permitted transferees and class e shares may only be transferred with the approval the holders of more than sixty-five percent of the issued and outstanding class e shares section of the bylaws and participation_agreement of trust company provides in part that there shall initially be nine directors of trust company the board_of directors may expand the number of director positions notwithstanding the foregoing trust company shall not have less than five or more than fifteen directors section a of the bylaws and participation_agreement of trust company provides that no officer or director of trust company shall participate in a decision of trust company nor be present during any board or committee discussion of or vote on such a decision involving the exercise of any discretionary power other than investment powers with respect to any trust of which trust company is a trustee if the officer director or spouse of the officer or director is a grantor or donor to the trust a current or contingent beneficiary of the trust or a descendant or spouse or former spouse of a descendant of either patriarch x or patriarch y section a however shall apply only to a_trust a current or contingent beneficiary of which is a descendant or a spouse or former spouse of a descendant of either patriarch x or patriarch y section b provides that no officer or director of trust company shall participate in a decision of trust company nor be present during any board or committee discussion of or vote on such a decision involving the exercise of any incidents_of_ownership of any life_insurance_policy insuring the life of the officer or director section dollar_figure further provides that a director that is subject_to the restrictions of section dollar_figure with respect to a decision of trust company although absent from at least that part of the meeting shall be deemed present for the purpose of determining whether a quorum is present for that part of the meeting section dollar_figure of the bylaws and participation_agreement provides that an independent director is a director who is neither an employee of trust company nor with respect to a particular trust of which trust company is a trustee related or subordinate within the meaning of sec_672 to any individual described in section a or the board_of directors and the participants shall take all necessary actions to cause there to be in office at all times at least one director who is plr-162067-02 not precluded under section dollar_figure or section dollar_figure from participating in the making of any decisions of trust company described in section section dollar_figure of the bylaws and participation_agreement provides that subject_to the requirements of applicable law and to enable directors to comply when advisable with taxation laws restrictions on self-dealing or other matters a director is authorized to renounce either revocably or irrevocably for any period of time by an instrument in writing delivered to and accepted by trust company his or her right and power to participate in the making of any trust company decision involving the exercise of any discretionary power other than investment or administrative_powers not affecting any beneficiary’s beneficial_enjoyment with respect to any trust of which trust company is a trustee the current independent_trustee proposes to distribute the assets of trust and trust to two new trusts trust 2a and trust 3a respectively unless otherwise specified the new trust agreement provisions are identical to each other except for the name of the primary beneficiary child will be the beneficiary of trust 2a and child will be the beneficiary of trust 3a each new trust will terminate on or before the date on which its counterpart original trust was required to terminate under its applicable perpetuities period provision in addition the current trustees will via the new trust agreements update each trust’s administrative provisions and revise each trust’s trustee requirements trustee selection and trustee succession provisions to better provide for the long-term management of the trusts finally the current trustees desire to appoint trust company to serve as an independent_trustee on date the trustees filed a petition for instructions with probate_court in state probate_court is the court having jurisdiction over the trusts that are the subject of this private_letter_ruling the petition for instructions sought confirmation of the independent trustee’s authority to exercise his discretionary power of distribution in favor of further trusts on date probate_court issued two separate orders one for each trust contingent upon a private_letter_ruling from the internal_revenue_service regarding the estate and generation-skipping_transfer_tax consequences of the exercise the orders stated that trust agreement grants the independent_trustee a discretionary power of distribution that may be exercised in favor of one or more new trusts created by him for the benefit of all or any one of the permissible distributees under the original trusts equally or unequally the orders further provided that the power may be exercised by the independent_trustee without either beneficiary consent or court approval if the new trusts do not benefit anyone who was not a current or future permissible distributee under the relevant original trust and the terms of the new trust do not extend the duration of the trusts beyond the perpetuities period of the relevant original trust sec_1 a of the trust agreement will provide that during the remainder of the primary beneficiary’s lifetime and until the trust’s subsequent actual termination any part or all of the net_income and or principal of the trust may be distributed in the sole discretion of its independent_trustee s to or for the benefit of any one or more of plr-162067-02 the following permissible distributees i the primary beneficiary ii any one or more of the primary beneficiary’s descendants iii any entity then owned and controlled by no one other than one or more of the then permissible distributees described in paragraph a and iv any trust that is at the time a qualified distributee trust as defined in the trust technical provisions for the primary benefit of any one or more of the individual permissible distributees even a newly created trust the foregoing discretion to make or withhold distributions of income and principal to the permissible distributees is an absolute discretion to be exercised solely in accordance with the independent trustee’s s’ own best judgment moreover at the end of each tax_year any income that is not distributed shall be added to principal and to provide greater equality among the primary beneficiary’s descendants all distributions made to a child of the primary beneficiary after attaining age twenty-three as well as certain distributions made before that age for example to get married acquire a home etc if so designated by the independent_trustee s are to be treated as advances on that child’s ultimate share of the trust as are all distributions to that child’s children sec_1 b of the trust agreement will provide that with the approval of the then independent_trustee s of the trust if the beneficiary is under age fifty the primary beneficiary shall have the power to appoint any part or all of that trust’s assets as well as the assets of the hereafter described interim trust effective at any time during the affected trust’s existence to or in trust for any one or more of the descendants of grantor and or their spouses but the power shall not be used to benefit the primary beneficiary the primary beneficiary’s estate or the creditors of either sec_1 of the trust agreement will provide for the distribution of the assets of each trust on the death of the primary beneficiary in the event that the primary beneficiary has not directed otherwise by exercise of power_of_appointment under sec_1 sec_1 a will provide that while the deceased primary beneficiary has two or more children at least one of whom is under age twenty-three the trust’s remaining assets shall continue in trust as the interim trust in that beneficiary’s name having the provisions set forth in sec_1 of the trust agreement sec_3_1 of the trust agreement will provide that any one or more of the three trustee offices may either be occupied or left vacant provided that the office of corporate independent_trustee must at all times be occupied sec_3_1 will provide that two of the trustee positions are independent_trustee offices one may be occupied by an individual and the other must be occupied by a corporate independent_trustee sec_3_1 will provide that the third trustee position will be the family trustee office sec_3_2 of the trust agreement will provide that the family trustee may remove the corporate independent_trustee for the reasons set forth in sec_3_2 of the trust technical provisions the individual independent_trustee may remove the corporate independent_trustee with or without cause plr-162067-02 sec_3_2 of the trust technical provisions will describe the circumstances in which the family trustee may remove the corporate independent_trustee sec_3_2 will provide that the removal power may not be exercised in a manner contrary to the specific restrictions on fiduciary actions listed in sec_4 a of the trust technical provisions sec_3_2 of the trust technical provisions will provide that the notice of removal will set forth the reason s for the removal of the corporate independent_trustee the reasons need not be such as to justify judicial removal and include the following i the family trustee believes the expense of administering the trust can be reduced or its investment needs can be better served by a trustee change ii a personality conflict or difference of opinion as to the investment philosophy to be followed by the trust has arisen with the trustee or the trust officer assigned iii the trustee’s reports are not responsive to the needs of the family trustee iv the trust would be more conveniently administered in another location or v the trustee’s services are being adversely affected by ineffectiveness unavailability trust officer turnover or inexperience sec_3_2 of the trust agreement will provide that the family trustee may remove the then acting individual independent_trustee for the reasons set forth in sec_3_2 of the trust technical provisions sec_3_2 of the trust technical provisions will describe the circumstances in which the family trustee may remove the individual independent_trustee sec_3_2 will provide that the power may not be exercised in a manner contrary to the specific restrictions on fiduciary actions listed in sec_4 a of the trust technical provisions sec_3_2 will provide that the notice of removal will set forth the reason s for the removal that must meet the criteria and in general be of the kind described in sec_3_2 except for sub- sec_3_2 in addition sec_3_2 will provide that the individual independent_trustee may be removed if the trustee’s services are being adversely affected by age health ineffectiveness unavailability or inexperience sec_3_2 of the trust agreement will provide that with respect to trust 2a and trust 3a the right to remove the family trustee of each with or without cause is held by the top control list person or persons who shall be the first in order and is eligible to act sec_3_2 will provide that first level of the control list includes child or her designees or child or her designees as the case may be if she or a descendant of hers is the primary beneficiary of the trust sec_3_2 will provide that the second level of the control list includes child or child 3's most senior generation descendant if any who is an ancestor of the primary beneficiary or the ancestor’s designees sec_3_2 will provide that the third level of the control list includes the primary beneficiary or that individual’s designees sec_3_2 will provide that the fourth level of the control list includes the primary beneficiary’s descendant s of the most senior generation having an eligible descendant or the descendant’s or descendants’ designees sec_3_2 will provide that the last level of the control list includes the most senior generation descendant s of the closest ancestor of any of that trust’s primary beneficiary who has an eligible descendant plr-162067-02 provided that each most senior generation descendant is a descendant of grantor or the descendant’s or descendants’ designees an individual is eligible to act as a family trustee control list person if he or she is not incapacitated and at least twenty-five years old or at least twenty-one years old if he or she is one of the most senior generation descendants of a particular individual when two or more persons occupy a place on a control list their removal appointment and other actions must be by a majority of them sec_3_2 of the trust technical provisions will provide that when only two people hold a right or power with respect to a_trust the two must act together unanimously sec_3_3 of the trust agreement will provide that whenever a vacancy exists in the office of family trustee for any trust created under trust agreement the control list person s then having and while continuing to have the right to remove the family trustee of that trust may at any time select and appoint an individual age twenty-five or older even the appointor himself or herself to fill the vacancy that until thus filled shall remain vacant sec_3_3 of the trust agreement will provide that whenever a vacancy exists in i the office of the corporate independent_trustee of any trust or ii the office of the individual independent_trustee if the office is required to be kept filled under the provisions of sec_3_5 the office shall be promptly filled by a qualified_successor to that office or to either office if there is not stipulation then in effect under sec_3_5 the successor independent_trustee shall be selected and appointed by the family trustee of the trust if the vacancy is not filled within thirty days or if there is no family trustee when the vacancy occurs the successor independent_trustee shall be selected and appointed by the top control list person s for the trust if the vacancy is not filled within thirty days of when the top control list person or all of those persons first becomes aware that the vacancy had not been or could not be filled the successor shall be selected and appointed by the representative beneficiary or the representative beneficiaries of the trust if the vacancy is not filled within sixty days of when the representative beneficiary or all of them first becomes aware that the vacancy had not been filled the successor shall be selected and appointed by the court having jurisdiction over the trust sec_3_3 of the trust agreement will provide that whenever a_trust has only one independent_trustee then acting and its other independent_trustee office is not then required to be kept filled or left vacant under sec_3_5 that trust’s then family trustee may at any time appoint a second independent_trustee meeting the qualifications of the vacant office until such appointment is made or until the circumstances change the other independent_trustee office shall remain vacant sec_3_4 of the trust agreement will provide that a corporate independent_trustee must be an independent bank or trust company as described in sec_3_4 of the trust technical provisions sec_3_4 of the trust technical provisions will provide that to be eligible to serve as an independent_trustee of a specific trust under plr-162067-02 the trust agreement a bank or trust company must have certain corporate independent_trustee qualifications sec_3_4 of the trust technical provisions will provide that the corporate independent_trustee position must be filled by a bank or trust company with respect to which no donor to or current or contingent beneficiary of that trust personally holds voting rights regardless of whether the rights are held in an individual or a fiduciary capacity or both that when aggregated with any voting rights held by that trust are more than fifty percent of the total voting rights relating to the control of the bank or trust company sec_3_4 of the trust technical provisions will provide that the bank or trust company must maintain and enforce firewall rules prohibiting any individual who is connected to the bank or trust company including an officer director employee or one percent shareholder as defined in the document from participating in a decision of the bank or trust company involving the exercise of either a any incidents_of_ownership with respect to any insurance on the life of the individual whether owned by the bank or trust company or owned by any trust as to which the bank or trust company is acting as an independent_trustee and or b any discretionary power other than investment or administrative_powers not affecting any current or contingent beneficiary’s enjoyment of that trust the effect of which would be to make or withhold any distribution from or to grant or withhold permission to enjoy any asset of that trust in favor of i any individual if the connected individual is a living donor or an individual related to a living donor or ii a current or contingent beneficiary or any individual whom the beneficiary is then under an obligation to support if the connected individual is the beneficiary or an individual related to the beneficiary but the paragraph b restriction shall not apply to any individual who would be eligible to serve as an individual independent_trustee of that trust under paragraph b of sec_3_4 substituting for this purpose one percent for fifty percent in subparagraph b of sec_3_4 sec_3_4 of the trust technical provisions will provide that a one percent shareholder shall mean any individual who holds voting rights whether the rights are held in an individual or a fiduciary capacity or both that when aggregated with the voting rights of any trust of which the individual is a donor or a current or contingent beneficiary represent more than one percent of the voting rights of all of the then issued and outstanding shares of the bank or trust company sec_3_4 of the trust technical provisions will provide that an individual shall be considered to be related to a living donor or current or contingent beneficiary if related in any of the following classifications spouse ancestor lineal descendant brother or sister sec_3_4 of the trust agreement will provide that each individual independent_trustee shall be an independent experienced individual who is not related to nor employed by any trust donor or beneficiary as described in sec_3_4 of the trust technical provisions sec_3_4 of the trust technical provisions will plr-162067-02 provide that to be eligible to serve as an independent_trustee of a specific trust under the trust agreement an individual must have certain individual independent_trustee qualifications sec_3_4 will provide the individual may not be either a a donor to or a current or contingent beneficiary of that trust nor related to the donor or beneficiary who is then living in any of the following classifications - spouse ancestor lineal descendant brother or sister - nor b an employee of a donor or current or contingent beneficiary of that trust or of any corporation firm or partnership i in which a donor or beneficiary is an executive or ii with respect to which a donor or beneficiary personally holds voting rights regardless of whether the rights are held in an individual or a fiduciary capacity or both that when aggregated with any voting rights held by that trust are more than fifty percent of the total voting rights relating to the control of the corporation firm or partnership sec_3_5 of the trust agreement will provide that the top control list person s for any present or future trust may by stipulation require that under certain circumstances the office of individual independent_trustee office shall be i kept filled ii left vacant or iii be filled or left vacant as the family trustee may from time to time determine sec_4 a of the trust technical provisions will provide that all trustees at any time acting with respect to any trust under the trust agreement when exercising their powers and discretions as trustees shall act as fiduciaries and not as the holders of powers for their own benefit specifically sec_4 a provides that any power that any trustee of any trust s established under trust agreement may have to remove any trustee s shall be exercisable in accordance with the terms and procedures set forth regarding removal furthermore unless a trustee removal power is expressly referred to or described either a as an absolute right and power that the powerholder may exercise to remove a trustee from office that is exercisable by the powerholder with or without cause or b as a power that is not held or not intended to be held in a fiduciary capacity all trustee removal rights shall be exercisable only in furtherance of trust purposes and not as a means of obtaining the personal goals of the powerholder or a_trust beneficiary by influencing through trustee removal the manner in which discretions granted exclusively to the trustee s subject_to removal are to be exercised sec_4 a b will provide a procedure for a removed trustee to obtain judicial review regarding whether a decision to remove a trustee was in furtherance of trust purposes or intended to achieve personal goals sec_5 b of the trust technical provisions will provide that all other provisions of the agreement to the contrary notwithstanding trust and trust shall unless earlier terminated terminate on the rule_against_perpetuities required termination_date applicable to that trust the required termination_date on which these trusts shall terminate shall be the day prior to the expiration of twenty-one years after the death of the last survivor of a group of individuals composed of the lineal_descendants of patriarch x trustee and the lineal_descendants of each who were living on date namely grantor trustee measuring life measuring life plr-162067-02 child child child measuring life measuring life measuring life and measuring life on date probate_court issued one order affecting each of the trusts that are the subject of this private_letter_ruling the order approves an interim trustee succession plan proposed by the trustees and agreed to by the adult beneficiaries of the various trusts and a guardian ad litem representing the minor and unborn beneficiaries the agreement signed by the parties defines a_trust restructuring period that begins on date the trust restructuring period ends after the internal_revenue_service issues a private_letter_ruling and probate_court issues a final order approving the trust restructuring plan the date probate_court order provides that during the trust restructuring period the requirement that a currently acting individual trustee must resign in favor of a bank or trust company upon the death of trustee is suspended in addition the order creates an additional independent_trustee office and appoints trustee to fill the office if a vacancy shall occur in a co-independent trustee office during the trust restructuring period that vacancy shall be filled by a qualified_individual or left vacant in the discretion of the person s who hold the power to appoint a successor independent_trustee under the applicable_section of the original trust agreement the trustees have requested the following rulings the implementation of the proposed trust restructuring plan will not cause the value of the assets of the trusts created under trust agreement to be included in the gross_estate of any grantor or beneficiary under sec_2036 sec_2038 or sec_2041 and the implementation of the proposed trust restructuring plan will not result in any change in the inclusion_ratio of any of the trusts created under trust agreement for purposes of the generation-skipping_transfer_tax ruling sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in the case of a bona_fide sale for an adequate_and_full_consideration in money or money’s worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period that does not in fact end before his death - the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2036 provides in part that for the purposes of sec_2036 a corporation shall be treated as a controlled_corporation if at any time after the transfer of the property and during the three-year period ending on the date of the decedent’s death the decedent owned with the application of sec_318 or had the right either alone plr-162067-02 or in conjunction with any person to vote stock possessing at least twenty percent of the total combined voting power of all classes of stock sec_20_2036-1 provides in part that if a decedent reserved the unrestricted power to remove or discharge a trustee at any time and to appoint himself as trustee the decedent is considered as having the powers of the trustee sec_2038 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in the case of a bona_fide sale for an adequate_and_full_consideration in money or money’s worth by trust or otherwise where the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person without regard to when or from what source the decedent acquired the power to alter amend revoke or terminate or where any power is relinquished during the three-year period ending on the date of decedent’s death sec_20_2038-1 provides in part that if a decedent had the unrestricted power to remove or discharge a trustee at any time and appoint himself trustee the decedent is considered as having the powers of the trustee sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of his death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released a power_of_appointment by a disposition that is of the nature that if it were a transfer of property owned by the decedent the property would be includible in the decedent’s gross_estate under sec_2035 to inclusive for purposes of sec_2041 the power_of_appointment shall be considered to exist on the date of the decedent’s death even though the exercise of the power is subject_to a precedent giving of notice or even though the exercise of the power takes effect only on the expiration of a stated period after its exercise whether or not on or before the date of the decedent’s death notice has been given or the power has been exercised sec_2041 provides that a general_power_of_appointment is a power that is exercisable in favor of the decedent the decedent’s estate the decedent’s creditors or the creditors of the decedent’s estate however a power to consume invade or appropriate property for the benefit of the decedent that is limited by an ascertainable_standard relating to the health education support or maintenance of the decedent shall not be deemed a general_power_of_appointment sec_20_2041-1 provides in part that a power in a donee to remove or discharge a trustee and appoint himself may be a power_of_appointment for example if under the terms of the instrument the trustee or his successor has the power to appoint the principal of the trust for the benefit of individuals including himself and the decedent has the unrestricted power to remove or discharge the trustee at any time and plr-162067-02 appoint any other person including himself the decedent is considered as having a power_of_appointment however the mere power of management investment custody of assets or the power to allocate receipts and disbursements as between income and principal exercisable in a fiduciary capacity whereby the holder has not power to enlarge or shift any of the beneficial interests therein except as an incidental consequence of the discharge of the fiduciary duties is not a power_of_appointment revrul_95_58 1995_2_cb_191 holds that a decedent grantor’s reservation of an unqualified power to remove a trustee and appoint an individual or corporate successor trustee that is not related or subordinate to the decedent within the meaning of sec_672 is not considered a reservation of the trustee’s discretionary powers of distribution over the property transferred by the decedent grantor to the trust accordingly the trust corpus was not included in the decedent’s gross_estate under sec_2036 or sec_2038 the ruling notes that the eighth circuit in 973_f2d_1409 8th cir concluded that the decedent had not retained dominion and control_over assets transferred to a_trust by reason of his power to remove and replace the trustee with a party that was not related or subordinate to the decedent accordingly the court held that under sec_25_2511-2 the decedent made a completed_gift when he created the trust and transferred assets to it sec_672 defines the term related_or_subordinate_party to mean any nonadverse_party who is the grantor’s spouse if living with the grantor or any one of the following the grantor’s father mother issue brother or sister an employee of the grantor a corporation or any employee of a corporation in which the stock holdings of the grantor and the trust are significant from the viewpoint of voting control a subordinate employee of a corporation in which the grantor is an executive in order for to apply the decedent must have made a transfer of property or any interest therein except in the case of a bona_fide sale for an adequate_and_full_consideration in money or money’s worth under which the decedent retained an interest in or power over the income or corpus of the transferred property for purposes of sec_2036 and sec_2038 it is immaterial in what capacity the power was exercisable by the decedent in the present case only the independent_trustee s possess the power to make discretionary distributions from the trusts sec_3_2 of the trust agreement and technical provisions governing both trusts will authorize the removal of the independent_trustee s by either the family trustee that may include the grantor or a beneficiary of the trusts or the other independent_trustee that may include trust company sec_3_3 of the trust agreement and technical provisions will describe how vacant trustee positions will be filled sec_3_3 of the trust agreement will provide that if a vacancy occurs in the office of corporate independent_trustee or in the office of individual independent_trustee and that office is required to be filled under sec_3_5 the appointment of a successor trustee will be made in order of preference by the family trustee the top control list person the representative beneficiary or a court having jurisdiction over the trust sec_3_3 of the trust plr-162067-02 agreement will provide that if a vacancy in the office of individual independent_trustee is not required to be filled under sec_3_5 the family trustee may fill the vacancy or allow the office to remain vacant in either case the person or corporation filling the independent_trustee office must fill the requirements of the office as described in sec_3_4 of the trust technical provisions sec_3_4 of the trust technical provisions will preclude a donor to or a current or contingent beneficiary of a_trust from serving as the individual independent_trustee in addition sec_3_4 of the trust technical provisions will preclude any donor to or current or contingent beneficiary of a_trust from participating in discretionary distribution decisions if they are connected to a bank or trust company serving as the corporate independent_trustee sec_3_4 and sec_3_4 of the trust technical provisions will further preclude any individual related to a living donor or beneficiary as spouse ancestor lineal descendant brother sister or employee from serving as the individual independent_trustee of a_trust in addition the sections preclude these individuals from participating in discretionary distribution decisions if they are connected to a bank or trust company serving as the corporate independent_trustee sec_3_4 will provide that no employee of any corporation firm or partnership in which a donor or beneficiary is an executive or with respect to which a donor or beneficiary personally holds voting rights regardless of whether the rights are held in an individual or a fiduciary capacity or both that when aggregated with any voting rights held by that trust are more than fifty percent of the total voting rights relating to the control of the corporation firm or partnership may serve as the individual independent_trustee sec_3_4 requires that the corporate independent_trustee be a bank or trust company in which no donor to or current or contingent beneficiary of the trust personally holds voting rights that when aggregated with any voting rights held by that trust are more than fifty percent of the total voting rights relating to the control of the bank or trust company sec_3_4 will also include a firewall provision precluding anyone connected to the bank from participating in discretionary distribution decisions in favor of any individual if the connected individual is or is related to a living donor a current or contingent beneficiary or any individual whom the beneficiary is then under an obligation to support if the connected individual is or is related to the beneficiary unless the connected individual meets the requirements of an individual independent_trustee and is not an employee of any corporation firm or partnership in which a donor or beneficiary personally holds voting rights regardless of whether the rights are held in an individual or a fiduciary capacity or both that when aggregated with any voting rights held by that trust are more than one percent of the total voting rights relating to the control of the corporation firm or partnership the provisions described above thus prohibit the grantors from participating directly or indirectly in discretionary distribution decisions in addition the provisions prohibit any individual beneficiary from participating directly or indirectly in discretionary distribution decisions finally the provisions preclude anyone closely plr-162067-02 related to a donor or a current or contingent beneficiary from participating in discretionary distribution decisions furthermore under the trust company bylaws and participation_agreement the grantor beneficiaries and other family members are all eligible to participate as a director of trust company however section dollar_figure expressly prohibits any officer or director from participating in a decision of trust company involving the exercise of a discretionary power other than investment powers of any trust of which the officer director or spouse of the officer or director is a grantor or donor to the trust or a current or contingent beneficiary of the trust in addition family members are prohibited from participating in trust company decisions relating to the discretionary decisions from trusts where the current or contingent beneficiary of the trust or his or her spouse is a descendant of either patriarch x or patriarch y therefore the grantor and the beneficiaries of the trusts created under trust agreement are sufficiently prohibited from participating in decisions regarding discretionary distributions from their own trusts in addition the structure of the bylaws prohibits the grantors and beneficiaries of the family x and family y trusts from participating in trust company’s exercise of discretion to make distributions from any of either family’s trusts preventing the possibility of outside reciprocal agreements that may indirectly give members_of_family x effective_control over the discretionary distributions from the trusts the combination of the firewall provisions in the revised trust agreement trust technical provisions and the trust company bylaws preclude a donor to any of the trusts from having the retained dominion and control as contemplated by sec_2036 or sec_2038 grantor therefore will not be considered as having the powers of the trustees under sec_20_2036-1 or sec_20_2038-1 solely as a result of possessing directly or indirectly the power to remove and or to replace either independent_trustee under trust agreement in addition although grantor may be a shareholder in and participate in the daily activities of trust company he is precluded from participating in discretionary distribution decisions made by trust company with respect to trusts created under trust agreement accordingly based on the facts submitted and the representations made we conclude that the implementation of the proposed trust restructuring plan including the appointment of trust company as trustee of the trusts and trust company’s future exercise of discretionary powers over distributions to the beneficiaries of the trusts will not result in the inclusion of any portion of the trusts in the estate of a grantor under sec_2038 or sec_2038 furthermore the combination of provisions also preclude a beneficiary from having the power to affect the beneficial_enjoyment of the trust property as contemplated by sec_2041 no beneficiary therefore will be considered as having the powers of the trustee under sec_20_2041-1 solely as a result of possessing directly or indirectly the power to remove and or replace either independent_trustee under trust agreement in addition although beneficiaries may be shareholders in and participate in the daily activities of trust company they are precluded from participating in discretionary distribution decisions made by trust company with respect to trusts created under trust agreement accordingly based on the facts submitted and the plr-162067-02 representations made we conclude that the implementation of the proposed trust restructuring plan including the appointment of trust company as trustee of the trusts and trust company’s future exercise of discretionary powers over distributions to the beneficiaries of the trusts will not result in the inclusion of any portion of the trusts in the estate of a beneficiary under sec_2041 ruling sec_2601 imposes a tax on every generation-skipping_transfer sec_2611 defines the term generation-skipping_transfer to include a taxable_distribution taxable_termination and a direct_skip the trusts created under trust agreement are generation-skipping_transfer trusts because they provide for distributions to one or more generations of beneficiaries below the grantor’s generation date is prior to date and trust and trust were irrevocable on date trust and trust therefore are exempt from the generation-skipping_transfer_tax pursuant to sec_26_2601-1 grantor exercised a non-general power_of_appointment over two trusts of which he was a beneficiary and appointed assets to trust it has been represented that the trusts over which the powers were exercised were exempt from the generation-skipping_transfer_tax under b a of the tax_reform_act_of_1986 and sec_26 b i thus the additions to trust did not cause any change in the status of trust as exempt from the generation-skipping_transfer_tax it has been represented that with respect to any additions made to trust and trust after date other than as a result of the exercised powers of appointment the transfers qualified for the gift_tax annual exclusion in addition transfers made to the trusts prior to date were deemed to have a zero inclusion_ratio under sec_2642 then in effect finally a sufficient portion of the donor’s and donor’s spouse’s when applicable generation-skipping_transfer_tax_exemption was allocated to the transfers made to the trusts after date accordingly prior to the implementation of the trust restructuring plan each trust had an inclusion_ratio of zero under b a of the tax_reform_act_of_1986 and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the generation-skipping_transfer_tax provisions do not apply to any generation-skipping_transfer under a_trust as defined in sec_2652 that was irrevocable on date but only to the extent that the transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added sec_26_2601-1 provides that any trust in existence on date is considered an irrevocable_trust except as provided in sec_26_2601-1 or c which relate to property includible in a grantor’s gross_estate under sec_2038 and sec_2042 in the present case the trusts created under trust agreement are considered to have been irrevocable on date because neither sec_2038 nor sec_2042 applies plr-162067-02 sec_26_2601-1 provides that the release exercise or lapse of a power_of_appointment other than a general_power_of_appointment as defined in sec_2041 is not treated as an addition to a_trust if the power_of_appointment was created in an irrevocable_trust that is not subject_to chapter under paragraph b of this section and in the case of an exercise the power_of_appointment is not exercised in a manner that may postpone or suspend the vesting absolute ownership or power of alienation of an interest in property for a period measured from the date of creation of the trust extending beyond any life in being at the date of creation of the trust plus a period of twenty-one years plus if necessary a reasonable period of gestation the perpetuities period for purposes of this paragraph b v b the exercise of a power_of_appointment that validly postpones or suspends the vesting absolute ownership or power of alienation of an interest in property for a term of years that will not exceed years measured from the date of creation of the trust will not be considered an exercise that postpones or suspends the vesting absolute ownership or power of alienation beyond the perpetuities period if a power is exercised by creating another power it is deemed to be exercised to whatever extent the second power may be exercised sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax under sec_26_2601-1 or hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status the rules contained in sec_26_2601-1 are applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides in part that the distribution of trust principal from an exempt trust to a new trust will not cause the new trust to be subject_to the provisions of chapter if the terms of the governing instrument of the exempt trust authorize distributions to the new trust without the consent or approval of any beneficiary or court and the terms of the governing instrument of the new trust do not extend the time for vesting of any beneficial_interest in the trust in a manner that may postpone or suspend the vesting absolute ownership or power of alienation of an interest in property for a period measured from the date the original trust became irrevocable extending beyond any life in being at the date the original trust became irrevocable plus a period of twenty-one years plus if necessary a reasonable period of gestation sec_26_2601-1 provides examples illustrating the application of paragraph b in each example the trust established in was irrevocable for purposes of sec_26_2601-1 and there have been no additions to any trust after date example illustrates a trustee’s power to distribute principal authorized under a_trust instrument in grantor established an irrevocable_trust plr-162067-02 trust for the benefit of grantor’s child a a’s spouse and a’s issue at the time trust was established a had two children b and c a corporate fiduciary was designated as trustee under the terms of trust the trustee has the discretion to distribute all or part of the trust income to one or more of the group consisting of a a’s spouse or a’s issue the trustee is also authorized to distribute all or part of the trust principal to one or more trusts for the benefit of a a’s spouse or a’s issue under terms specified by the trustee in the trustee’s discretion any trust established under trust however must terminate twenty-one years after the death of the last child of a to die who was alive at the time trust was executed trust will terminate on the death of a at which time the remaining principal will be distributed to a’s issue per stirpes in the trustee distributes part of trust’s principal to a new trust for the benefit of b and c and their issue the new trust will terminate twenty-one years after the death of the survivor of b and c at which time the trust principal will be distributed to the issue of b and c per stirpes the terms of the governing instrument of trust authorize the trustee to make the distribution to a new trust without he consent or approval of any beneficiary or court in addition the terms of the governing instrument of the new trust do not extend the time for vesting of any beneficial_interest in a manner that may postpone or suspend the vesting absolute ownership or power of alienation of an interest in property for a period measured from the date of creation of trust extending beyond any life in being at the date of creation of trust plus a period of twenty-one years plus if necessary a reasonable period of gestation therefore neither trust nor the new trust will be subject_to the provisions of chapter of the internal_revenue_code the present transaction is similar to that in example of sec_26_2601-1 with respect to trust and trust the independent_trustee has the discretion to make the proposed distributions in the trust agreements furthermore the terms of the new trust agreements will not extend the time for vesting that was provided for in the original trusts because the individuals used as measuring lives for the new trusts were included as measuring lives under the original trust therefore the new trusts will terminate at the same time the original trusts were to terminate with respect to the special powers of appointment exercised in favor of trust the powers were created in irrevocable trusts that are not subject_to chapter under sec_26_2601-1 in addition the exercise of the powers did not postpone or suspend the vesting absolute ownership or power of alienation beyond the period prescribed in sec_26_2601-1 with respect to trust and trust the terms in the new trust agreements do not extend the time for vesting of any beneficial_interest in the trust in a manner that may postpone or suspend the vesting absolute ownership or power of alienation of an interest in property in contradiction to sec_26_2601-1 or sec_26_2601-1 we therefore conclude that after the implementation of the proposed trust restructuring plan trust 2a and trust 3a will each have an inclusion_ratio of zero for purposes of the generation-skipping_transfer_tax plr-162067-02 except as expressly provided herein no opinion is expressed or implied concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination pursuant to the power_of_attorney on file with this office a copy of this letter is being sent your attorney this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent sincerely james f hogan acting branch chief branch office of associate chief_counsel passthroughs and special industries enclosure copy of this letter for sec_6110 purposes


t c summary opinion united_states tax_court mark a crompton and diane j crompton petitioners v commissioner of internal revenue respondent docket no 1838-07s filed date mark a crompton and diane j crompton pro sese monica j miller and kevin parrington for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax the issue for decision is whether petitioners are entitled to claim a dollar_figure deduction for alimony paid to nancy wood former wife background some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received into evidence are incorporated herein by reference when petitioners filed their petition they resided in georgia on date mark a crompton mr crompton was divorced from former wife by a final decree of the family court of delaware family court a stipulation and order resolving ancillary matters pursuant to a decree of divorce the order was entered on date the order directed mr crompton to pay alimony of dollar_figure per month for a 10-year period beginning date the order does not contain a provision regarding the effect of remarriage on mr crompton’s obligation to pay alimony in former wife remarried former wife did not inform mr crompton of her subsequent marriage and he was otherwise not informed that she had remarried during mr crompton continued to make monthly payments of dollar_figure to former wife former wife did not include the payments in gross_income on her joint_return for petitioners filed a joint_return for and claimed a dollar_figure deduction for alimony paid i burden_of_proof discussion the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer has the burden to prove that the determinations are in error rule a 290_us_111 but the burden_of_proof on factual issues that affect a taxpayer’s tax_liability may be shifted to the commissioner if he introduces credible_evidence with respect to the issue see sec_7491 there is no dispute as to any factual issue accordingly this case is decided by the application of law to the undisputed facts and sec_7491 is inapplicable ii alimony deduction sec_215 allows a deduction for alimony paid during the taxable_year sec_215 provides that the term alimony means any alimony as defined in sec_71 that is includable in the recipient’s gross_income under sec_71 sec_71 defines alimony as any cash payment meeting the four criteria provided in subparagraphs a through d the first criterion is that the payment must be made under_a_divorce_or_separation_instrument sec_71 the phrase divorce_or_separation_instrument includes a written instrument incident to a divorce decree sec_71 the parties dispute the characterization of the dollar_figure monthly payments respondent citing del code ann tit sec b supp contends that the payments are not alimony b ecause under delaware state law unless the divorce decree expressly states that the payments have to continue after remarriage the obligation to make the payments ceases upon the remarriage of the recipient spouse because of that under the internal_revenue_code these payments were no longer required under_a_divorce_or_separation_instrument which is necessary to be qualified as alimony mr crompton contends that because he did not know that former wife had remarried i continued to meet what i felt was my obligation for alimony paying on a monthly basis the divorce decree clearly stated that i needed to pay alimony for years he also contends that former wife’s cohabitation remarriage or death is merely a statutory factor for termination thus petitioners are entitled to a deduction for alimony paid 1del code ann tit sec b supp provides that the obligation to pay future alimony is terminated on the recipient’s remarriage unless otherwise agreed by the parties in writing and expressly provided in the decree see also caldwell v caldwell a 2d del fam ct remarriage by a once-dependent former spouse operates as an absolute bar to alimony regardless of any continuing need for support congress in amending sec_71 has determined that a uniform federal standard should be set forth to determine what constitutes alimony for federal tax purposes h rept 98th cong 2d sess this definition is predicated on an objective standard and courts generally should not make subjective inquiries under the varying laws of the states 102_f3d_842 6th cir affg tcmemo_1995_183 it is congress’s intent that courts in determining whether payments constitute alimony under sec_71 will look to state law only to determine whether the requirement of sec_71 is satisfied ie whether state law provides that the payments terminate upon the payee’s death id citing h rept supra pincite if the court were to accept respondent’s argument it would have to look first to delaware law in order to determine whether the order was enforceable and thereby such payments were received under_a_divorce_or_separation_instrument pursuant to state law such an inquiry impermissibly injects state law into sec_71 through the back door this the court cannot do--it will follow congress’s intent under the order mr crompton was required to pay dollar_figure per month for a 10-year period the payments were received by former wife under_a_divorce_or_separation_instrument consonant with sec_71 accordingly respondent’s determination is not sustained to reflect the foregoing decision will be entered for petitioners


t c memo united_states tax_court carol trescott petitioner v commissioner of internal revenue respondent docket no filed date carol trescott pro_se joel d mcmahan for respondent memorandum findings_of_fact and opinion paris judge respondent issued a notice_of_deficiency determining the following deficiencies in petitioner’s federal_income_tax and additions to tax under sec_1 a and and year deficiency dollar_figure big_number big_number big_number big_number big_number additions to tax sec_6651 sec_6651 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure sec_6654 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure respondent conceded at trial that petitioner was entitled to sec_163 deductions for mortgage interest as well as sec_164 deductions for real_estate_taxes paid for the years at issue the remaining issues for decision are whether respondent correctly determined that petitioner had gross_income of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for tax_year sec_2002 and respectively whether petitioner is entitled to any deductions under sec_162 for ordinary and necessary business_expenses incurred during the years at issue whether petitioner is liable for additions to 1unless otherwise indicated section references are to the internal_revenue_code code in effect for the tax years at issue and rule references are to the tax_court rules_of_practice and procedure tax under sec_6651 for failure_to_file federal_income_tax returns timely for the years at issue whether petitioner is liable for additions to tax under sec_6651 for failure to pay federal_income_tax timely for the years at issue whether petitioner is liable for additions to tax under sec_6654 for failure to make estimated_tax payments for the years at issue and whether a sec_6673 penalty should be imposed upon petitioner findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received in evidence are incorporated herein by this reference petitioner resided in florida when her petition was filed petitioner has been a massage therapist licensed in the state of florida since during the years at issue petitioner operated a massage therapy business from her home and was paid for her massage therapy services petitioner did not file any federal_income_tax returns for the years at issue in the internal_revenue_service began an audit examination of petitioner on date respondent prepared substitutes for returns under sec_6020 for tax_year sec_2002 through because petitioner dealt primarily in cash and refused to cooperate in the examination respondent wa sec_2petitioner also did not file a federal_income_tax return for tax_year forced to determine petitioner’s income for tax_year sec_2002 through using a combination of petitioner’s known expense sec_3 and bureau of labor statistics bls minimum living expense information for a single_person with a mortgage in petitioner’s geographic region for tax_year respondent determined petitioner’s income by using an amount petitioner reported on a credit application submitted to jp morgan-chase bank in date on date respondent issued to petitioner the notice_of_deficiency for tax_year sec_2002 and petitioner timely filed a petition with this court i respondent’s determinations of income opinion it is well established that the commissioner’s determinations as embodied in his statutory notices of deficiency are presumed correct 290_us_111 the presumption is procedural and transfers to the taxpayer the burden of proving that the commissioner’s determinations are incorrect 408_f2d_65 7th cir aff’g t c memo 3respondent was able to find records of petitioner’s mortgage payments as well as real_estate_taxes paid to her county of residence by her mortgage_lender 4the amounts reflected in the notice_of_deficiency are the same as those reproduced in the above table however the burden_of_proof shifts to the commissioner if the taxpayer can show that the commissioner’s determinations were arbitrary and excessive 293_us_507 91_tc_179 aff’d without published opinion 872_f2d_411 3d cir a tax_year sec_2002 through sec_61 defines gross_income as all income from whatever source derived including compensation_for services such as wages salaries and bonuses see also sec_1_61-2 income_tax regs taxpayers are required to maintain books_and_records sufficient to establish the amount of their gross_income sec_6001 if the taxpayer fails to do this then the commissioner is entitled to reconstruct the taxpayer’s income through the use of any reasonable method see 348_us_121 54_tc_1530 reliance on bls statistics in reconstructing a taxpayer’s income has been held to be reasonable giddio v commissioner t c pincite bennett v commissioner tcmemo_1998_96 petitioner admits that she conducted an ongoing massage therapy business during the years at issue petitioner neither filed federal_income_tax returns nor provided respondent with any books_and_records concerning her massage therapy business respondent did his best to reconstruct petitioner’s income by combining petitioner’s known expenses with cost of living estimates presented by bls statistics for tax_year sec_2002 through the court finds that respondent’s efforts to reconstruct petitioner’s income for tax_year sec_2002 through were reasonable and the determinations resulting from those efforts were not arbitrary or excessive petitioner failed to introduce any substantive evidence as to her income for the years at issue petitioner failed to carry her burden to prove that respondent’s determinations were incorrect accordingly respondent’s determinations of gross_income for tax_year sec_2002 through are sustained b tax_year for tax_year respondent reconstructed petitioner’s income by relying on an application_for a line of credit that petitioner filled out in date petitioner contends that this method of reconstruction was unreasonable and that the notice_of_deficiency was arbitrary and excessive when a taxpayer asks the court to find a statutory_notice_of_deficiency to be arbitrary and excessive he or she is asking the court to look behind that notice as a general_rule the court will not honor such a request even though the determination may have been based on hearsay or other inadmissible evidence 83_tc_269 the rationale for the general_rule is that a trial before the court is a proceeding de novo and determinations therefore are to be based upon the merits of the case and not upon the record developed at the administrative level 62_tc_324 the court has recognized exceptions to the general_rule however in cases involving unreported income where the commissioner introduced no substantive evidence but rested on the presumption of correctness and the taxpayer challenged the notice_of_deficiency on the grounds that it was arbitrary see 73_tc_394 all that is required to support the presumption of correctness is that the commissioner’s determination have some minimal factual predicate 994_f2d_1542 11th cir aff’g tcmemo_1991_636 it is only when the commissioner’s assessment is shown to be without rational foundation or arbitrary and erroneous that the presumption should not be recognized 100_f3d_1308 7th cir aff’g tcmemo_1995_243 furthermore the court has held that it is reasonable for the commissioner to reconstruct a taxpayer’s income from self-reported income figures supplied by the taxpayer on a loan application see driggers v commissioner tcmemo_1997_ respondent presented substantive evidence of his determination in the form of a credit application signed by petitioner in date as a result it is the court’s opinion that the aforementioned exception to the general_rule of refusing to look behind the notice_of_deficiency is inapplicable even if the exception were applicable it cannot be said that respondent’s decision to base his determination on the credit application was without rational foundation or arbitrary and erroneous the income figure respondent used was self-reported by petitioner to a federally insured institution on a signed credit application accordingly respondent’s determinations are presumed correct at trial petitioner did not produce any evidence beyond self-serving testimony that respondent’s income determinations were incorrect petitioner was asked repeatedly by respondent’s counsel to produce evidence relating to petitioner’s income for the years at issue instead of attempting to prove her true income petitioner only denied that respondent’s determinations were accurate petitioner failed to carry her burden of proving that respondent’s determination was incorrect accordingly respondent’s determination of gross_income for tax_year is sustained ii business_expenses sec_162 allows a deduction for ordinary and necessary expenses paid_or_incurred in carrying_on_a_trade_or_business an expense is ordinary if it is customary or usual within a particular trade business or industry or relates to a transaction of common or frequent occurrence in the type of business involved 308_us_488 an expense is necessary if it is appropriate and helpful for the business see 320_us_467 taxpayers must keep sufficient records to substantiate any deductions otherwise allowed by the code sec_6001 rule a petitioner failed to keep sufficient records of her business transactions or expenses for any of the years at issue although petitioner prepared an estimated expense spreadsheet representing purported expenses for the years at issue she 5while the court notes that the income attributed to petitioner for tax_year was substantially more than for the other years at issue petitioner failed to take advantage of several opportunities to provide any income information for tax_year furnished very little evidence to substantiate any of the expenses claimed the items of expense discussed below are the only ones for which petitioner provided any evidence in substantiation beyond her estimated expense spreadsheet and self-serving testimony accordingly petitioner has failed to carry her burden_of_proof with respect to all other items of expense for the years at issue a telephone expenses petitioner furnished telephone bills she paid for a secondary telephone line used in relation to her massage therapy business the amounts she paid for the years at issue were as follows amount_paid dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure petitioner adequately established that the telephone account listed on the records was indeed a secondary telephone line unrelated to her personal telephone furthermore the court accepts petitioner’s testimony that said records relate to a phone used in the day-to-day operations of her massage therapy business the court finds that those expenses were ordinary and necessary in carrying on her massage therapy business accordingly petitioner is entitled to sec_162 deductions for expenses paid in relation to this telephone line b massage therapy license expenses if a taxpayer establishes that he or she paid a deductible business_expense but cannot substantiate the precise amount the court may estimate the amount of the deductible expense bearing heavily upon the taxpayer whose inexactitude is of his own making see 39_f2d_540 2d cir in order for the court to estimate the amount of an expense the court must have some basis upon which an estimate may be made 85_tc_731 petitioner has sufficiently established that she was a massage therapist licensed in the state of florida for the years at issue the parties have stipulated that petitioner has been a licensed massage therapist for a number of years and have included certificates of verification in the stipulations of fact petitioner claimed her yearly licensing fees to have been dollar_figure for each year at issue but did not offer any physical evidence to substantiate the precise amount the court takes judicial_notice that according to the florida department of health through which official state licensure is issued the yearly renewal for an individual massage therapy license is dollar_figure and the yearly renewal for a massage therapy establishment is also dollar_figure and that these fees are required to be paid in conjunction the court finds that petitioner is entitled to a sec_162 licensing expense deduction of dollar_figure for each of the years at issue c business use of home deductions sec_280a in general provides that no deduction is allowed with respect to the use of a taxpayer’s personal_residence however an exception is granted where the deduction is allocable to a portion of the dwelling_unit which is exclusively used on a regular basis as the principal_place_of_business for any trade_or_business of the taxpayer as a place of business which is used by patients clients or customers in meeting or dealing with the taxpayer in the normal course of his trade_or_business or in the case of a separate structure which is not attached to the dwelling_unit in connection with the taxpayer’s trade_or_business sec_280a petitioner has introduced evidence to show that she is a licensed massage therapist petitioner has also provided testimony and other evidence sufficient to show that she operated her massage therapy business from a portion of her home designated exclusively for business use however even granting petitioner that her home_office qualifies for the exception under sec_280a she has 6see generally massage therapy renewal information florida department of health http www doh state fl us mqa renewal marenewal ma_renewal html failed to substantiate any expenses beyond the mortgage interest and the real_estate_taxes that respondent has already conceded petitioner produced no utility bills or insurance bills to substantiate the pro_rata deductions she claimed on her estimated expense spreadsheet additionally petitioner did not allege that she was entitled to any depreciation for the business portion of her home much less provide any evidence to that effect petitioner provided adequate substantiation for the mortgage interest and real_estate tax deductions respondent conceded petitioner also provided adequate evidence with which to calculate the percentage of her home that was dedicated to business use however respondent has already conceded both of these items as allowable deductions on schedule a itemized_deductions under sec_163 and sec_164 petitioner has not established that she is entitled to any expenses related to the business use of her home greater than respondent has already allowed iii additions to tax a sec_6651 addition_to_tax failure_to_file a tax_return by the date prescribed leads to a mandatory addition_to_tax unless the taxpayer shows that such failure was due to reasonable_cause and not due to willful neglect sec_6651 for each month the return is late an addition_to_tax equal to of the amount of tax required to be shown on the return shall be assessed not exceeding in the aggregate id under sec_7491 the commissioner has the burden of production to show that the imposition of an addition_to_tax under sec_6651 is appropriate the parties have stipulated that petitioner did not file federal_income_tax returns for the years at issue therefore respondent has met his burden of production the burden of proving reasonable_cause and lack of willful neglect falls on the taxpayer rule a 469_us_241 116_tc_438 reasonable_cause exists where a return is late despite the taxpayer’s exercising ordinary business care and prudence sec_301_6651-1 proced admin regs circumstances that are considered to constitute reasonable_cause are typically those outside of the taxpayer’s control for example unavoidable postal delays timely filing of a return with the wrong office death or serious illness of the taxpayer or a member of the taxpayer’s immediate_family taxpayer’s unavoidable absence from the united_states destruction by casualty of taxpayer’s records or place of business and reliance on the erroneous advice of an internal_revenue_service officer_or_employee 114_f3d_366 2d cir aff’g tcmemo_1995_547 petitioner stipulated that she did not file federal_income_tax returns for the years at issue petitioner’s only argument was that she had studied the code and found no section which she believed imposed an income_tax on her this does not fall under any of the reasonable_cause circumstances enumerated above and in fact was based on a misguided and self-serving interpretation of established tax law accordingly the court sustains the additions to tax under sec_6651 b sec_6651 addition_to_tax sec_6651 imposes an addition_to_tax on taxpayers for their failure to pay timely the amount of tax shown on a return a substitute for return prepared by the commissioner under sec_6020 is treated as a return filed by the taxpayer for purposes of sec_6651 sec_6651 see also eg 127_tc_200 aff’d 521_f3d_1289 10th cir respondent has the burden to prove that substitutes for returns satisfying the requirements of sec_6020 were prepared see 120_tc_163 gleason v commissioner tcmemo_2011_154 a return for sec_6020 purposes must be subscribed it must contain sufficient information from which to compute the taxpayer’s tax_liability and the return form and any attachments must purport to be a return spurlock v commissioner tcmemo_2003_124 the court has held that these requirements have been met where the substitutes for returns consist of forms a income_tax examination changes forms 886-a explanation of items and forms sec_6020 certification and the forms contain the taxpayer’s name and social_security_number and sufficient information to compute a tax_liability gleason v commissioner tcmemo_2011_154 respondent’s substitutes for returns included forms 4549-a 886-a and furthermore they contained petitioner’s name and social_security_number and sufficient information upon which to compute a tax_liability accordingly respondent’s substitutes for returns constitute valid sec_6020 returns deemed to have been filed by petitioner for the purposes of sec_6651 respondent has shown that the prepared substitutes for returns for the years at issue were valid petitioner did not make any payments toward her federal_income_tax liabilities for the tax years at issue respondent has therefore satisfied the burden of production under sec_7491 with respect to the sec_6651 addition_to_tax petitioner did not introduce evidence to show that her failure to pay was due to reasonable_cause accordingly petitioner is liable for the additions to tax under sec_6651 c sec_6654 addition_to_tax sec_6654 imposes an addition_to_tax for a taxpayer’s underpayment of estimated income_tax the addition_to_tax is calculated with reference to four installment payments each equal to of the required_annual_payment sec_6654 d a the annual payment is the lesser_of of the tax_shown_on_the_return for the taxable_year or if no return is filed of the tax for such year or of the tax shown on the taxpayer’s return_for_the_preceding_taxable_year sec_6654 option does not apply where a taxpayer has not filed a return_for_the_preceding_taxable_year sec_6654 for the tax years at issue respondent introduced evidence to prove that petitioner had federal_income_tax liabilities petitioner was required to file federal_income_tax returns petitioner did not file returns and petitioner did not make any estimated_tax payments therefore respondent met his burden under sec_7491 to show that for each tax_year at issue petitioner had a required_annual_payment under sec_6654 but did not make any estimated_tax payments 7additionally respondent introduced evidence that petitioner did not file a federal_income_tax return for tax_year accordingly petitioner’s estimated_tax for each year could not be based on the amount of tax reported for the previous year petitioner had taxable_income for the years at issue petitioner did not make any estimated_tax payments for tax_year sec_2002 through in her filings with the court petitioner did not allege that any of the statutory exemptions under sec_6654 applies petitioner is therefore liable for the sec_6654 additions to tax d sec_6673 penalty sec_6673 allows the court to impose a penalty payable to the united_states and not in excess of dollar_figure whenever it appears that the proceedings before it have been instituted or maintained by the taxpayer primarily for delay the taxpayer’s position in such proceeding is frivolous or groundless or the taxpayer unreasonably failed to pursue available administrative remedies respondent has moved for imposition of such a penalty because of petitioner’s lack of cooperation and reliance on frivolous arguments early in the court_proceeding however petitioner has since renounced many of her frivolous positions and was reasonably cooperative at trial the court will refrain from imposing such a penalty at this time however petitioner is hereby warned that penalties may be imposed in the future if she again decides to advance frivolous arguments accordingly respondent’s motion to impose a penalty under sec_6673 will be denied the court has considered all arguments the parties have made and to the extent not discussed herein we find that they are moot irrelevant or without merit to reflect the foregoing order and decision will be entered under rule