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 plr-107551-10 date date legend legend company ----------------------------------------------------------- ------------------------------------ shareholder ------------------------------------------------------------- ------------------ state date dear ------------- ---------- ------------------- this letter responds to a letter dated date and subsequent correspondence written on behalf of company requesting a ruling under sec_1362 of the internal_revenue_code facts company was incorporated in state on date company’s shareholder intended for company to be an s_corporation effective date however company’s form_2553 election by a small_business_corporation was not timely filed company requests a ruling that it will be recognized as an s_corporation effective date law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation plr-107551-10 sec_1362 provides that an election under sec_1362 may be made by a small_business_corporation for any taxable_year at any time during the preceding_taxable_year or at any time during the taxable_year and on or before the 15th day of the third month of the taxable_year sec_1362 provides that if a small_business_corporation makes an election under sec_1362 for any taxable_year and the election is made after the 15th day of the third month of the taxable_year and on or before the 15th day of the third month of the following taxable_year then the election is treated as made for the following taxable_year sec_1362 provides that if an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making the election for the taxable_year or no election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for the taxable_year and sec_1362 shall not apply conclusion based solely on the facts submitted and the representations made we conclude that company has established reasonable_cause for failing to make an s_corporation_election in a timely manner thus we conclude that company is eligible for relief under sec_1362 accordingly if company makes an election to be an s_corporation effective date by filing a completed form_2553 with the appropriate service_center within days from the date of this letter then such election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center a copy is enclosed for that purpose except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether company is otherwise eligible to be an s_corporation for federal tax purposes in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to company’s authorized representative this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-107551-10 the ruling contained in this letter is 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 ruling_request it is subject_to verification on examination sincerely s danielle grimm acting senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes cc


t c memo united_states tax_court gaylon l harrell petitioner v commissioner of internal revenue respondent docket no filed date p did not file a federal_income_tax return for or r determined deficiencies and additions to tax for each year r filed a motion under rule tax_court rules_of_practice and procedure this court granted r’s motion in part with respect to the deficiencies in income_tax and additions to tax under sec_6651 and sec_6654 i r c but denied the motion as to the issue of p’s liability for the fraud addition_to_tax under sec_6651 i r c for held p is liable for an addition_to_tax for fraud under sec_6651 i r c for held further p is liable for a penalty of dollar_figure under sec_6673 i r c gaylon l harrell pro_se james a kutten for respondent memorandum findings_of_fact and opinion chabot judge respondent determined deficiencies in federal individual income_tax and additions to tax under sec_6651 failure_to_file f fraud and underpayment of estimated_tax against petitioner as follows year deficiency sec_6651 sec_6651 sec_6654 additions to tax dollar_figure big_number big_number dollar_figure -- dollar_figure -- -- dollar_figure the notice_of_deficiency computations for the additions to tax under sec_6651 and sec_6651 did not take into account withholdings on petitioner’s wages sec_6651 respondent concedes that the additions to tax due under sec_6651 for and are in the amounts of dollar_figure and dollar_figure respectively and not in the amounts of dollar_figure and dollar_figure as determined in the notice_of_deficiency and the addition_to_tax due under sec_6651 for is dollar_figure and not dollar_figure as determined in the notice_of_deficiency unless indicated otherwise all section references are to sections of the internal_revenue_code_of_1986 as in effect for the years in issue the notice_of_deficiency computation for the addition_to_tax under sec_6654 also apparently failed to take into account withholdings on petitioner’s wages sec_6654 the rule computation is to take into consideration withholdings from petitioner’s wages in computing this addition_to_tax unless indicated otherwise all rule references are to the tax_court rules_of_practice and procedure after resolution of other matters the issue for decision is whether petitioner is liable for the fraud addition_to_tax under sec_6651 for on the court’s own motion we also consider the penalty under sec_6673 findings_of_fact some of the facts have been stipulated the stipulations and the stipulated exhibits are incorporated herein by this reference when the petition was filed in the instant case petitioner resided in latham illinois petitioner was employed as a substitute rural carrier for the u s postal service hereinafter sometimes referred to as the usps from through from onward he has been employed as a full-time rural carrier for the usps petitioner had filed tax returns for about years until he has not filed any_tax returns since petitioner generally had tax_return_preparers prepare his tax returns his last tax_return was prepared by a tax_return_preparer petitioner never asked a tax_return_preparer if petitioner had a duty to file a tax_return petitioner never asked a certified respondent moved to dismiss this case under rule for failure to state a claim on which relief could be granted in our earlier opinion in this case disposing of this motion harrell v commissioner tcmemo_1996_64 we treated respondent’s motion as a motion for partial judgment on the pleadings and granted judgment in favor of respondent except as to the fraud addition_to_tax public accountant about petitioner’s duty to file a tax_return for petitioner’s failure_to_file tax returns since is intentional during petitioner had wage income from the usps in the amount of dollar_figure from which there was withheld dollar_figure income_tax dollar_figure social_security_tax and dollar_figure medicare_tax petitioner also received pension distributions from the caterpillar ncp trust in the amount of dollar_figure during petitioner has not had a bank account in his name since about the mid-1980’s for about years including petitioner had his paychecks deposited into a checking account in the name of his adult son randy petitioner does not have signatory authority over this checking account randy wrote checks on this checking account to petitioner petitioner cashed the checks and petitioner then used the currency obtained thereby to pay his expenses the petition and amended petitions that petitioner filed in the instant case raised frivolous contentions that resulted in this court’s granting partial judgment on the pleadings in favor of respondent our opinion disposing of respondent’s motion harrell v commissioner tcmemo_1996_64 closed with the following paragraph we would ordinarily caution petitioner that his continuing advancement of frivolous and groundless protester allegations might subject him to a penalty under the provisions of sec_6673 petitioner however has already received and ignored such a warning petitioner is interested only in using the federal courts to propound his misguided views on the federal_income_tax system not in disputing the merits of either the deficiencies in tax or the additions to tax determined by respondent see 13_f3d_232 7th cir harrell’s challenge to the tax_assessment is frivolous harrell v commissioner tcmemo_1994_406 petitioner’s argument declared frivolous and sanctions imposed under sec_6673 affd without published opinion 72_f3d_132 7th cir petitioner should nevertheless note that in view of his past actions his persistent assertion in this case of frivolous and groundless arguments is likely to result in sec_6673 sanctions larger than those previously imposed upon him in due course the instant case was set for trial during the preliminary proceedings at the trial session the following occurred the court all right now mr harrell before i ask you about an opening statement i guess one of the things that i must remind you is that judge dean in his opinion stated that you were warned that the court might impose a penalty under sec_6673 against you and that matter is also part of our proceedings and you should note by the way that there have been occasions in which this court has ended up ruling for the taxpayer on a dispute about fraud and still ended up imposing the penalty under sec_6673 because of the nature of the taxpayer’s arguments so that too in addition to the fraud addition_to_tax for is before us at this point now mr harrell do you wish to make an opening statement and do you wish to have your trial memorandum filed as part of your opening statement mr harrell yes i would like to have my trial memorandum with exhibits filed on record that’s correct the court then noted that the document that petitioner offered was rather bulky and appeared to include a number of different items the following ensued the court let’s do it this way mr harrell would you look at this package and just make sure that we’ve got what you want to file okay rather than my reading things out and you’re trying to catch on the fly what i’m saying mr harrell perusing documents that’s correct your honor the entire package the court is your -- mr harrell that’s correct the court all right mr clerk would you file petitioner’s trial memorandum with the attached materials the series of items that petitioner thus filed as his trial memorandum i sec_44 pages long it is essentially an argument that federal reserve notes are not money and that they do not have any value the documents that petitioner filed in the instant case and petitioner’s testimony include the following petitioner did in fact receive payment for services actually rendered in a fair_market_value exchange not comprising taxable_income said acts performed under the unalienable rights to life liberty pursue happiness and acquire property with labor being property am ptn p par f ailure by the respondent to recognize the unalienable rights of the petitioner and the fair_market_value exchange of his labor would amount to a denial of due process and constitutional and civil rights violations am ptn p par petitioner has made a direct challenge to the jurisdiction of the commissioner 2d am ptn p par d all federal reserve notes were not redeemable in any lawful money of the united_states p’s resp to st p par federal reserve notes have never been considered by congress or the constitution to be constitutional money p’s resp to st p par the issue that i want to bring forth is the federal reserve notes that circulate as dollars today are not dollars and i didn’t receive dollars and i still stand and believe that i had no duty to report to the federal government my receipt or my expenditures of federal reserve notes federal reserve notes are not legal tender federal reserve notes do not conform to the purported guidelines of their issuance the founding fathers never intended for anything but dollars representing a parity of gold or silver content in fineness and weight as defined by the coinage act of tr lines tr lines at the end of the trial the court described the role of post-trial briefs stressed the importance of proposed findings_of_fact and emphasized that each proposed finding of fact should state where in the record is the basis for this proposed finding of fact petitioner’s proposed findings_of_fact in their entirety are as follows petitioner’s request for finding fact sic throughout the year or any other year petitioner was not involuntarily obligated to file a federal_income_tax return returning a portion of the unredeemable federal reserve notes to respondent and its issuer the united_states because petitioner was not obligated to file this return to the obligator in the first instance fraudulent penalties in denominational amounts of unredeemable federal reserve notes should not be levied against the petitioner in accordance with sec_6673 or any other internal revenue law for that matter petitioner has been before this and other courts on income_tax matters on numerous occasions as shown in table harrell i table harrell v united_states no ___ c d ill date dismissing petitioner's challenge to propriety of levy on wages described in harrell ii harrell ii harrell v united_states no u s dist lexis wl c d ill date dismissing suit to quiet title to petitioner's wages although petitioner is representing himself in this action and pro_se complaints must be liberally construed we caution plaintiff that he is subject_to the mandate of rule fed r civ p and the potential for sanctions should he file a third action in this court harrell iii harrell v united_states 4_f3d_996 table only u s app lexis wl text 7th cir after district_court granted summary_judgment for government in petitioner's suit for damages under sec_7433 and imposition of dollar_figure penalty under sec_6673 court_of_appeals affirmed and imposed additional dollar_figure frivolous appeal penalty harrell iv 13_f3d_232 7th cir affg harrell ii so the district_court was correct that it had no jurisdiction over the case--and for another reason harrell's challenge to the tax_assessment is frivolous harrell v harrell v united_states tcmemo_1994_406 after failing to file tax returns for and petitioner contended that he was citizen of the sovereign state of illinois and that income he received was not taxable by the united_states we sustained commissioner's determination and imposed dollar_figure penalty under sec_6673 affd without published opinion 72_f3d_132 7th cir harrell vi larue v collector of internal revenue no u s dist lexis wl c d ill date petitioner and others contended that they were exempt from federal_income_tax because illinois is not state as defined in the internal_revenue_code district_court dismissed complaint and imposed sanctions under fed r civ p on petitioner and everyone else who had signed complaint ___________________________ respondent has shown by clear_and_convincing evidence that the amount_required_to_be_shown_as_tax by petitioner on a tax_return exceeded the amount withheld from petitioner’s wages as income_tax and petitioner’s failure to timely file his income_tax return for was fraudulent opinion i sec_6651 respondent contends that petitioner’s failure_to_file an income_tax return for is fraudulent petitioner contends that he was not obligated to file tax returns because the unredeemable federal reserve notes he may have received are valueless and so did not trigger any involuntary requirement to report such u s obligation activity to the respondent petitioner contends that even if federal reserve notes were redeemable from the treasury in silver coins he still would not have to file tax returns because under the fifth_amendment sustains my right not to have to make a report to the federal government petitioner also contends that his employment by the united_states postal service in was not an interstate commerce activity we agree with respondent when determining whether a failure_to_file is fraudulent under sec_6651 we must consider essentially the same elements as are considered in imposing the addition_to_tax for fraud under former sec_6653 and the present sec_6663 102_tc_632 when respondent seeks to impose the addition_to_tax under sec_6651 respondent has the burden_of_proof to carry sec_6651 provides in pertinent part as follows sec_6651 failure_to_file tax_return or to pay tax a addition to the tax --in case of failure-- to file any return required under authority of subchapter_a of chapter on the date prescribed therefor determined with regard to any extension of time for filing unless it is shown that such failure is due to reasonable_cause and not due to willful neglect there shall be added to the amount_required_to_be_shown_as_tax on such return percent of the amount of such tax if the failure is for not more than month with an additional percent for each additional month or fraction thereof during which such failure continues not exceeding percent in the aggregate b penalty imposed on net amount due --for purposes subsection a the amount of tax required to be shown on the return shall be reduced by the amount of any part of the tax which is paid on or before the date prescribed for payment of the tax and by the amount of any credit against the tax which may be claimed on the return continued of-- this burden_of_proof for a year respondent must prove the following petitioner’s tax_liability for that year exceeds petitioner’s income_tax_withholding and other prepayment_credits and petitioner’s failure_to_file a timely tax_return for that year is due to fraud sec_7454 rule b see 264_f2d_930 5th cir 56_tc_213 53_tc_96 each of these elements must be proven by clear_and_convincing evidence see 96_tc_858 affd 959_f2d_16 2d cir 94_tc_654 81_tc_640 for this purpose respondent need not prove the precise amount of the excess of liability over credits but only that there is some excess and that the failure to timely file is in some respect attributable to fraud see 466_f2d_11 5th cir 465_f2d_299 7th cir affg tcmemo_1970_274 continued f increase in penalty for fraudulent_failure_to_file --if any failure_to_file any return is fraudulent paragraph of subsection a shall be applied-- by substituting percent for percent each place it appears and by substituting percent for percent in proving that there is an excess of liability over credits respondent may not rely on petitioner’s failure to meet his burden of proving error in respondent’s determinations as to the excess see 92_tc_661 78_tc_304 and cases cited therein a mere failure_to_file when there is such an excess does not itself establish fraud however a pattern of consistent failures to file for several years is strong evidence of fraud see 451_f2d_197 3d cir affg t c memos and 422_f2d_63 6th cir affg tcmemo_1968_100 otsuki v commissioner t c pincite the issue of fraud is a factual question that is to be decided on an examination of all the evidence in the record plunkett v commissioner f 2d pincite 328_f2d_147 7th cir affg 37_tc_703 stone v commissioner t c pincite respondent must show that petitioner intended to evade taxes which he knew or believed were owed by conduct intended to conceal mislead or otherwise prevent the collection_of_taxes e g 394_f2d_366 5th cir affg tcmemo_1966_81 252_f2d_56 9th cir 73_tc_370 61_tc_249 affd 519_f2d_1121 5th cir this intent may be inferred from circumstantial evidence powell v granquist f 2d pincite 67_tc_181 affd without published opinion 578_f2d_1383 8th cir including the implausibility of petitioner’s explanations 796_f2d_303 9th cir and cases therein cited affg tcmemo_1984_601 204_f2d_205 5th cir affg a memorandum opinion of this court dated date a tax_liability we have found that petitioner received wage income of dollar_figure and pension distributions of dollar_figure during petitioner has not directed our attention to and we have not found anything in the record suggesting that any part of the pension distributions is excludable from gross_income as for example investment_in_the_contract within the meaning of sec_72 except for petitioner’s arguments about the status of federal reserve notes and the fair_market_value exchange of his labor we conclude that respondent has shown by clear_and_convincing evidence that petitioner has more than dollar_figure of adjusted_gross_income in the notice_of_deficiency respondent allowed deductions of dollar_figure for the standard_deduction and dollar_figure for the personal_exemption petitioner has not directed our attention to and we have not found anything in the record suggesting that he is entitled to any greater amounts of deductions we conclude that respondent has shown by clear_and_convincing evidence that petitioner has a little more than dollar_figure of taxable_income the tax_tables show an income_tax_liability of dollar_figure for a single_person at that taxable_income level petitioner has not suggested and we have not found any basis for concluding that petitioner is entitled to a more favorable tax status except for his claim to not being taxable under the internal_revenue_code because the code is unconstitutional at least as applied to him nor that he is entitled to any credit that reduces his tax_liability the only evidence in the record as to the amount of petitioner’s income_tax payments is the stipulated form_w-2 from the usps which shows dollar_figure income_tax_withholding petitioner does not contend and we have not found any basis for concluding that petitioner is entitled to any greater amount of withholding or that he made any other_payments that are to be taken into account for purposes of sec_6651 we conclude and we have found that respondent has shown by clear_and_convincing evidence that the amount_required_to_be_shown_as_tax by petitioner on a tax_return exceeded the amount withheld from petitioner’s wages as income_tax we hold for respondent on this issue b fraud petitioner filed tax returns for about years until and then he stopped filing tax returns his failure_to_file tax returns since then is intentional petitioner’s most clearly stated explanation is that he was paid in federal reserve notes which are not lawful money and which are worthless yet petitioner used the supposedly worthless federal reserve notes to pay his expenses we do not believe petitioner really thought that the federal reserve notes were worthless petitioner worked for years as a substitute rural carrier for the usps and from onward as a full-time rural carrier evidently petitioner also had worked for another employer at some time--during he received dollar_figure in pension distributions we do not believe petitioner would have continued for so long to exchange his labor or services for the right to receive worthless paychecks or worthless currency again we do not believe petitioner really thought that the federal reserve notes were worthless petitioner took the trouble to arrange a home-made money- laundering operation passing his paychecks through a bank account in the name of his son and having his son write checks to petitioner on this account petitioner has not had a bank account in his name since the mid-1980’s this is evidence that petitioner was concerned with making it more difficult for respondent to locate his assets we have concluded that petitioner’s tax_liability dollar_figure is almost dollar_figure more than his income_tax_withholding dollar_figure thus if respondent had not proceeded against petitioner then petitioner would have evaded almost half his tax_liability from the foregoing we conclude and we have found that petitioner’s failure to timely file his income_tax return for was fraudulent by now respondent is aware of petitioner’s refusals to obey the income_tax laws see supra table this sort of disclosure does not affect our conclusions as to civil tax_fraud 829_f2d_828 9th cir affg t c memo 792_f2d_91 7th cir affg tcmemo_1985_237 but see 676_f2d_980 3d cir revg tcmemo_1980_571 at trial there was some testimony as to petitioner’s wife it was not clear whether petitioner was married in in the notice_of_deficiency respondent determined that petitioner was single in if petitioner were married in then his tax_liability would have been greater than dollar_figure the instant case is appealable to the court_of_appeals for the seventh circuit which has stated that we reject the analysis of the third circuit in 676_f2d_980 3d cir 792_f2d_91 7th cir affg tcmemo_1985_237 see 54_tc_742 affd 445_f2d_985 10th cir as we have noted petitioner relies primarily on his stated beliefs about federal reserve notes in the course of his testimony and his filings in the instant case he also adverts to various constitutional objections petitioner does not challenge the wisdom of the hundred-million-plus people who file tax returns but contends that he is not obligated to file tax returns and will not do so we do not believe that petitioner had a good-faith misunderstanding of the internal_revenue_code or the constitution petitioner was not bent on presenting a serious issue to the courts and cooperating with respondent in doing so compare 35_tc_913 with habersham-bey v commissioner t c pincite petitioner’s asserted confusions are not the sort that enable him to escape our verdict of fraud 99_tc_202 we hold for respondent on this issue ii sec_6673 we turn now on our own motion to the award of a penalty against petitioner under sec_6673 a sec_6673 provides in pertinent part as follows sec_6673 sanctions and costs awarded by courts a tax_court proceedings -- procedures instituted primarily for delay etc --whenever it appears to the tax_court that-- continued this court the district_court for the central district of illinois and the court_of_appeals for the seventh circuit all have described petitioner’s contentions as frivolous both this court and the district_court have imposed penalties against petitioner under sec_6673 the court_of_appeals has upheld these impositions and in one instance imposed an additional frivolous appeal penalty supra table our findings include a brief sampling of petitioner’s contentions at various stages of the instant case in our opinion on the motion in the instant case we warned petitioner that in view of his past actions his persistent assertion in this case of frivolous and groundless arguments is likely to result in sec_6673 sanctions larger than those previously imposed upon him harrell v commissioner tcmemo_1996_64 immediately before petitioner’s opening statement we warned him again during the trial the following colloquy occurred continued a proceedings before it have been instituted or maintained by the taxpayer primarily for delay b the taxpayer’s position in such proceeding is frivolous or groundless or c the taxpayer unreasonably failed to pursue available administrative remedies the tax_court in its decision may require the taxpayer to pay to the united_states a penalty not in excess of dollar_figure q mr kutten your prior tax_court trial was it in this very same room mr harrell where you’re sitting today a petitioner that’s correct yes q and did you make basically the same arguments to the court then a basically the same argument as the issue today q yes a part of the issue is the issue i’ve raised today yes q and the court stated that your arguments were frivolous is that not correct a i believe that’s correct that that was the terminology used someplace in the decision whether it was by the tax_court or the appeals court i don’t recall in view of the fact that petitioner disregarded the court’s warning and persisted in presenting frivolous arguments that have been firmly rejected by this court and others in the past and that petitioner persisted in presenting such arguments after having been warned twice during the course of the instant case we conclude that petitioner’s conduct justifies imposing a substantial penalty on petitioner we award a penalty to the united_states in the amount of dollar_figure under the provisions of sec_6673 to take account of the foregoing including the matters described supra note sec_1 and decision will be entered under rule


pvgtpcn cid 4gxgpwg cid 5gtxkeg grctvogpv cid qh cid vjg cid 6tgcuwt 9cujkpivqp cid cid cid cid cid cid cid cid cid cid cid number release date index nos telephone number cvg cid cid cid 2gtuqp cid vq cid qpvcev cid refer reply to cc fip plr-108691-00 date legend trust fund a fund b limited_partnership company a company b state x state y date date date a b dear this is in response to a date letter and subsequent correspondence submitted on behalf of fund a and fund b each a fund or collectively the funds and trust the four rulings requested in the letter are as follows plr-108691-00 ruling trust will not be a publicly_traded_partnership taxed as a corporation under sec_7704 of the internal_revenue_code the code ruling each of the funds will be deemed to own a proportionate share of each of the assets of trust and will be deemed to be entitled to the income of trust attributable to such share for purposes of determining whether the fund satisfies the requirements of sec_851 sec_851 sec_852 sec_853 and sec_854 ruling under sec_721 no gain_or_loss will be recognized by trust or the funds upon a contribution of property to trust by a fund in exchange for shares of beneficial_interest in trust ruling the method to be employed by trust for making forward and reverse sec_704 allocations among the funds including aggregating qualified_financial_assets is a reasonable method within the meaning of sec_1_704-3 and sec_1_704-3 of the income_tax regulations and is permitted by the commissioner under sec_1_704-3 facts the funds were organized as state x corporations on date under the sponsorship of limited_partnership the funds intend to qualify for and elect status as regulated_investment_companies rics under of the code the funds have elected to have a fiscal_year ending on february limited_partnership is a limited_partnership the partners of which are company a and company b limited_partnership is in the business of providing investment management and related_services and is registered with the securities_and_exchange_commission as an investment adviser under the investment advisers act of it is anticipated that limited_partnership will be the principal investment adviser of each fund limited_partnership established trust as a state y business_trust by filing a certificate of trust and by conveying assets to the trustees for the trust a declaration of trust declaration dated on date sets out the terms of the trust trust is registered as an open-end management company under the investment_company act of the act trust has a taxable_year identical to that of the funds on date limited_partnership transferred dollar_figurea to each of the funds on the same date the funds then transferred the dollar_figurea each received from limited_partnership to trust in exchange for general_partnership interests in trust also company b transferred dollar_figureb to trust in exchange for a general plr-108691-00 partnership_interest in trust trust is registered as an open- end management company under the investment_company act of trust will be involved in the investment of the funds of its investors the investment objective of trust will be identical to that of the funds all of the assets contributed to trust will be managed at the trust level interests in trust will be offered and sold only to rics insurance_company separate_accounts common or commingled trust funds group_trusts and similar entities that qualify as accredited investors within the meaning of regulation d under the securities act of such entities are referred to as institutional investors any entity with an interest in trust is referred to as a holder and will be limited to institutional investors trust will not issue interests to any individual s_corporation partnership or grantor_trust a grantor of which includes an individual s_corporation or partnership taxpayer represents that trust will be classified as a partnership for federal tax purposes trust will establish a capital_account for each holder upon such holder’s contribution of capital cash or securities to trust a holder’s interest in trust will be determined by reference to its capital_account therein the initial value of any holder’s capital_account will be the fair_market_value of the assets contributed on the date of contribution trust will adjust each holder’s capital_account and therefore its interest in the trust daily pursuant to sec_1_704-1 of the regulations trust will also adjust each holder’s capital_account for each holder’s ratable share of unrealized_gain or loss allocations of book income of trust will be in accordance with the holder’s interest in each class of interests in trust determined by reference to its capital_account trust represents that it is a management company within the meaning of sec_1_704-3 and will hold as assets only qualified_financial_assets within the meaning of sec_1 e ii and cash trust will aggregate gains and losses from its financial_assets as provided in sec_1_704-3 by using the full netting approach set forth in sec_1_704-3 representations the following representations are made on the behalf of trust fund a and fund b ruling plr-108691-00 trust will not have a holder that is a flow-through_entity with a principal purpose of permitting the trust to satisfy the 100-partner limitation under sec_7704 of the code the number of holders owning interests in trust will be less than and none of the holders will be a partnership grantor_trust or an s_corporation that is beneficially owned by more than one individual no interests in trust have been traded on an established_securities_market or issued in a transaction registered under the securities act of ruling for purposes of determining the required_distribution under sec_4982 of the code fund a and fund b will each account for its share of partnership items of income gain loss and deduction as they are taken into account by trust except as required by sec_704 and sec_1_704-1 of the regulations fund a’s and fund b’s allocable share of trust’s income gain loss deduction and credit will be comprised of a proportionate share of each item_of_income includible in trust’s gross_income the organization of trust was done in a manner to enable it to be classified as a partnership and was not done to enable a partner that is a ric to make distributions that would be prohibited under revrul_89_81 1989_21_cb_226 had the ric invested directly in trust’s assets ruling fund a and fund b have contributed or will contribute solely cash and or a diversified portfolio of stock and securities to trust any other transferor who has contributed or will contribute assets to trust has contributed or will contribute solely cash and or a diversified portfolio of stock and securities to trust for purposes of these representations a portfolio of stocks and securities is diversified if it satisfies the and percent tests of sec_368 of the code applying the relevant provisions of sec_368 except that in applying sec_368 government securities are included in determining total assets unless the government securities are acquired to meet the requirements of sec_368 plr-108691-00 ruling trust is a management company within the meaning of sec_1 e iii b of the regulations and will hold as assets only qualified_financial_assets within the meaning of sec_1 e ii and cash trust will comply in all respects with the capital_account maintenance rules set forth in sec_1_704-1 revaluations and the corresponding allocations of tax items by trust are not and will not be made with a view to shifting the tax consequences of built-in-gain or loss among its partners in a manner that substantially reduces the present_value of the partners’ aggregate tax_liability the funds intend to qualify for and elect status as regulated_investment_companies rics under future partners in trust will satisfy the following conditions the partner is registered under the investment_company act of u s c 80a-1 et seq and would be considered a publicly_offered_regulated_investment_company as defined in sec_67 and sec_1_67-2t the partner’s contribution is made and accepted for valid business purposes and not made primarily for tax motivated reasons other than the fact that the contribution to trust is tax-free and to the extent trust relies on this ruling for the contribution trust will document any such contribution on its tax_return filed subsequent to the contribution ruling law and analysis sec_7704 of the code provides that a publicly_traded_partnership is treated as a corporation sec_7704 and sec_1_7704-1 of the regulations provide that under sec_7704 the term publicly_traded_partnership means any partnership if interests in the partnership are i traded on an established_securities_market or ii readily_tradable on a secondary market or the substantial equivalent thereof sec_1_7704-1 provides that interests in a partnership are readily_tradable on a secondary market or the substantial equivalent thereof if taking into account all of the facts and circumstances the partners are readily able to buy sell or exchange their partnership interests in a manner that is comparable economically to trading on an established_securities_market plr-108691-00 sec_1_7704-1 provides that interests in a partnership are not treated as readily_tradable on a secondary market or the substantial equivalent thereof within the meaning of sec_7704 if i all interests in the partnership were issued in a transaction or transactions that was not registered under the act and ii the partnership does not have more than partners at any time during the taxable_year sec_1_7704-1 provides that for sec_1_7704-1 a person who owns an interest in a partnership grantor_trust or s_corporation flow-through entities that owns directly or through other flow-through entities an interest in the partnership is treated as a partner in the partnership only if i substantially_all of the value of the beneficial owner’s interest in the flow-through_entity is attributable to the flow- through entity’s interest direct or indirect in the partnership and ii a principal purpose of the use of the tiered arrangement is to permit the partnership to satisfy the 100-partner limitation of sec_1_7704-1 ruling sec_851 of the code defines a ric in part as a domestic_corporation registered under the act as a management company sec_851 limits the definition of a ric to a corporation meeting certain election gross_income and diversification requirements sec_851 provides that to qualify as a ric percent of a corporation's gross_income must be derived from dividends interest payments_with_respect_to_securities_loans as defined in sec_512 gains from the sale_or_other_disposition of stocks securities foreign_currencies or other income derived with respect to the business of investing in such stocks securities or currencies sec_851 requires that to qualify as a ric at the close of each quarter of the taxable_year at least percent of the value of a corporation's total assets must be represented by cash and cash items including receivables government securities securities of other rics and other_securities generally limited in respect of one issuer to an amount not greater in value than percent of the value of the total assets of the corporation and to not more than percent of the outstanding_voting_securities_of_such_issuer sec_851 provides that to qualify as a ric not more than percent of the corporation's total assets may be invested in the securities other than government securities and plr-108691-00 securities of other rics of any one issuer or of two or more issuers that the corporation controls and which are determined under regulations to be engaged in the same or similar trades_or_businesses or related trades_or_businesses sec_852 provides that a ric at least percent of the value as defined in sec_851 of whose total assets at the close of each calendar_quarter consists of obligations described in sec_103 is eligible to pay exempt-interest dividends which are treated by the ric’s shareholders as interest excludable from gross_income pursuant to sec_103 sec_853 provides that a ric more than percent of the value as defined in sec_851 of whose total assets at the close of the taxable_year consists of stock_or_securities in foreign_corporations and which meets the requirements of sec_852 for the taxable_year may elect to treat its shareholders as if they had paid certain foreign taxes incurred by the ric for purposes of determining a shareholder’s foreign_tax_credit under sec_901 sec_854 provides that a dividend other than a capital_gain dividend received from a ric qualifies for the dividends received deduction under sec_243 to the extent so designated by the ric provided that the ric meets the requirements of sec_852 for the taxable_year during which it paid the dividend sec_854 provides that the aggregate amount that may be designated as dividends under sec_854 shall not exceed the aggregate_dividends_received by the ric for the taxable_year sec_854 provides that the term aggregate_dividends_received includes only dividends received from domestic corporations sec_854 provides in part that for purposes of determining an amount to be treated as a dividend eligible for the dividends received deduction under sec_243 of the code a payment to a ric shall not be treated as a dividend unless had it not been a ric it would have been allowed a dividends received deduction under sec_243 with respect to the payment sec_702 provides that the character of items stated in sec_702 that are included in a partner's_distributive_share shall be determined as if such items were realized directly from the source from which realized by the partnership or incurred in the same manner as incurred by the partnership sec_702 provides that where it is necessary to determine the amount or character of the gross_income of a partner such amount shall plr-108691-00 include his distributive_share of the gross_income of the partnership section n of the technical_and_miscellaneous_revenue_act_of_1988 added a sentence to the flush language of sec_851 of the code that states that income derived from a partnership or trust shall be treated as satisfying the percent test of sec_851 only to the extent that such income is attributable to items of income of the partnership or trust which would be described in sec_851 if earned directly by the ric the legislative_history of that sentence indicates that it was intended to clarify the general_rule used to characterize items of income gain loss deduction or credit includible in a partner's_distributive_share as applied to rics that are partners it therefore explains the relationship of sec_702 to the percent test under sec_851 see s rep no 100th cong 2d sess under subchapter_k of the code a partnership is considered to be either an aggregate of its members or a separate_entity under the aggregate approach each partner is treated as an owner of an undivided_interest in partnership assets and operations the entity_theory provides that the partnership is a separate_entity in which partners have no direct interest in partnership assets and operations see s rep no 83d cong 2d sess and h_r rep no 83d cong 2d sess in order for the funds to qualify as rics under the diversification tests of sec_851 the aggregate approach will have to be applied to each fund’s partnership_interest in trust as an aggregate each fund will be able to take into account its share of the individual items of income and assets of trust revrul_75_62 1975_1_cb_188 concerns a life_insurance_company that contributed cash to a partnership in exchange for a percent interest in the partnership the partnership held real_estate as its principal asset for the taxable_year in question sec_805 required life_insurance_companies to value their assets each taxable_year for this purpose sec_805 required that shares of stock and real_estate be valued at their fair market values and that other assets be valued at their adjusted_basis the issue presented in the ruling is whether for purposes of sec_805 the life_insurance company's interest in the partnership is considered to be an investment in the real_estate held by the partnership an aggregate approach or an investment in other_property an entity approach revrul_75_62 holds that the partnership_interest held by the life_insurance_company must be accounted for as other_property for purposes of sec_805 the ruling cites sec_705 and sec_741 of the code both of which generally treat an interest in plr-108691-00 a partnership as an interest in an entity as evidence of an intent in subchapter_k to take the entity approach in questions concerning the nature of an interest in a partnership the ruling states that the legislative_history of sec_805 does not indicate that application of the entity approach to the facts of the ruling is inappropriate and that there is no compelling reason to take the aggregate approach the flush language of sec_851 of the code formerly sec_851 for taxable years of a ric that began before date and its legislative_history indicate that here unlike the situation described in revrul_75_62 congress intended that an aggregate approach be taken in determining the nature of the partnership interests held by the funds the flush language of sec_851 mandates an aggregate approach in applying the percent gross_income_test of sec_851 to rics that hold partnership interests it would be anomalous to suggest that congress intended that a ric's interest in a partnership be viewed as a direct investment in the partnership's assets for purposes of the sec_851 test but not be viewed as a direct investment in those assets for purposes of the tests set out in inter alia sec_851 the tax treatment accorded real_estate_investment_trusts reits lends further support to applying the aggregate approach to the present case reits were created to provide an investment vehicle similar to the ric for small investors to invest in real_estate and real_estate mortgages see h_r rep no 86th cong 2d sess like rics reits are subject_to restrictions on the type of assets they can hold if they want to retain the benefits accorded them under subchapter_m for example under sec_856 of the code at least percent of the gross_income of a reit must be derived from any or all of nine sources including rents_from_real_property interest on obligations secured_by mortgages gain from the sale or disposition of real_property and income and gain derived from foreclosure_property reits and rics also have similar distribution and holding_period requirements sec_1_856-3 of the regulations provides that in the case of a real_estate_investment_trust which is a partner in a partnership as defined in sec_7701 and the regulations thereunder the trust will be deemed to own its proportionate share of each of the assets of the partnership and will be deemed to be entitled to the income of the partnership attributable to such share for purposes of sec_856 the interest of a partner in a partnership's assets shall be determined in accordance with his capital interest in the partnership the character of the various assets in the hands of the partnership and items of gross_income of plr-108691-00 the partnership shall retain the same character in the hands of the partners for all purposes of sec_856 thus for example if a_trust owns a percent capital interest in a partnership which owns a piece of rental property the trust will be treated as owning percent of such property being entitled to percent of the rent derived from the property by the partnership similarly if the partnership holds any property primarily_for_sale_to_customers in the ordinary course of its trade_or_business the trust will be treated as holding its proportionate share of such property primarily for such purpose also for example where a partnership sells real_property or a_trust sells its interest in a partnership which owns real_property any gross_income realized from such sale to the extent that it is attributable to the real_property shall be deemed gross_income from the sale or disposition of real_property held for either the period that the partnership has held the real_property or the period that the trust was a member of the partnership whichever is shorter thus the regulations adopt the language of the aggregate look-through approach in determining how a reit should account for its partnership interests for purposes of all of the income and asset qualification tests under sec_856 of the code the legislative purpose underlying the creation of both rics and reits was to provide small investors a means of pooling their resources to invest in a particular type of assets without the imposition of the corporate_income_tax the qualification tests are similar for each therefore although the ric regulations do not specifically address the issue herein it is appropriate to adopt an approach for rics that parallels that set forth for reits ruling sec_721 of the code provides that no gain_or_loss is recognized to a partnership or any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership sec_721 provides however that sec_721 does not apply to gain realized on a transfer of property to a partnership that would be treated as an investment_company within the meaning of sec_351 if the partnership were incorporated sec_351 states that no gain_or_loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately_after_the_exchange such person or persons are in control as defined in sec_368 of the corporation sec_351 plr-108691-00 does not apply to a transfer of property to an investment_company sec_351 sec_1_351-1 of the regulations states that a transfer to an investment_company will occur when i the transfer results directly or indirectly in diversification of the transferors’ interests and ii the transferee is a ric reit or a corporation more than 80-percent of the value of whose assets excluding cash and non-convertible debt obligations from consideration are held for investment and are readily marketable stocks or securities or interests in rics or reits sec_1002 of the taxpayer_relief_act_of_1997 pub_l_no 111_stat_788 the act amends sec_351 for transfers after date in taxable years ending after such date subject_to certain transitional relief provisions sec_1002 of the act is intended to expand the types of assets considered in determining whether a transfer is to a transferee described in sec_1_351-1 to include certain assets in addition to readily marketable stocks or securities and interests in rics and reits however the act is not intended to alter the requirement of sec_1_351-1 that a transfer of property will be considered to be a transfer to an investment_company under sec_351 only if the transfer results directly or indirectly in diversification of the transferors' interests see s rep 105th cong 1st sess h_r rep 105th cong 1st sess h_r rep 105th cong 1st sess sec_1_351-1 provides that a transfer ordinarily results in diversification of the transferors' interests if two or more persons transfer nonidentical assets to a corporation in the exchange it further provides that if a transfer is part of a plan to achieve diversification without recognition of gain such as a plan which contemplates a subsequent transfer however delayed of the corporate assets or of the stock_or_securities received in the earlier exchange to an investment_company in a transaction purporting to qualify for nonrecognition treatment the original transfer will be treated as resulting in diversification sec_1_351-1 provides that i a transfer of stocks and securities will not be treated as resulting in a diversification of the transferors' interests if each transferor transfers a diversified portfolio of stocks and securities and ii a portfolio of stocks and securities is considered to be diversified if it satisfies the and percent tests of sec_368 applying the relevant provisions of sec_368 except that government securities are included in total assets for purposes of the denominator of the and 50-percent tests unless acquired to meet the and 50-percent tests but are not treated as securities of an issuer for purposes of the numerator of the and 50-percent tests plr-108691-00 a corporation is diversified within the meaning of sec_368 if not more than percent of the value of its total assets is invested in the stock and securities of any one issuer and not more than percent of the value of its total assets is invested in the stock and securities of or fewer issuers ruling sec_704 of the code provides that under regulations prescribed by the secretary income gain loss and deduction with respect to property contributed to the partnership by a partner shall be shared among the partners so as to take account of the variation between the basis of the property to the partnership and its fair_market_value at the time of contribution sec_1_704-3 of the regulations provides that the purpose of sec_704 is to prevent the shifting of tax consequences among partners with respect to pre-contribution gain_or_loss under sec_704 a partnership must allocate income gain loss and deductions with respect to property contributed by a partner to the partnership so as to take into account any variation between the adjusted tax basis of the property and its fair_market_value at the time of contribution notwithstanding any other provision of sec_1_704-3 the allocations must be made using a reasonable method that is consistent with the purpose of sec_704 sec_1_704-3 of the regulations provides that the principles of sec_1_704-3 apply to allocations with respect to property for which differences between book_value and adjusted tax basis are created when a partnership revalues partnership property pursuant to sec_1_704-1 reverse sec_704 allocations a partnership that makes allocations with respect to revalued property must use a reasonable method that is consistent with the purposes of sec_704 and c sec_704 generally applies on a property-by-property basis sec_1_704-3 therefore in determining whether there is a disparity between adjusted tax basis and fair_market_value the built-in gains and built-in losses on items of contributed or revalued property generally cannot be aggregated sec_1_704-3 sets forth a special rule allowing certain securities partnerships to make reverse sec_704 allocations on an aggregate basis specifically sec_1 e i provides that for purposes of making reverse sec_704 allocations a securities_partnership may aggregate gains and losses from qualified_financial_assets using any reasonable approach that is consistent with the purpose of sec_704 once a plr-108691-00 partnership adopts an aggregate approach the partnership must apply the same aggregate approach to all of its qualified_financial_assets for all taxable years in which the partnership qualifies as a securities_partnership sec_1_704-3 of the regulations provides that a partnership is a securities_partnership if the partnership is either a management company or an investment_partnership and the partnership makes all of its book allocations in proportion to the partners’ relative book capital accounts except for reasonable special allocations to a partner that provides management services or investment advisory services to the partnership under sec_1_704-3 a partnership is a management company if it is registered as a management company under the act sec_1_704-3 provides that a qualified_financial_asset is any personal_property including stock that is actively_traded as defined in sec_1_1092_d_-1 for a management company qualified_financial_assets also include the following even if not actively_traded shares of stock in a corporation notes bonds debentures or other evidences of indebtedness interest rate currency or equity notional_principal_contracts evidences of an interest in or derivative financial instruments in any security currency or commodity including any option forward or futures_contract or short position or any similar financial_instrument sec_1_704-3 only applies to reverse sec_704 allocations thus a securities_partnership using an aggregate approach must generally account for any built-in_gain or loss from contributed_property separately the preamble to sec_1 e explains that the final regulations do not authorize aggregation of built-in gains and losses from contributed_property with built-in gains and losses from revaluations because this type of aggregation can lead to substantial distortions in the character and timing of income and loss recognized by contributing partners t d 1995_1_cb_120 however the preamble also recognizes that there may be instances in which the likelihood of character and timing distortions is minimal and the burden of making sec_704 allocations is great id consequently sec_1_704-3 authorizes the commissioner to permit by published guidance or by letter_ruling aggregation of qualified_financial_assets for purposes of making sec_704 allocations in the same manner as that described in sec_1_704-3 in this case trust’s burden of making sec_704 allocations separate from reverse sec_704 allocations is substantial while the assets of trust will be purchased and sold in conformity with its investment objectives and policies it is plr-108691-00 impossible to predict which particular assets will be purchased or sold or when such a purchase or sale will occur since trust will be managed in response to changing market conditions the recognition and or allocation of built-in_gain or loss on contributed_property cannot be predicted further due to the large volume of securities held and the related transactions tracking the contributed built-in gains and losses on an asset- by-asset basis and on a partner-by-partner basis would be a significant cost burden and would largely nullify the economic benefits otherwise anticipated in a master feeder structure holdings based upon the facts presented and the representations made by the taxpayer we rule as follows trust will not be a publicly_traded_partnership under sec_7704 of the code in accordance with the relationships detailed above fund a and fund b as partners in trust will be deemed to own a proportionate share of the assets of trust and will be deemed to be entitled to the income of trust attributable to that share for purposes of determining whether fund a and fund b each satisfies the requirements of sec_851 sec_851 sec_852 sec_853 and sec_854 of the code for purposes of these sections the interest of fund a and fund b in trust shall be determined in accordance with fund a’s and fund b’s capital interest in trust provided trust is treated as a partnership for purposes of sec_721 the transfers by fund a fund b and company b to trust are not transfers of property to a partnership that would be treated as an investment_company within the meaning of sec_351 if trust were incorporated provided that these are the only transfers to trust except for transfers solely of cash and or a diversified portfolio of stocks and securities within the meaning of sec_1_351-1 of the regulations contributions solely of cash and or a diversified portfolio of stocks and securities within the meaning of sec_1 c i to trust by new funds will not cause the initial transfers by the funds or company b to be treated as a transfer of property to a partnership ie trust that would be treated as an investment_company within the meaning of sec_351 if the partnership were incorporated plr-108691-00 trust may aggregate built-in gains and losses from qualified_financial_assets contributed to it by the funds with built- in gains and losses from revaluations of qualified_financial_assets held by trust for purposes of making sec_704 and reverse sec_704 allocations trust’s method of making sec_704 and reverse sec_704 allocations is reasonable within the meaning of sec_1_704-3 and is a method which is permitted by the commissioner under sec_1 e iii we further conclude that trust may aggregate built-in gains and losses from qualified_financial_assets contributed by future partners with built-in gains and losses from revaluations of qualified_financial_assets held by trust for purposes of making sec_704 and reverse sec_704 allocations and that trust’s method of making these allocations is reasonable within the meaning of sec_1 e and is a method which is permitted by the commissioner under sec_1_704-3 to the extent that the future partners are qualified contributors a qualified contributor is a partner for which the following conditions are satisfied the partner is registered under the investment_company act of as amended and would be considered a publicly_offered_regulated_investment_company as defined in sec_67 and sec_1 2t g ii the contribution is made and accepted for valid business purposes and not made primarily for tax- motivated reasons other than the fact that the contribution to trust is tax-free and to the extent trust relies on this ruling for the contribution it will document any such contribution on its tax_return filed subsequent to the contribution this ruling is limited to fund a fund b and trust no opinion is expressed with respect to the federal_income_tax consequences of this transaction other than as concluded above specifically no opinion is expressed as to whether fund a or fund b qualifies as a ric that is taxable under subchapter_m part i of the code moreover we express no opinion on the propriety of any of the rulings herein with respect to the contribution and subsequent admission of additional partners in trust which are not specifically included in any representation given by the taxpayer additionally we express no opinion as to whether the transaction involving the transfers from the funds and company b is part of a plan to achieve diversification without recognition of gain under sec_1_351-1 furthermore we express no opinion as to the consequences of other transfers to trust either as to whether such other transfers would be transfers to an investment_company or whether such other transfers would when taken together with the transfers by the funds and company b cause those transfers to be considered plr-108691-00 transfers to an investment_company except for transfers solely of cash and or a diversified portfolio of stocks and securities temporary or final regulations pertaining to one or more of the issues addressed in this ruling letter have not yet been adopted therefore this ruling will be modified or revoked if adopted temporary or final regulations are inconsistent with any conclusions in the ruling see dollar_figure of revproc_2000_1 2000_1_irb_4 date however when the criteria in dollar_figure of revproc_2000_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances in accordance with the provisions of a power_of_attorney currently on file we are sending a copy of this ruling letter to your authorized representative a copy of this letter should be attached to the federal_income_tax return for fund a and fund b for every taxable_year in which it participates in the arrangement described in this letter sincerely yours acting associate chief_counsel financial institutions and products by alice m bennett chief branch enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------ -------------------------------- ------------------ ----------------------------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------- telephone number ---------------------- refer reply to cc fip b02 plr-112165-18 date date legend taxpayer state a operating partnership facilities systems fixtures x y dear --------------- -------------------------------------------- -------------- -------------------------------------------- ------------------------------------------ ----------------------------- -------------------------------- -- -- this is in reply to a letter dated date requesting a ruling on behalf of taxpayer taxpayer requests a ruling that certain amounts paid to operating partnership by tenants as described below do not depend in whole or in part on the income or profits derived by any person from facilities leased by operating partnership within the meaning of sec_856 of the internal_revenue_code facts taxpayer is a state a corporation that has elected to be taxed as a real_estate_investment_trust reit under sec_856 through taxpayer’s activities primarily occur through operating partnership operating partnership leases facilities to tenants as part of a new program operating partnership is offering to enter into agreements with its existing tenants of facilities to install systems in place of fixtures in plr-112165-18 facilities the agreements for the typical project the installation of systems is expected to take x to y weeks depending on the size of the tenant’s space metering devices will also be installed to track energy usage taxpayer represents that costs related to the installation of systems and the metering devices will be borne by operating partnership taxpayer expects operating partnership to enter into similar arrangements with any new tenants that lease facilities however the arrangements are expected to be integrated in the new tenant’s lease rather than a separate agreement currently operating partnership offers two types of leases to its tenants of facilities tenants pay a monthly base_amount plus either the tenant’s share of actual operating_expenses or a fixed amount for operating_expenses in addition tenants are directly responsible for amounts paid to the utilities provider for electricity under the agreements tenants will be required to pay operating partnership a monthly fee the charge for tenant’s use of systems the charge is in addition to the payments tenants must make under the tenant’s existing lease agreements the charge is calculated based on the tenant’s energy cost savings from using systems systems use less kilowatt hours kwh than fixtures therefore the use of systems results in a net reduction in electricity costs at facilities the charge is calculated by multiplying a fixed rate per kwh by the amount of kwh saved by using systems the amount of kwh saved is the difference between the actual kwh used as determined by the metering device and either the amount of kwh that was historically used under the old system or a stipulated amount taxpayer represents that costs related to the monitoring of energy savings will be borne by operating partnership law analysis sec_856 provides that at least percent of a reit's gross_income must be derived from among other sources rents_from_real_property sec_856 provides that at least percent of a reit's gross_income must be derived from among other sources rents_from_real_property sec_856 provides that rents_from_real_property include subject_to exclusions provided in sec_856 a rents from interests_in_real_property b charges for services customarily furnished or rendered in connection with the rental of real_property whether or not such charges are separately_stated and c rent attributable to personal_property leased under or in connection with a lease of real_property but only if the rent attributable to the personal_property for the taxable_year does not exceed percent of the total rent for the taxable_year attributable to both the real and personal_property leased under or in connection with such lease plr-112165-18 sec_856 provides that rents_from_real_property does not include amounts received or accrued directly or indirectly with respect to any real or personal_property if the determination of such amount depends in whole or in part on the income or profits derived by any person from such property the charge is a fee for_the_use_of systems the charge is based on the electricity cost savings provided by systems which results from the fact that systems use less electricity than fixtures the charge does not depend on the income or profits derived by any person from facilities conclusion based on the facts and representations submitted we rule that the charge paid_by tenants does not depend in whole or in part on the income or profits derived by any person from facilities within the meaning of sec_856 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied on whether taxpayer otherwise qualifies as a reit under subchapter_m of the code additionally no opinion is provided regarding whether the amounts paid_by tenants of facilities otherwise qualify as rents_from_real_property for purposes of sec_856 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 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely andrea m hoffenson___________ andrea m hoffenson chief branch office of associate chief_counsel financial institutions products


t c memo united_states tax_court western property restoration inc petitioner v commissioner of internal revenue respondent michael b sprague petitioner v commissioner of internal revenue respondent docket nos filed date walter d channels for petitioners cassidy b collins for respondent memorandum findings_of_fact and opinion morrison judge during the and tax years michael b sprague was the sole shareholder of western property restoration inc a subchapter_c_corporation these consolidated cases involve income-tax deficiencies determined against sprague and western property restoration for both years we have jurisdiction to resolve the cases under sec_6214 unless otherwise indicated all references to sections are to the internal_revenue_code_of_1986 as amended we hold sprague received dividends from western property restoration totaling dollar_figure in and dollar_figure in and western property restoration is liable for sec_6662 penalties for and findings_of_fact sprague was the sole shareholder of western property restoration during and during western property restoration made direct payments to sprague totaling dollar_figure it also paid dollar_figure of sprague’s personal expenses during western property restoration made direct payments to sprague totaling dollar_figure it also paid dollar_figure of sprague’s personal expenses western property restoration’s federal-income-tax return for reported that it paid sprague dollar_figure in compensation sprague’s federal-income-tax return for reported that he earned dollar_figure in compensation his return reported no dividends western property restoration’s return for reported that it paid sprague dollar_figure in compensation sprague’s return for reported that he earned dollar_figure in compensation his return reported no dividends western property restoration’s returns also reported the following items item other deductions advertising deduction rent-expense deduction cost_of_goods_sold dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number additionally for western property restoration reported a net-operating-loss deduction of dollar_figure in date the internal_revenue_service irs mailed a notice_of_deficiency to sprague determining deficiencies of dollar_figure for and dollar_figure for the notice also determined sec_6662 penalties of dollar_figure for and dollar_figure for among other adjustments the notice determined that sprague had received dividends from western property restoration totaling dollar_figure in and dollar_figure in in date the irs mailed a notice_of_deficiency to western property restoration determining deficiencies of dollar_figure for and dollar_figure for the notice also determined sec_6662 penalties of dollar_figure for and dollar_figure for among other adjustments the notice disallowed portions of the amounts reported in each year for o ther deductions advertising deductions and cost_of_goods_sold the notice also disallowed the dollar_figure net-operating-loss deduction that western property restoration claimed on it sec_2012 return sprague and western property restoration filed timely petitions for redetermination of the deficiencies at the time sprague resided in california western property restoration’s principal_place_of_business was also in california in date the irs amended its answer to assert that sprague received dividends of dollar_figure for and dollar_figure for and that he had deficiencies of dollar_figure for and dollar_figure for before trial the parties resolved many of the issues through stipulations they stipulated that the amounts reported by western property restoration on its returns should be adjusted as follows item other deductions advertising deduction rent-expense deduction cost_of_goods_sold agreed-upon amount dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number they further stipulated that western property restoration is not entitled to a net- operating-loss deduction for the parties stipulated that of the dollar_figure in direct payments that western property restoration made to sprague during sprague correctly reported dollar_figure as compensation the parties stipulated that they disagree as to whether the remaining direct payments amounting to dollar_figure should be treated as dividends the irs’s position or a tax-free return_of_capital sprague’s position the stipulation did not resolve the tax treatment of western property restoration’s payment of dollar_figure of sprague’s personal expenses in the parties stipulated that of the dollar_figure in direct payments that western property restoration made to sprague during sprague correctly reported dollar_figure as compensation the parties stipulated that they disagree as to whether the remaining direct payments amounting to dollar_figure should be treated as dividends the irs’s position or a tax-free return_of_capital sprague’s position the stipulation did not resolve the tax treatment of western property restoration’s payment of dollar_figure of sprague’s personal expenses in in its opening brief the irs concedes that sprague is not liable for sec_6662 penalties it continues to take the position that western property restoration is liable for sec_6662 penalties opinion dividends earned by sprague in and the tax treatment of a distribution_of_property made by a corporation to a shareholder with respect to its stock is set forth in sec_301 sec_301 sec_301 provides the portion of the distribution which is a dividend is included in the shareholder’s income the portion of the distribution which is not a dividend is applied against and reduces the adjusted_basis of the stock and the portion of the distribution which is not a dividend to the extent that it exceeds the adjusted_basis of the stock is treated as gain from the sale_or_exchange of property a dividend is defined by sec_316 as a distribution_of_property by a corporation to its shareholders out of its earnings_and_profits for this purpose a distribution is considered to be made out of earnings_and_profits to the extent of earnings_and_profits id in his brief sprague concedes that the payment by western property restoration of dollar_figure of his personal expenses in constitutes a dividend however he contends that the dollar_figure of noncompensation payments by western property restoration to him are a tax-free return_of_capital he does not dispute that for the tax_year western property restoration had earnings_and_profits at least equal to the distributions it made to him that year dollar_figure dollar_figure dollar_figure he argues that western property restoration intended the dollar_figure in payments to be distributions of capital rather than earnings he also argues that western property restoration recorded the distributions in its books as reductions to paid-in capital rather than as dividends a distribution to a shareholder is a dividend if it is made out of earnings_and_profits sec_316 a distribution is made out of earnings_and_profits if earnings_and_profits is at least equal to the amount of the distribution id western property restoration’s earnings_and_profits for the tax_year was at least dollar_figure the amount of the distributions it made during therefore the distributions totaling dollar_figure are dividends within the meaning of sec_316 that western property restoration intended the distributions to consist of returned capital is irrelevant see 552_us_421 it is also irrelevant that the company treated the distributions as returned capital on its books see id for sprague’s brief concedes that the payment by western property restoration of dollar_figure of his personal expenses constitutes a dividend he contends that the dollar_figure in noncompensation payments made in should be treated as a tax-free return_of_capital for the same reasons he gives regarding the distributions he does not contest that western property restoration’s earnings_and_profits for the tax_year was at least dollar_figure the total amount of the distributions it made during dollar_figure ' dollar_figure dollar_figure therefore the distributions of dollar_figure are dividends see sec_316 our determination of this dividend issue does not depend on the resolution of disputed facts thus we need not determine which party bears the burden_of_proof we hold that sprague received dollar_figure of dividends in and dollar_figure of dividends in western property restoration’s liability for sec_6662 penalties for and sec_6662 and b and imposes an accuracy-related_penalty of of the portion of an underpayment_of_tax that is attributable to the taxpayer’s negligence or disregard of rules or regulations or that is attributable to any substantial_understatement_of_income_tax the irs determined that for the tax_year sec_2011 and sec_2012 western property restoration is liable for accuracy-related_penalties for underpayments attributable to negligence or substantial understatements of income_tax negligence includes the failure to exercise ordinary and reasonable care in the preparation of a tax_return sec_1_6662-3 income_tax regs negligence also includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly id western property restoration exhibited a lack of ordinary and reasonable care in improperly claiming cost- of-goods-sold allowances for both years improperly claiming o ther deductions and advertising deductions for both years improperly claiming a net-operating-loss deduction for and not maintaining adequate books_or_records to substantiate the allowances and the deductions it was negligent with respect to the underpayments for and alternatively each annual understatement of income_tax on western property restoration’s returns is substantial and each underpayment is attributable to a substantial_understatement_of_income_tax if the understatement exceeds the lesser of-- i percent of the tax required to be shown on the return for the taxable_year or if greater dollar_figure or ii dollar_figure see sec_6662 whether the understatements are substantial will be determined by post-opinion computations under tax_court rule_of practice and procedure under sec_6664 a taxpayer who is otherwise liable for the accuracy-related_penalty may avoid the liability by showing that there was a reasonable_cause for the underpayment and that the taxpayer acted in good_faith with respect to the underpayment western property restoration notes that a certified_public_accountant cpa reviewed its books_and_records and aided in the preparation of its tax returns it is not a defense to the accuracy-related_penalty merely that a return was prepared by a cpa as the mere fact that a certified_public_accountant has prepared a tax_return does not mean that he or she has opined on any or all of the items reported therein 115_tc_43 aff’d 299_f3d_221 3d cir 1the penalty applies only once to a portion of an underpayment even if that portion is attributable to both negligence and a substantial_understatement_of_income_tax see sec_1_6662-2 income_tax regs there is no evidence that the cpa or any other tax professional advised western property restoration regarding any of the positions taken on its tax returns therefore western property restoration has no reasonable_cause and is liable for accuracy-related_penalties to reflect the foregoing decisions will be entered under tax_court rule_of practice and procedure


department of the treasury internal_revenue_service washington d c qo q j al te rs a dec jog8 uniform issue list numbers kkk rk kkk kek kkk kk kkk kk kee kkk kek kkekkerekek kak kk kk kk kkk kkk kk kk kk kk rk kr kkk kk rk ker kkk kk kkk kk kee kkk kkk ke kkk kkk kkk kkk ak ak kk ko kk ek kr kk kk kk kkk kk kk kok ok kek ok ke kok ok kok kkk koko kk kkk attn 1k kok ok ok kk ok ke kk kkk kk kk kok kk kk kk kk kk kk kk kk kk kk kk kk ko kk kk legend individual a surviving_spouse beneficiary b beneficiary c trust d kkk kkk kkk kkk kkk kk kkk kr ak kk kk rk kr kkk keke kk keke keke kaa kkk kkk kk kkk kkk kaka kkk kkk kkk kkk kkk kkk kk kk ee er ee kk ka kk kaa k kk rk kk rk kr kk kek kek kkk kkk rk kkk kr kr kr kr kr kr rk kk kr kr kk rk kkk ake dee ok kk kok ek kk kek kkk kk kk kk kk kk kkk kk kkk kkk kk kk kk kr rr kk rk kkk kkk ek kk trustee kkk rk rk kr kk kk kr kkk kkk rk kk kk kk kk kk kk kk kk kk kk kk kk ak kr kk ke wk kkk rk rk kk kk kk kkk kkk kkk ok oe ke de kk rk kk kk kk kk kk kk kk kkk kk kk kk kekkkkkk kkk kek k kek individual retire- ment arrangement sira kkkkk kkk kkk kr rk rk kk kkk kk kek kk kkk kkk kr kek kkk kkk keke karr kk kkk kkk kkk kkk ka kkk kk rk ek k state e kk rk kr kkk i ee ee eee eee ee ee ee ee ladies and gentlemen this is in response to a letter dated march and december in which your authorized representative requested private supplemented by additional correspondence dated october october october november date letter rulings on your behalf and in your capacity as trustee of trust d named above regarding the effect of certain distributions from trust d under sec_401 a of the internal_revenue_code request you have submitted the following statements and representations in furtherance of your ruling and d as on eeee eee individual a executed trust d a revocable_living_trust trust d was amended and restated on e k with additional amendments dated t and keeeerh ee - e individual a’s death years old a valid trust under the laws of state upon at the time of death individual a wa sec_63 and became irrevocable by its terms as of trust d is you have represented that at the time of death individual a owned a qualified_individual retirement arrangement ira with assets totaling approximately dollar_figure individual a hereinafter the decedent designated trust d the ira’s beneficiary effect at the time of the decedent’s death the assets of the decedent’s ira were transferred directly into another ira administered by the trustee of trust d trustee ira custodian was informed of the decedent’s beneficiary designation and was provided copies of the trust document this beneficiary designation was in in january on ke keke eee the as after full funding and settlement of mortgage payments and as the marital trust various other specific bequests and estate expenses trust d provides that the balance of the trust estate will constitute a residuary_trust estate for the benefit of the decedent’s surviving_spouse to be referred to decedent’s surviving_spouse is the primary beneficiary of the marital trust and is entitled to all the income from that trust on a quarterly basis or at more frequent intervals as the trustee deems necessary or appropriate amended contains an additional proviso that does not equal or exceed dollar_figure the difference between the marital trust’s income and the specified amount should be paid to the decedent’s surviving_spouse out of principal trustee of the marital trust has the discretion to distribute additional principal as needed from the trust for the surviving spouse's health support and maintenance the trustee of trust d has received a copy of the trust the marital trust as if its annual income also the the kk kk kkk ok ok ok kk kk ok ok ok ok ke kk kk eek kek kkk ke kk 18go qs your authorized representative has asserted that the ira assets cannot be used to satisfy any of the trust d specific bequests after the death of the surviving_spouse the marital trust’s are to be distributed to beneficiaries in pertinent part state e statutes remaining assets if any b and c descendants of the decedent and the surviving_spouse or to their then living descendants if either b the surviving_spouse provide that any interest of any participant or beneficiary ina retirement or profit-sharing_plan that is qualified under sec_408 of the code is exempt from all claims of creditors of the beneficiary or participant pursuant to this statutory requirement all of the expenses and charges against trust d have been fully funded with assets other than the decedent’s ira the assets of that ira must be used exclusively to fund the marital trust provided for by trust d or c predeceases and based on the preceding facts statements and representations you have requested the following rulings even though trust d is named as the beneficiary of the the surviving_spouse is treated as the decedent's ira designated_beneficiary of the decedent’s ira as the decedent’s death distribution period for payment of benefits from the decedent's ira under sec_401 for purposes of determining the of the code of the date of that beginning no later than date dis- tributions made from the decedent’s ira to the marital trust over the life of the surviving_spouse or over a period not extending beyond the life expectancy of the surviving_spouse accordance with by sec_1 regulations proposed regs a -1 q a c-3 a of the proposed income_tax a b iii as interpreted of the code are in sec_408 of the code and sec_1_408-8 q a a-1 of the proposed regs provide that under regulations prescribed by the secretary iras are subject_to distribution rules similar to the rules provided in a -1 of the proposed regs for qualified_plans benefit requirements also shall apply to the distribution of the entire_interest of maintained an individual for whose benefit an ira is of the code and sec_1 the incidental death a sec_401 a a generally provides that a plan will not be qualified under sec_401 unless that plan provides that the entire_interest of each employee i will be distributed to such kk rr kr rk kr rrr kkk kkk eker kkk kek kek 1qo d q t o p p e n u o f in accordance with regulations over the life of such employee not later than the required_beginning_date be distributed beginning not later than the required_beginning_date employee or over the joint lives of such employee and a desig- nated beneficiary or over a period not extending beyond the life expectancy of such employee or the joint life expectancies of such employee and a designated_beneficiary ii or will sec_401 a c i and ii of the code defines the term required_beginning_date as applied to iras the calendar_year immediately following the calendar_year in which an employee a former employee attains age as april or of sec_401 a b ii generally provides that a plan is not qualified under sec_401 unless the plan provides that an employee dies before distribution of the employee’s interest has begun in accordance with sec_401 a ii interest of the employee will be distributed within five years after the date of the death of such employee five-year rule sec_1 a -1 q a c-2 of the proposed regs states in part employee’s interest must be distributed by december calendar_year which contains the fifth anniversary of the date of the employee’s death that in order to satisfy the five-year rule the former of the the entire if sec_401 a b iii of the code provides an exception the exception applies if a designated_beneficiary a designated_beneficiary to the five-year rule if certain amounts are payable over the life of any portion of the employee’s interest is payable to benefit of distributed in accordance with the regulations over the life of such designated_beneficiary and begin not later than one year after the date of the employee's death regulations sec_401 a b iii applies if date or or such later date as the secretary may prescribe by sec_1 a - q a c-3 a provides that any individual is designated as the employee’s surviving_spouse of the employee’s date of a beneficiary other than such portion will be such distributions in addition to iii ii i as or for the with regard to ruling_request sec_1 a -1 q a d-2a a of the proposed regs provides that only individuals may be designated beneficiaries for purposes of however sec_1 that trust may be treated as designated beneficiaries under a a -1 q a d-5 a provides that the beneficiaries of in cases where a_trust is named as the plan beneficiary sec_401 a bk rr kr kr kkk kk kkk kk kkk kkk kkk kek ek igys i cad plan or ira provided the following four requirements trust qualification requirements are met the trust is a valid trust under state law or would be but for the fact there is no corpus the trust is irrevocable or will by its terms become irrevocable upon the death of the employee the beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s benefit are identifiable from the trust instrument and a copy of the trust document is provided to the plan sec_1 a -1 b q a d-6 a of the proposed regs that if a_trust is named as provides in pertinent part beneficiary of an employee all beneficiaries of the trust with respect to the trust’s interest in the employee’s benefit are treated as designated beneficiaries of the employee under the plan for purposes of determining the distribution period under under sec_401 a b iii requirements cited above are satisfied as employee’s death if the four trust qualification of the date of the a sec_1 a -1l b q a e-5 a provides that if more a beneficiary with respect than one individual is designated as to an employee as employee dies prior to his required_beginning_date designated_beneficiary with the shortest life expectancy will be the designated_beneficiary for purposes of determining the distribution period of his date of death in the case where the the sec_1 a -1 q a e-5 e of the proposed regs an employee’s if a beneficiary’s entitlement to states that benefit is contingent on the death of a prior beneficiary such contingent beneficiary will not be considered a beneficiary for purposes of determining who is the designated_beneficiary with the shortest life expectancy under paragraph a beneficiary who is not an individual is rule does not apply if the death occurs prior to the applicable_date for determining the designated_beneficiary q a e-5 e provides an example illustrating that a death contingency is a provision in which the availability of benefits is dependent on another beneficiary’s death a beneficiary or whether a this in this case you have represented that trust d of which the marital trust is state e that became irrevocable at the time of the decedent's a valid trust under the laws of a part is tek kk ok kok kk kkk kk kk ok kk kk kok kk kkk kk kkk ke 1eoe we d a r e h you have further all other expenses and charges against trust d the marital trust residuary_trust estate in accordance with statutory requirements of death by the terms of the trust agreement represented that state e were fully funded with trust assets other than the decedent’s ira the sole named beneficiary of the decedent’s ira surviving_spouse is the sole income_beneficiary of the marital trust and the only discretionary beneficiary of principal the death of the surviving_spouse any assets remaining in the marital trust will be divided equally between contingent beneficiaries b and c stirpes surviving_spouse is older than either beneficiary b beneficiary c copies of the trust as required under sec_1 a -1 q a d-5 a item your authorized representative has asserted that the or their then living descendants per finally the trustee ira custodian has received is therefore or the decedent's after it is concluded therefore that under the rules of d-5 a of the proposed regs sec_1 a -1 q a surviving_spouse is treated as the designated_beneficiary of the decedent’s ira for purposes of determining the designated_beneficiary with the shortest life expectancy determined at the time of the decedent’s death ruling_request one spouse is considered to be the designated_beneficiary for purposes of determining the time period over which required distributions will be made from the decedent’s ira to the marital trust pursuant to is ruled that the decedent’s surviving accordingly with respect to of the code sec_401l a the it with regard to ruling_request number two sec_1 a -1 of the proposed regs provides in pertinent part a designated_beneficiary for a q a d- sec_5 that only an individual may be qualified_plan or requirements of the proposed_regulations have been satisfied for purposes of sec_401 distributions made to a_trust will be treated as paid directly to the beneficiaries of the trust with respect to the trust’s interest in the employee’s benefit however because the trust qualification ira in this case annuity distributions have commenced from the an irrevocable_trust decedent’s qualified ira to trust established and maintained primarily for the benefit of the decedent’s surviving_spouse occurred on or before december calendar_year immediately following the calendar_year in which the decedent died of the proposed regs distributions made from the ira to the marital trust are considered as being paid directly to the the annuity_starting_date the last day of the under the rule_of sec_1 the marital a -1 q a d-5 b ok kor rk rr kkk kk kk kk kk kk ke qo ce mm goss oo ae ge a -7- designated_beneficiary ie of the sec_401 rules the surviving_spouse for purposes accordingly as to ruling_request two it is ruled that distributions made to beginning no later than december the marital trust over the life of the surviving_spouse or over a period not extending beyond the life expectancy of the surviving_spouse are in accordance with sec_401 a b iii the code proposed_regulations as interpreted by sec_1 401l a -1 q a c-3 a of the of it is assumed that the ira represented herein to be a in which the decedent’s ira assets are deposited qualified ira contains the necessary provisions for making timely distributions of ira assets into the marital trust as described in this ruling_request and required under sec_401 this ruling makes no determination as the decedent’s ira assumed that the marital trust is property qtip did not request a ruling from the service as the marital trust as given further you have represented and it a qualified terminable_interest trust under sec_2056 and no such ruling has been to the qualified status of to the validity of a qtip_trust of the code of the code however you is a copy of this letter has been sent to your authorized representatives in accordance with a power_of_attorney on file in this office should you have questions pertaining to your ruling your contact in the national_office of the service is take kee rk employee_plans technical branch op e eb til at eee rrr heh sincerely eqeouw8 zb clore ohn swieca chief employee_plans technical branch enclosures deleted copy of this private_letter_ruling notice notice of intention to disclose copy of cover letter to authorized representative