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-100909-10 date date taxpayer ------------------------------------------------------------ --------------------------- trust ----------------------------------------------------------- ------------------------------------------------------------ date x dear -------------- ------------------ ----- this is in response to a letter dated date and subsequent correspondence submitted by your authorized representative requesting rulings under sec_671 sec_678 and sec_2041 of the internal_revenue_code the information submitted states that taxpayer is the trustee and beneficiary of the trust an irrevocable_trust dated date which taxpayer’s father created and funded trust is bifurcated into two subtrusts subtrust a and subtrust b subtrust b is represented as being a qualified_subchapter_s_trust qsst with respect to subtrust a_trust provides in part that during each of the first x taxable years of this trust ending after the date of this agreement the trustee shall distribute annually to taxpayer all or any portion of the income of the trust estate as taxpayer acting alone shall direct the right to withdraw income under this section of trust shall be noncumulative and shall lapse as to each taxable_year on the last day of the taxable_year to which the right of withdrawal applies plr-100909-10 during the term of this trust the trustee may also distribute to or for the benefit of taxpayer and the issue of the settlor or any of them such amounts from income or principal of the trust estate as the trustee determines to be necessary for the health education support or maintenance of the recipient u pon the death of taxpayer the trustee shall divide and distribute the trust estate as taxpayer shall appoint by will the power_of_appointment hereby granted to taxpayer may only be exercised in favor of any or all of the issue of the settlor or one or more organizations described in c of the internal_revenue_code_of_1986 as amended with respect to subtrust a_trust provides in part that income not distributed within fifteen months of receipt thereof shall be added to the principal of the trust to which the income is allocated based on the above facts taxpayer requests rulings regarding whether taxpayer is the owner of the income portion of subtrust a under sec_671 and sec_678 for the first x taxable years of trust’s existence and to what extent that the corpus of subtrust a will be includable in taxpayer’s gross_estate under sec_2041 issue sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter in computing taxable_income or credits against the tax of an individual sec_678 provides in general that a person other than a grantor shall be treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income there from in himself or such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would within the principles of sec_671 to inclusive subject a grantor of a_trust to treatment as the owner thereof based solely on the facts and representations submitted we conclude that taxpayer is the owner of the income portion of subtrust a under sec_671 and sec_678 for the first x taxable years of trust’s existence plr-100909-10 issue sec_2036 of the internal_revenue_code provides in part that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2038 provides in part that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power to alter amend revoke or terminate or where any such power is relinquished during the 3-year period ending on the date of the decedent's death sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power_of_appointment by a disposition that is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent's gross_estate under sec_2035 to inclusive sec_2041 defines a general_power_of_appointment as one that exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_2041 provides that the lapse of a power_of_appointment created after date during the life of the individual possessing the power is considered a release of the power to the extent that the property that could have been appointed by the exercise of the lapsed power exceeds the greater of dollar_figure or percent of the aggregate value at the time of such lapse of the assets out of which the exercise of the lapsed power could have been satisfied plr-100909-10 sec_20_2041-1 of the estate_tax regulations provides in part that the term power_of_appointment includes all powers that are in substance and effect powers of appointment regardless of the nomenclature used in creating the power and regardless of local property law connotations for example if a_trust instrument provides that the beneficiary may appropriate or consume the principal of the trust the power to consume or appropriate is a power_of_appointment similarly a power given to a decedent to affect the beneficial_enjoyment of trust property or its income by altering amending or revoking the trust instrument or terminating the trust is a power_of_appointment further a power in a donee to remove or discharge a trustee and appoint himself may be a power_of_appointment sec_20_2041-3 provides in part that property subject_to a general_power_of_appointment created after date is includable in the gross_estate of a decedent even though he does not have the power at the date of his death if during his life he exercised or released the power under circumstances such that if the property subject_to the power had been owned and transferred by the decedent the property would be includable in the decedent's gross_estate under sec_2035 sec_2036 sec_2037 or sec_2038 further sec_2041 provides that the lapse of a power_of_appointment is considered to be a release of the power to the extent set forth in sec_20_2041-3 the principles set forth in sec_20_2041-2 for determining the application of the pertinent provisions of sec_2035 through to a particular exercise of a power_of_appointment are applicable for purposes of determining whether or not an exercise or release of a power_of_appointment created after date causes the property to be included in a decedent's gross_estate under sec_2041 sec_20_2041-2 example provides that s created a_trust in to pay the income to a for life remainder as b appoints by an instrument filed with the trustee during b's lifetime and in default of appointment remainder to c b exercised the power in by directing that after a's death the income be paid to himself for life with remainder to c if b dies after a the entire value of the trust property would be included in b's gross_estate since such a disposition if it were a transfer of property owned by b would cause the property to be included in his gross_estate under sec_2036 if b dies before a the value of the trust property less the value of a's life_estate would be included in b's gross_estate for the same reason sec_20_2041-2 example provides in part that s created a_trust in to pay the income to a for life remainder as a appoints by an instrument filed with the trustee during a's lifetime a exercised the power in five years before his death reserving the right of revocation the exercise if not revoked before death will cause the property subject_to the power to be included in a's gross_estate under sec_2041 since such a disposition if it were a transfer of property owned by a would cause the property to be included in his gross_estate under sec_2038 plr-100909-10 sec_20_2041-3 provides in part that the failure to exercise a power_of_appointment created after date within a specified time so that the power lapses constitutes a release of the power however sec_2041 provides that such a lapse of a power_of_appointment during any calendar_year during the decedent's life is treated as a release for purposes of inclusion of property in the gross_estate under sec_2041 only to the extent that the property which could have been appointed by exercise of the lapsed power exceeds the greater of i dollar_figure or ii percent of the aggregate value at the time of the lapse of the assets out of which or the proceeds of which the exercise of the lapsed power could have been satisfied for example assume that a transferred dollar_figure worth of securities in trust providing for payment of income to b for life with remainder to b's issue assume further that b was given a noncumulative right to withdraw dollar_figure a year from the principal of the trust fund which neither increased nor decreased in value prior to b's death in such case the failure of b to exercise his right of withdrawal will not result in estate_tax with respect to the power to withdraw dollar_figure which lapses each year before the year of b's death at b's death there will be included in his gross_estate the dollar_figure which he was entitled to withdraw for the year in which his death occurs less any amount which he may have taken during that year however if in the above example b had possessed the right to withdraw dollar_figure of the principal annually the failure to exercise such power in any year will be considered a release of the power to the extent of the excess of the amount subject_to withdrawal over percent of the trust fund in this example dollar_figure assuming that the trust fund is worth dollar_figure at the time of the lapse since each lapse is treated as though b had exercised dominion over the trust property by making a transfer of principal reserving the income therefrom for his life the value of the trust property but only to the extent of the excess of the amount subject_to withdrawal over percent of the trust fund is includable in b's gross_estate unless before b's death he has disposed of his right to the income under circumstances to which sec_2035 through would not be applicable sec_20_2041-3 provides in part that the purpose of sec_2041 is to provide a determination as of the date of the lapse of the power of the proportion of the property over which the power lapsed which is an exempt disposition for estate_tax purposes and the proportion which if the other requirements of sec_2035 through are satisfied will be considered as a taxable disposition once the taxable proportion of any disposition at the date of lapse has been determined the valuation of that proportion as of the date of the decedent's death or if the executor has elected the alternate_valuation method under sec_2032 the value as of the date therein provided is to be ascertained in accordance with the principles which are applicable to the valuation of transfers of property by the decedent under the corresponding provisions of sec_2035 through for example if the life_beneficiary of a_trust had a right exercisable only during one calendar_year to draw down dollar_figure from the corpus of a_trust which he did not exercise and if at the end of the year the corpus was worth dollar_figure the taxable_portion over which the power lapsed is dollar_figure the excess of dollar_figure over percent of the corpus or of the total value on the decedent's death if the total value of plr-100909-10 the corpus of the trust excluding income accumulated after the lapse of the power on the applicable_valuation_date was dollar_figure dollar_figure of dollar_figure would be includable in the decedent's gross_estate however if the total value was then dollar_figure only dollar_figure of dollar_figure would be includable sec_20_2041-3 provides in part that if the failure to exercise a power such as a right of withdrawal occurs in more than a single year the proportion of the property over which the power lapsed that is treated as a taxable disposition will be determined separately for each such year the aggregate of the taxable proportions for all such years valued in accordance with the above principles will be includable in the gross_estate by reason of the lapse the includable amount however shall not exceed the aggregate value of the assets out of which or the proceeds of which the exercise of the power could have been satisfied valued as of the date of the decedent's death or if the executor has elected the alternate_valuation method under sec_2032 the value as of the date therein provided as noted above during each of the first x years of the trust term taxpayer has the right to withdraw such portion of the income as taxpayer may direct during the entire term of trust taxpayer has the right to receive such amounts as the trustee determines to be necessary for taxpayer’s health education support or maintenance taxpayer has the testamentary power to appoint the trust remainder among the settlor’s issue and charity taxpayer is trustee of trust the gross_estate includes the value of all property with respect to which the decedent has at the time of death a general_power_of_appointment sec_2041 taxpayer’s power to direct the distribution of annual income to herself for an x-year period constitutes a general_power_of_appointment within the meaning of sec_2041 sec_20_2041-1 accordingly should taxpayer’s death occur during the x-year term of the general_power_of_appointment the gross_estate will include the trust income attributable to the taxable_year in which death occurs less any amount of income which may have been withdrawn during that year sec_20_2041-3 estate of dietz v commissioner tcmemo_1996_471 sec_2041 also includes in the gross_estate the value of all property with respect to which the decedent at any time released a general_power_of_appointment by a disposition that were it a transfer of property owned by the decedent would be includible in the gross_estate under sec_2035 to but only to the extent that the value of the property that could have been appointed exceeds the greater of dollar_figure or percent of the assets subject_to the power taxpayer’s power to direct the distribution of annual income to taxpayer for an x- year period constitutes a general_power_of_appointment within the meaning of sec_2041 a transfer of property owned by taxpayer to trust would be includible in taxpayer’s gross_estate under sec_2036 and sec_2038 accordingly regardless of plr-100909-10 taxpayer’s date of death the gross_estate will include the lapse of any annual income withdrawal right during the x-year term to the extent of the excess of the income not withdrawn over the greater of dollar_figure or percent of the income section d estate of noland v commissioner tcmemo_1984_209 except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code pursuant to a power_of_attorney on file a copy of this letter is being sent to your 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 sincerely bradford r poston acting chief branch passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number ------------------------------- ----------------- ------------------------ ------------------------------------------- re ------------------------------------------------------- ------- ----------------------------------------------- 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 b04 plr-120230-14 date november legend --------------------------- settlor trust ----------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --- --------------------------------------------------------------- ---------------------- date date date date corporate trustee child grandchild grandchild a grandchild b grandchild a_trust --------------------------------------------------------------------- grandchild b_trust --------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------- state court -------------------------------------------------------------------------------------------------------------- case ------------------------------------------------------------------------------------------------------------ -------------------------- --------------------- --------------------- --------------------------- ------------------------------------------------- -------------------------------------------- ---------------------------- ----------------------------------- -------------------------------- ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ ----------------------------------------------------------------------- plr-120230-14 case ----------------------------------------------------- x ------------------ ------------------------------------------------------------------------ dear --------------- this is in response to a letter dated date and subsequent correspondence submitted by your authorized representative requesting rulings on the gift_tax and generation-skipping_transfer_tax consequences of a judicial construction of a_trust the facts and representations submitted are summarized as follows settlor created and funded trust an irrevocable_trust on date a date before date for the primary benefit of grandchild corporate trustee is the current trustee under article ii a of trust the trustee is authorized to purchase and maintain insurance on the life of child the net_income is to be accumulated however the trustee may in its sole discretion pay for the benefit of grandchild so much of the net_income as the trustee may deem necessary and proper to provide for the support maintenance and education of grandchild article ii d and article iii provide that trust is to terminate five years after child’s death upon termination the trustee is to distribute all of the trust assets in equal shares to grandchild’s then surviving descendants if all of grandchild’s descendants die before they would otherwise be entitled to receive the trust assets then the trust is to terminate and the assets are to be distributed in equal shares to grandchild’s siblings grandchild a and grandchild b then surviving however if grandchild a is then a current beneficiary of grandchild a_trust then her share is to be added to grandchild a_trust likewise if grandchild b is then a current beneficiary of grandchild b_trust then his share is to be added to grandchild b_trust child died on date trust will terminate on the earlier of grandchild’s death or date the fifth anniversary of child’s death grandchild the income_beneficiary of trust is living but she has no descendants grandchild a is living and currently the beneficiary of grandchild a_trust grandchild b is likewise living and currently the beneficiary of grandchild b_trust trust grandchild a_trust and grandchild b_trust were created at the same time and have virtually identical provisions on date the parties petitioned state court for an order construing and reforming article ii d and article iii of the trust instrument to identify the contingent_remainder plr-120230-14 beneficiaries and to clarify the disposition of the trust remainder upon its likely termination on date under the proposed reformation the trust assets will be divided into two equal shares with one share being distributed to grandchild a_trust and the other share being distributed to grandchild b_trust upon either i grandchild’s death before date or ii trust’s termination on date after such distribution the one-half share distributed to grandchild a_trust will continue to be held in grandchild a_trust and administered pursuant to the terms of that trust the one-half share distributed to grandchild b_trust will be continue to be held in grandchild b_trust and administered pursuant to the terms of that trust requested rulings you have asked us to rule that the proposed reformation of articles ii d and iii of trust will not cause trust to be subject_to the tax_on_generation-skipping_transfers under sec_2601 of the internal_revenue_code and the proposed reformation of articles ii d and iii of trust will not constitute a gift_for purposes of sec_2501 ruling sec_1 and sec_2501 imposes a tax on the transfer of property by gift sec_2511 provides that the gift_tax shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2601 imposes a tax on every generation-skipping_transfer which is defined under sec_2611 as a taxable_distribution a taxable_termination or a direct_skip under of the tax_reform_act_of_1986 the act gst tax is generally applicable to generation-skipping transfers made after date however under section b a of the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer under a_trust that was irrevocable on date except to the extent the transfer is made out of principal added to the trust by an actual or constructive_addition after date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax under sec_26_2601-1 will not cause plr-120230-14 the trust to lose its exempt status in general unless specifically provided otherwise these rules are applicable only for purposes of determining whether an exempt trust retains exempt status for generation-skipping_transfer_tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a judicial construction of a governing instrument to resolve an ambiguity in the terms of the instrument or to correct a scrivener's error will not cause an exempt trust to lose its exempt status if the judicial action involves a bona_fide issue and the construction is consistent with applicable state law that would be applied by the highest court of the state sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy paragraph sec_26_2601-1 b or c by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust sec_26_2601-1 example provides as follows in grantor established an irrevocable_trust for the benefit of grantor's children a and b and their issue the trust is to terminate on the death of the last to die of a and b at which time the principal is to be distributed to their issue however the provision governing the termination of the trust is ambiguous regarding whether the trust principal is to be distributed per stirpes only to the children of a and b or per capita among the children grandchildren and more remote issue of a and b in the trustee files a construction suit with the appropriate local court to resolve the ambiguity the court issues an order construing the instrument to provide for per capita distributions to the children grandchildren and more remote issue of a and b living at the time the trust terminates the court's construction resolves a bona_fide issue regarding the proper interpretation of the instrument and is consistent with applicable state law as it would be interpreted by the highest court of the state therefore the trust will not be subject_to the provisions of chapter under applicable state law a_trust instrument may be reformed to conform to the settlor's intent to ascertain the settlor's intent the state courts look to the trust instrument as a whole and the circumstances known to the settlor on the date of execution cite cite plr-120230-14 in 387_us_456 the court considered whether a state trial court's characterization of property rights conclusively binds a federal court or agency in a federal estate_tax controversy the court concluded that the decision of a state trial_court as to an underlying issue of state law should not be controlling when applied to a federal statute rather the highest court of the state is the best authority on the underlying substantive rule_of state law to be applied in the federal matter if there is no decision by that court then the federal authority must apply what it finds to be state law after giving proper regard to the state trial court's determination and to relevant rulings of other courts of the state in this respect the federal_agency may be said in effect to be sitting as a state court based on the facts submitted and the representations made we conclude that the the judicial action involves bona_fide issues and the judicial reformation of trust to provide for the distribution of trust assets to grandchild trust a and grandchild trust b as described above is consistent with applicable state law as applied by the highest court of state accordingly we conclude that the judicial reformation of trust as described above will not result in a shift of any beneficial_interest in trust to any beneficiary who occupies a generation lower than the persons holding the beneficial_interest prior to the modification further the reformation of trust will not extend the time for vesting of any beneficial_interest in trust beyond the period provided for in the original trust therefore the reformation will not cause trust to be subject_to the tax on generation- skipping transfers under sec_2601 in addition the judicial reformation of trust will not result in any change in the beneficial interests of the beneficiaries accordingly no beneficiary will be regarded as making a gift as a result of the judicial reformation and distributions described above except as expressly provided herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives plr-120230-14 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 request for rulings it is subject_to verification on examination sincerely melissa c liquerman chief branch office of associate chief_counsel passthroughs special industries enclosure copy of letter for sec_6110 purposes


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division uics legend taxpayer a taxpayer b taxpayer c taxpayer d taxpayer e date date date date date date date date month state v ira x trust w page trust x trust y subtrust z dear this is in response to the request for private_letter_ruling submitted on your behalf by your authorized representative as supplemented in which you through your representative request several letter rulings the following facts and representations support your ruling_request taxpayer a whose date of birth was date ' died on date having reached his required_beginning_date as that term is defined and applied in sec_401gncid of the internal_revenue_code as of his death of death taxpayer a owned ira x taxpayer a was survived by a son taxpayer b whose date of birth was date a daughter taxpayer c whose date of birth was date and another daughter taxpayer d whose date of birth was date eldest of taxpayers b c and d ruling_request taxpayers b c and d are alive as of the date of this thus taxpayer c is the on date taxpayer a named trust w as the beneficiary of his ira x on date on date - thus at taxpayer a’s death trust y was the beneficiary of taxpayer a’s ira x taxpayer a executed trust x which restated and superceded trust w taxpayer a executed trust y which restated and superceded trust x article vi of trust y provides for a subtrust z article vi a of subtrust z provides that upon the death of taxpayer a the trustee of trust y will transfer and deliver to taxpayer e outright and free of trust trust assets equal in value to of the value of the trust fund as of the date of taxpayer a’s death article vlb of subtrust z provides in short that the remaining portion of the trust estate is to be divided into equal separate shares for the benefit of taxpayer a’s surviving children article vi b part a a of subtrust z provides that all of the net_income of the share allocated to a particular child of taxpayer a shall be distributed currently to such child page article vil part a of trust y provides that the trustee of trust y may invade the principal of the share allocated to the particular child of taxpayer a if necessary to provide for the health education maintenance and support of a beneficiary of said share article vi b part a b provides that at the death of such child all of the then remaining amount of principal shall be distributed as he or she shail have effectively appointed by the last instrument in writing which such child shall have delivered to trustee during such child’s lifetime or by such child’s probated will provided that such appointment is not exercised in favor of such child such child’s estate such child’s creditors the creditors of such child’s estate or any disqualified appointee article xv i of trust y defines disqualified appointee as any individual born in a calendar_year prior to the calendar_year of birth of my oldest living issue at the time of my death any person other than a_trust or an individual or any trust that may have as a beneficiary an individual born in a calendar_year prior to the calendar_year of birth of my oldest living issue at the time of my death article viilf of trust y provides in relevant part that the trustee shall not charge any debts administrative expenses or taxes of the estate against property coming from an ira of which the trust is a beneficiary article i of trust y provides that trust y was revocable by taxpayer a during his lifetime thus at the death of taxpayer a_trust y became irrevocable your authorized representative has asserted on your behalf that trust y is valid under the laws of state v the state of taxpayer a’s domicile at his death furthermore the identity of the beneficiaries of trust y was provided to the administrator of ira x during calendar_year during month taxpayer b taxpayer c taxpayer d and taxpayer e created four sub-accounts within ira x each separate_account constitutes a portion of taxpayer a’s account balance under ira x which reflects the appropriate beneficiary’s interest in taxpayer a’s ira x using separate_accounting that allocates investment gains and losses and contributions and forfeitures on a pro_rata basis in a consistent manner between such portion and any other benefit each of the four separate_accounts was established for the benefit of a particular beneficiary in the name of the deceased taxpayer a each beneficiary has the right to direct investment of his her separate_account as well as withdraw funds with regard to his or her account the beneficiary of a distinct account has access solely to his or her sub- account page based on the above facts and representations you through your authorized representative request the following letter rulings trust y is a valid see-through trust within the meaning of sec_1_401_a_9_-4 of the final income_tax regulations question and answer sec_401 minimum required distributions may be made from ira x based on the life expectancy of taxpayer c the eldest of taxpayers b c and d to trust y for the benefit of taxpayers b c and d some of the beneficiaries thereof and the creation of the separate sub-accounts referenced above did not affect the tax deferred status of the funds held in ira x and will not be treated as a taxable_distribution or distributions with respect to your ruling requests sec_401 of the internal_revenue_code in general sets down the rules governing minimum required distributions from retirement plans qualified within the meaning of code sec_401 code sec_401 provides in short that distributions to a qualified_plan participant must begin no later than april of the calendar_year following the later of- the calendar_year in which the employee attains age ' or i the calendar_year in which the employee retires subclause id of clause i does not apply to a 5-percent_owner as that term is defined in code sec_416 or for purposes of sec_408 or b - code sec_408 provides that under regulations prescribed by the secretary rules similar to the rules of sec_401 and the incidental death_benefit requirements of sec_401 shall apply to the distribution of the entire_interest of an individual for whose benefit the trust is maintained code sec_401 provides that with respect to an employee plan participant who dies after distributions have begun in accordance with subparagraph a ii after his required_beginning_date ’ as that term is defined in code sec_401 distributions of the remaining portion that employee’s interest under a plan must be made at least as rapidly as under the method of distribution being used under subparagraph a ii as of the date of his death sec_401 of the code defines the term designated_beneficiary as any individual designated as a beneficiary by the employee final income_tax regulations under sec_401 and sec_408 were published in the federal_register pincite federal_register date page the preamble to the final regulations provides in relevant part final regulations that the final regulations apply for determining required minimum distributions for calendar years beginning on or after date for determining required distributions for calendar_year taxpayers may rely on either the proposed_regulations or the final regulations proposed_regulations under sec_401 were revised during calendar_year and published in the internal_revenue_bulletin pincite r b date new proposed_regulations the preamble to the new proposed_regulations provides in relevant part that they are applicable for determining required minimum distributions for calendar years beginning on or after date furthermore taxpayers may rely upon them for determining minimum required distributions for calendar_year sec_1_401_a_9_-2 of the final regulations question and answer-5 provides in relevant part that in order to satisfy the at least as rapidly mule of code sec_401g under an individual_account_plan the rules of sec_1_401_a_9_-5 apply sec_1_401_a_9_-2 of the new proposed_regulations question and answer-5 contains similar language sec_1_401_a_9_-5 of the final regulations q a-5 a provides in general that if an employee dies on or after his required_beginning_date in order to satisfy the requirements of code sec_401 the applicable distribution period for distribution calendar years after the distribution calendar_year containing the employee’s date of death if the employee has a designated_beneficiary as of the date determined under a-4 of sec_1_401_a_9_-4 the longer of i the remaining life expectancy of the employee’s designated_beneficiary determined in accordance with either paragraph c or paragraph c of this a-5 or ii the remaining life expectancy of the employee determined in accordance with paragraph c of this a-5 the new proposed_regulations provide at sec_1_401_a_9_-5 q a-5 a that if an employee ira holder dies on or after his required_beginning_date in order to satisfy sec_401 if the employee or ira holder has a designated_beneficiary that is not his spouse as of the date determined under a-4 of sec_1_401_a_9_-4 the applicable distribution period is the remaining life expectancy of the designated_beneficiary determined in accordance with paragraph c of a-5 sec_1_401_a_9_-5 of the final regulations q a-5 c provides in general that with respect to a non-spouse beneficiary the applicable distribution period measured by the beneficiary’s remaining life expectancy is determined using the beneficiary’s age as of the beneficiary’s birthday in the calendar_year immediately following the calendar_year mee of the employee’s death is reduced by one for each calendar_year that has elapsed after the calendar_year immediately following the calendar_year of the employee’s death in subsequent calendar years the applicable distribution period the new proposed_regulations contain similar language at sec_1_401_a_9_-5 q a-5 c sec_1_401_a_9_-4 of the final regulations q a-4 provides in relevant part that in order to be a designated_beneficiary an individual must be a beneficiary as of the date of the employee’s or ira holder’s death generally an employee’s designated_beneficiary will be determined based on the beneficiaries designated as of the date of death who remain beneficiaries as of september of the calendar_year following the calendar_year of death sec_1_401_a_9_-4 of the new proposed_regulations q a-4 provides in relevant part that an employee’s designated_beneficiary will be determined based on the beneficiaries designated as of the last day of the calendar_year following the calendar_year of the employee’s death sec_1 a -4 of the final regulations q a-3 provides that only individuals may be designated beneficiaries for purposes of sec_401 a person who is not an individual such as the employee's estate may not be a designated_beneficiary however q a-5 of sec_1_401_a_9_-4 provides that beneficiaries of a_trust with respect to the trust's interest in an employee's benefit may be treated as designated beneficiaries if the following requirements are met the trust is valid under state law or would be but for the fact that there is no corpus the trust is irrevocable or the trust contains language to the effect it becomes 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 within the meaning of a-1 of this section from the trust instrument the documentation described in a-6 of this section has been provided to the plan_administrator the new proposed_regulations contain similar language at sec_1_401_a_9_-4 q a-s page sec_1_401_a_9_-4 of the final regulations q a-6 b provides generally with respect to required minimum distributions after the death of the employee that documentation described therein must be provided by the trustee of the trust_beneficiary to the plan_administrator by october of the calendar_year following the calendar_year in which the employee died the new proposed_regulations at sec_1_401_a_9_-4 q a-6 b provide generally with respect to required minimum distributions after the death of the employee that documentation described therein must be provided by the trustee of the trust_beneficiary to the plan_administrator by the last day of the calendar_year following the calendar_year in which the employee died sec_1_401_a_9_-5 of the final regulations q a-7 provides in general that if an employee has designated more than one beneficiary as of the applicable_date for determining the designated_beneficiary the beneficiary with the shortest life expectancy will be the designated_beneficiary for purposes of determining the distribution period sec_1_401_a_9_-4 of the final regulations q a-5 c provides in relevant part that the rules of a-7 of sec_1_401_a_9_-5 above apply with respect to payments to a_trust having more than one beneficiary the new proposed_regulations contain similar language at sec_1 a - q a-7 and a -4 q a-s c sec_1_401_a_9_-8 of the final regulations qs as-2 and provide the rules governing the establishment of separate_accounts for purposes of computing code sec_401 minimum required distributions q a-3 a provides in relevant part that a separate_account is a portion of an employee’s benefit determined by an acceptable separate_accounting including allocating investment gains and losses and contributions and forfeitures on a pro_rata basis in a reasonable and consistent manner between such portion and any other_benefits q a-2 a provides in relevant part that with respect to defined contribution plans a separate_account must be established no later than the last day of the year following the calendar_year of the employee’s death sec_1_401_a_9_-8 of the new proposed_regulations contains similar language at qs as-2 and code sec_408 provides that except as provided in this subsection any amount_paid or distributed out of an individual_retirement_plan shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 page code sec_408 provides generally that amounts from an inherited ira cannot be rolled over into another ira in general an inherited ira is an ira maintained by an individual who acquired said ira by reason of the death of another if the acquiring individual is not the surviving_spouse of said other individual revrul_78_406 1978_2_cb_157 provides that the direct transfer of funds from one ira trustee to another ira trustee even if at the behest of the ira holder does not constitute a payment or distribution to a participant payee or distributee as those terms are used in code sec_408 furthermore such a transfer does not constitute a rollover_distribution finally revrul_78_406 is applicable if the trustee to trustee transfer is directed by the beneficiary of an ira after the death of the ira owner as long as the transferee ira is set up and maintained in the name of the deceased ira owner for the benefit of the beneficiary in this case trust y is the beneficiary of taxpayer a’s ira x trust y became irrevocable at the death of taxpayer a furthermore it has been represented that trust y is valid under the laws of state v additionally the identities of the beneficiaries of trust y and of subtrust z a subtrust created under the terms of trust y are ascertainable from the language of trust y finally said identities have been provided to the administrator of ira x thus based on the above the service concludes with respect to your first ruling_request as follows trust y is a valid see-through trust within the meaning of sec_1_401_a_9_-4 of the final income_tax regulations question and answer with respect to your second ruling_request as noted above trust y is a valid see-through trust as that term is used for code sec_401 purposes thus the life expectancies of the beneficiaries must be scrutinized in order to determine which beneficiary is the designated_beneficiary whose life expectancy will be used to determine the payout period with respect to taxpayer c’s share in ira x taxpayer c is a beneficiary of the share of ira x that has been allocated to her additional beneficiaries include individuals who cannot be older than taxpayer c thus any potential beneficiary of taxpayer c’s interest in ira x must be no older than taxpayer c therefore as the oldest potential beneficiary taxpayer c has a life expectancy that is shorter than that of any other potential beneficiary thus taxpayer c’s life expectancy must be used to determine the code sec_401 distribution period with respect to her share of ira x page thus with respect to your second ruling_request the service concludes as follows sec_401 minimum required distributions may be made from ira x based on the life expectancy of taxpayer c the eldest of taxpayers b c and d to trust y for the benefit of taxpayers b c and d some of the beneficiaries thereof with respect to your third ruling_request code sec_408 sets down the rules furthermore as noted governing distributions from iras and the taxation thereof above revrul_78_406 provides for transfers of amounts between iras that do not constitute taxable_distributions even if the transfer is accomplished at the behest of the ira holder or ira beneficiary in this case taxpayer a’s ira x was divided into four accounts each account was maintained in the name of taxpayer a for the benefit of a distinct beneficiary thereof said division was accomplished by the creation of separate sub-accounts under ira x each sub-account bore its own identification_number none of the beneficiaries of ira x including taxpayer c received a distribution of any amount from ira x at the time ira x was subdivided thus based on the above the service concludes as follows with respect to your third ruling_request the creation of the separate sub-accounts referenced above did not affect the tax deferred status of the funds held in ira x and will not be treated as a taxable_distribution or distributions this letter_ruling is based on the facts and representations contained herein furthermore it assumes that ira x and the sub-accounts created there under either have met meet or will meet the requirements of code sec_408 at all times relevant thereto pursuant to a power_of_attorney on file with this office the original of this letter_ruling is being sent to your authorized representative page this letter is directed only to the taxpayer that requested it and is based solely on the representations made with respect thereto sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours td parce u meoam frances v sloan manager employee_plans technical group tax_exempt_and_government_entities_division enclosures deleted copy of ruling letter notice of intention to disclose


department of the treasury internal_revenue_service commerce dallas texas date number release date legend org organization name uil xx date address address org address dear person to contact identification_number contact telephone number in reply refer to te_ge review staff this is a final adverse determination as to your exempt status under sec_501 of the internal_revenue_code our adverse determination was made for the following reasons organization is not operating exclusively for pleasure recreation and other non-profitable purposes org fails to meet the requirement for exemption under sec_501 and sec_1 c - of the income_tax regulations which states an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the community as a result of a recent audit of your organization's activities and form_990 for the period ended december 20xx the operation did not respond to our request for information made under the authority of sec_1_6033-2 i of the income_tax regulations sec_1_6033-2 of the income_tax regulations provides in part that every organization exempt from tax shall submit additional information as may be required by the internal_revenue_service for the purpose of inquiring into its exempt status based on the above we are revoking your organization's exemption from federal_income_tax under sec_501 of the internal_revenue_code effective january 20xx you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for all years beginning after december 20xx you are required to file form_1120 u s_corporation income_tax return form_1120 must be filed by the day of the third month after the end of your annual_accounting_period a penalty of dollar_figurea day is charged when a return is filed late unless there is reasonable_cause for the delay however the maximum penalty charged cannot exceed dollar_figureor percent of your gross_receipts for the year whichever is less this penalty may also be charged if a return is not complete so please be sure your return is complete before you file it you have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by calling or writing to taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely vicki l hansen acting director eo examinations internal_revenue_service department of the treasury date date org address taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your organization's exempt status is necessary if you do not agree with our position you may appeal your case the enclosed publication the examination process explains how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process if you request a conference we will forward your written_statement of protest to the appeals_office and they will contact you for your convenience an envelope is enclosed if you and appeals do not agree on some or all of the issues after your appeals_conference or if you do not request an appeals_conference you may file suit in united_states tax_court the united_states court of federal claims or united_states district_court after satisfying procedural and jurisdictional requirements as described in publication letter rev catalog number 34801v you may also request that we refer this matter for technical_advice as explained in publication exempt_organization appeal procedures for unagreed issues f a determination_letter is issued to you based on technical_advice no further administrative appeal is available to you within the irs on the issue that was the subject of the technical_advice if you accept our findings please sign and return the enclosed form_6018 consent to proposed adverse action we will then send you a final letter revoking your exempt status if we do not hear from you within days from the date of this letter we will process your case on the basis of the recommendations shown in the report of examination and this letter will become final in that event you will be required to file federal_income_tax returns for the tax period s shown above file these returns with the ogden service_center within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely marsha a ramirez director eo examinations enclosures publication publication form_6018 report of examination envelope letter rev catalog number 34801v form 886-a rev date schedule number or exhibit explanations of items tax identification_number year period ended name of taxpayer 20xx12 org legend org organization name xxx date issue whether exempt_organization qualifies for exemption under sec_501 of the internal_revenue_code facts exhibit a provides copies of the internal_revenue_service correspondence requesting that exempt_organization file the form_990 for the tax period ending december 20xx exempt_organization failed to respond to the internal_revenue_service correspondence or file the forms for the tax period ending december 20xx law sec_6001 of the code provides that every person liable for any_tax imposed by the code or for the collection thereof shall keep adequate_records as the secretary_of_the_treasury or_his_delegate may from time to time prescribe sec_6033 of the code provides except as provided in sec_6033 every organization exempt from tax under sec_501 shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe sec_1_6001-1 of the regulations in conjunction with sec_1_6001-1 provides that every organization exempt from tax under sec_501 of the code and subject_to the tax imposed by sec_511 on its unrelated_business_income must keep such permanent books or accounts or records including inventories as are sufficient to establish the amount of gross_income deduction credits or other matters required to be shown by such person in any return of such tax such organization shall also keep such books_and_records as are required to substantiate the information required by sec_6033 sec_1_6001-1 of the regulations states that the books_or_records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law sec_1_6033-1 of the regulations provides that every organization which has established its right to exemption from tax whether or not it is required to file an annual return of information shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 revrul_59_95 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and statement of its operations for a certain year however its records were form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service form 886-a rev date schedule number or exhibit explanations of items tax identification_number year period ended name of taxpayer 20xx12 org so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status in accordance with the above cited provisions of the code and regulations under sec_6001 and sec_6033 organizations recognized as exempt from federal_income_tax must meet certain reporting requirements these requirements relate to the filing of a complete and accurate annual information and other required federal tax forms and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax- exempt status and to determine its liability for any unrelated_business_income_tax conclusion it is the irs's position that the organization failed to meet the reporting requirements under sec_6001 and sec_6033 to be recognized as exempt from federal_income_tax under c of the internal_revenue_code the organization has also failed to provide books_and_records that confirm the organization’s purpose and activities serve a public rather than a private benefit form_1120 returns should be filed for the tax periods ending december 20xx revocation of the organization’s tax exempt status under sec_501 is effective as of january 20xx department of the treasury-internal revenue service catalog number 20810w -_- page form 886-a publish no irs gov


t c memo united_states tax_court eleanor a burkes petitioner v commissioner of internal revenue respondent caesar d burkes petitioner v commissioner of internal revenue respondent docket nos filed date madelon sprague for petitioner eleanor a burkes daniel m mccabe and kevin t o'connor for petitioner caesar d burkes katherine lee wambsgans for respondent memorandum findings_of_fact and opinion gerber judge respondent determined duplicate alternative deficiencies with respect to these consolidated cases the deficiencies remaining in dispute are the result of the disallowance of alimony deductions for one petitioner and inclusion of alimony income to the other with respect to payments made by the deducting spouse ultimately only one party will bear a tax burden with respect to each item depending on whether we decide that it is or is not an alimony payment the determined deficiencies penalties additions to tax and taxable periods for ms burkes and mr burkes are as follows eleanor a burkes penalty year deficiency sec_6662 dollar_figure dollar_figure dollar_figure caesar d burkes addition_to_tax penalty year deficiency sec_6651 sec_6662 dollar_figure dollar_figure dollar_figure dollar_figure --- dollar_figure big_number the parties have settled several adjustments leaving the following issues for our consideration whether the divorce judgment that orders certain payments to be made by mr burke sec_1 these cases involve a former husband and wife who have a common controversy over whether certain amounts do or do not constitute alimony these cases have been consolidated for purposes of trial briefing and opinion for ms burke's legal fees and other items meets the requirements of sec_71 d so as to be deductible and includable as alimony whether ms burkes was in receipt of certain amounts during or and whether either petitioner is liable for the accuracy-related_penalty of sec_6662 findings_of_fact petitioners were legal residents of ohio at the time their petitions were filed in their respective proceedings before this court petitioners were divorced by entry of judgment dated date during a temporary support order was issued requiring petitioner husband to on a monthly basis pay dollar_figure alimony dollar_figure child_support dollar_figure for each of four minor children the mortgage real_estate_taxes and insurance on the family home utility bills other than long-distance telephone calls life_insurance in force on family members and gas and maintenance of automobiles section references are to the internal_revenue_code as amended and in effect for the periods under consideration and rule references are to this court's rules_of_practice and procedure respondent is in the role of a stakeholder with respect to most of the alimony issues respondent concedes on brief that ms burkes is not required to report as income the payments made by petitioner husband for homeowners insurance and utilities concerning the accuracy-related_penalty respondent argues alternatively that each petitioner is liable with the exception that neither petitioner is liable for the penalty as it may relate to the attorney fees and automobile payment alimony issues the final divorce judgment contained the following pertinent paragraphs it is further ordered adjudged and decreed that mr burkes shall pay to ms burkes the sum of dollar_figure every month for the support of the minor children dollar_figure per month per child in addition mr burkes shall pay to ms burkes the sum of dollar_figure per month as support alimony for a term of six years or until her earlier death or remarriage subject_to further order of court within said term it is further ordered adjudged and decreed that ms burkes be and she is hereby awarded the real_estate located pincite butternut lane pepper pike ohio and ms burkes shall be responsible for the payment of and shall indemnify and hold mr burkes harmless on the mortgage principal and interest taxes and insurance on said real_property it is further ordered adjudged and decreed that ms burkes be and she is hereby awarded as alimony property division the cadillac automobile currently in her possession it is further ordered adjudged and decreed that mr burkes shall pay to ms burkes as and for division of property the sum of one million dollars dollar_figure with six percent simple interest per annum on the unpaid balance said payments to be made as follows specific annual payments are set out for consecutive annual payments for through it is further ordered adjudged and decreed that mr burkes be and he is hereby awarded as alimony property division the ira accounts in his name it is further ordered adjudged and decreed that mr burkes shall pay as additional alimony and hold ms burkes harmless thereon the loan against the cadillac automobile in ms burkes' possession and any and all other debts or charges he has incurred since the parties' separation it is further ordered adjudged and decreed that mr burkes shall pay to ms burkes the sum of dollar_figure as additional alimony toward attorney fees for which sum judgment is rendered and execution may issue during date ms burkes filed a garnishment proceeding against mr burkes seeking a dollar_figure judgment for attorney's_fees and mr burkes' wages were garnished in the amount of dollar_figure during on date the cleveland municipal court issued a dollar_figure check to ms burkes' counsel on date the cleveland municipal court issued a dollar_figure check to ms burkes' counsel the two checks were received by ms burkes' counsel and deposited in the counsel's trust account and were not disbursed to ms burkes until the dollar_figure balance of the attorney's_fees was paid during directly from mr burkes to ms burkes ms burkes used the cadillac throughout the year and mr burkes paid dollar_figure on the cadillac car loan the title to the cadillac during was in the name of mr burkes' corporation ms burkes' divorce attorney selected a certified_public_accountant and provided the accountant with ms burkes' tax information for purposes of preparing her federal_income_tax return ms burkes did not confer with the accountant in the course of the preparation of her income_tax return ms burkes relied on her attorney and the accountant to prepare her return which she signed and timely filed opinion other than with respect to the sec_6662 penalties respondent has taken the position of a stakeholder and has no preference concerning whether we find that the payments in controversy are alimony includable by ms burkes or property settlement and or child_support not deductible by mr burkes the other two parties controvert whether certain payments either were received or if received were alimony transfers of property between spouses property_settlements incident to a divorce are generally not taxable events and do not give rise to deductions or recognizable income see sec_1041 gross_income however does include amounts received as alimony or separate_maintenance payments sec_61 sec_71 sec_215 allows a deduction for the payment of alimony during a taxable_year sec_215 defines alimony as payment that is includable in the gross_income of the recipient under sec_71 sec_71 provides that sec_71 does not apply to any payment that is fixed by the terms of the divorce_or_separation_instrument as payable for the support of the children of the payor spouse if alimony is includable in the payee spouse's gross_income under sec_71 the payor spouse is allowed to deduct the amount of the alimony paid sec_215 and b sec_71 defines alimony or separate_maintenance as any cash payment meeting the four criteria provided in subparagraphs a through d of that section accordingly if any portion of the money paid to or on behalf of ms burkes meets all four enumerated criteria that portion is alimony if any portion of the payments made by mr burkes fails to meet any one sec_71 provides sec_71 alimony or separate_maintenance payments defined --for purposes of this section-- in general --the term alimony_or_separate_maintenance_payment means any payment in cash if-- a such payment is received by or on behalf of a spouse under_a_divorce_or_separation_instrument b the divorce_or_separation_instrument does not designate such payment as a payment which is not includible in gross_income under this section and not allowable as a deduction under sec_215 c in the case of an individual legally_separated from his spouse under a decree of divorce or of separate_maintenance the payee spouse and the payor spouse are not members of the same household at the time such payment is made and d there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment in cash or property as a substitute for such payments after the death of the payee spouse of the four enumerated criteria that portion is not alimony and thus is not deductible or includable sec_71 requires that the divorce_or_separation_instrument does not designate such payment as a payment which is not includible in gross_income and not allowable as a deduction under sec_215 ms burkes argues that with respect to the attorney's_fees question sec_71 b and d is in dispute and with respect to the remainder of alimony issues sec_71 and d is in dispute we consider each alimony item separately payment of attorney's_fees the operative language of the final divorce judgment concerning the payment of attorney's_fees is as follows mr burkes shall pay to ms burkes the sum of dollar_figure as additional alimony toward attorney fees for which sum judgment is rendered and execution may issue ms burkes argues that as a matter of ohio law the term alimony can include both spousal support and property_settlements therefore she contends that the state divorce court use of the term alimony here is inconclusive mr burkes agrees that prior to the term alimony under ohio law could refer to either a division of property or spousal support mr burkes however argues that judgment entries in the final divorce judgment contain specific differentiation of the items of property settlement and spousal support our reading of the final divorce judgment revealed that the judgment entries did differentiate between alimony that is to be property settlement or spousal support for example ms burkes was awarded dollar_figure per month for a term of years as support alimony and conversely she was awarded a cadillac automobile as alimony property division other examples where the judgment entry designated a division of property include a dollar_figure million sum payable over a period of years and an individual_retirement_account the term support alimony was used for the payment of the monthly support of ms burkes and the term additional alimony is used in other entries that do not contain the property division designation for example mr burkes was required to make payments on the cadillac and all other debts and charges he incurred since the parties' separation as additional alimony likewise the dollar_figure for ms burkes' attorney's_fees was designated as additional alimony the only entry that neither refers to alimony nor alimony with a reference to a property division is the one awarding certain real_estate the parties refer to 102_f3d_842 6th cir affg tcmemo_1995_183 as to the state of pre-1991 ohio law on the term alimony presumably a residence to ms burkes and requiring her to pay the mortgage taxes and insurance on the property accordingly there is little room for doubt that the pattern of judgment entries here designates those items that are alimony and those that are part of the property settlement having made that distinction we must consider whether under ohio law the requirement to pay support alimony extends beyond the death of the payee if it does not then the attorney's_fees payments meet the requirements of sec_71 and are deductible by mr burkes and includable by ms burkes under ohio law there is no liability to make alimony support payments for any period after the death of the payee spouse see ohio rev code ann sec b anderson and predecessor sections having decided that the dollar_figure constitutes alimony within the meaning of sec_71 we must address ms burkes' secondary argument that she did not receive any of the dollar_figure in attorney's_fees until in that regard mr burkes deducted dollar_figure as alimony representing attorney's_fees for and dollar_figure for ms burkes reported neither of those amounts and respondent determined that ms burkes should have included the dollar_figure for and dollar_figure for ms burkes' position is one of constructive receipt in that she argues that because the attorney's_fees were obtained by means of a judgment and garnishment of mr burkes' funds and were received late in by ms burkes' attorney ms burkes did not have the dollar_figure available for her benefit until we have found based on the parties' stipulation of facts that the cleveland municipal court garnished dollar_figure from mr burkes during we have also found that dollar_figure was received by ms burkes' attorney as of date and that dollar_figure was not received by ms burkes' attorney until date additionally we have found that dollar_figure was received by ms burkes from mr burkes during accordingly with respect to the dollar_figure and dollar_figure amounts ms burkes is required to include those amounts in her income as to the dollar_figure amount we find respondent's determination for ms burkes to be in error as to the dollar_figure received by ms burkes' attorney as of date the principles of constructive receipt dictate that we hold that ms burkes was required to report that amount as alimony for even though she did not actually physically receive that amount until receipt of payment by an agent is constructive receipt by the principal 251_us_342 42_tc_628 even if it were agreed between the agent and the principal that the agent would not distribute the funds received to the principal until a subsequent year courts have found constructive receipt by the principal 613_f2d_591 5th cir 205_f2d_538 8th cir ms burkes' attorney was acting as her agent and received the garnished wages on ms burkes' behalf see 349_f2d_953 3d cir affg tcmemo_1963_ mr burkes on the other hand is entitled to the alimony deduction involving the attorney's_fees as claimed for and and accordingly respondent's determination to that extent is in error due to the time delay between the garnishment and payment of the dollar_figure amount some inconsistencies result concerning the reporting of the alimony in these consolidated cases car payments the divorce judgment provided that ms burkes was to receive the automobile as a division of property and mr burkes was to pay as additional alimony the loan against the automobile mr burkes made payments of dollar_figure in both and and claimed alimony deductions in those amounts on his respective income_tax returns ms burkes did not include in either or any part of the dollar_figure as alimony on brief mr burkes argues that he is entitled to only dollar_figure6 for the parties used dollar_figure however it appears that dollar_figure would have been the monthly payment for purposes of continued and dollar_figure for ms burkes argues that the temporary support order which was in effect until the beginning of date did not require payment of the auto loan mr burkes' concession is likely based on his evaluation of ms burkes' argument that the final divorce decree did not become effective until the latter part of ms burkes argues that these payments were a division of property as opposed to being support alimony and accordingly those payments would not meet the sec_71 test that the payments cease at ms burkes' death for the same reasons we set forth in our discussion of the attorney's_fees question the payments on the automobile loan constitute support alimony and not a division of property therefore mr burkes is entitled to deduct from income and ms burkes is required to include in income dollar_figure for and dollar_figure for attributable to mr burkes' payments on the automobile loan respondent also disallowed the dollar_figure payment on the automobile loan claimed by mr burkes for mr burkes conceded on brief that the dollar_figure amount is not allowable as an alimony deduction for continued this case we accept dollar_figure as used by the parties utilities and homeowners insurance mr burkes during in accord with the temporary support order paid dollar_figure for residential utilities and dollar_figure for homeowners insurance for respondent determined that these payments constituted alimony to ms burkes for ms burkes argues that those amounts constitute child_support on brief respondent conceded that ms burkes is not required to report homeowners insurance payments and utility payments as income from alimony accuracy-related penalty-- sec_6662 with respect to each of petitioners' taxable years in issue respondent determined that the entire underpayment for each taxable_year was due to negligence or disregard of rules or regulations under sec_6662 on brief respondent conceded that the accuracy-related_penalty under sec_6662 for negligence does not apply to the adjustments made relative to the issue of whether the attorney fees and automobile payments constitute alimony or a division of marital property respondent however continues to maintain that the accuracy-related_penalty applies to all other adjustments sustained by the court or agreed pursuant to the parties' settlement petitioners bear the burden of showing that respondent's determination is in error ie that the remaining underpayments are not due to negligence or disregard of rules or regulations or that there was reasonable_cause and good_faith with respect to those underpayments rule a if the penalty is found applicable sec_6662 provides for a percent addition to those portions of the underpayment that are attributable to negligence or disregard of rules or regulations due to respondent's concession ms burkes is not liable for a sec_6662 penalty for the taxable_year ms burkes for the taxable_year argues that her failure to include dollar_figure of alimony was not due to negligence or intentional disregard because of her reliance on her divorce counsel to communicate complete and accurate information to her return preparer negligence is defined as the lack of due care or failure to do what an ordinarily prudent person would do under the circumstances 731_f2d_1417 9th cir affg 79_tc_714 negligence also includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws reasonable and good_faith reliance on the advice of an accountant or attorney may offer relief from the imposition of the negligence addition 469_us_241 reliance on professional advice however is not an absolute defense to negligence but rather a factor to be considered 89_tc_849 affd 904_f2d_1011 5th cir affd 501_us_868 here ms burkes' situation was very complex in that her reporting year contained a transitional situation where the amount reportable was changing and the amounts that were or were not reportable were subject_to some doubt in this situation ms burkes reasonably relied on her attorney and the accountant selected for her by the attorney there were substantial legal questions as to which of the numerous items were reportable as alimony these circumstances made it reasonable for ms burkes to rely on the advice of the two professionals involved we conclude that ms burkes was therefore not negligent within the meaning of sec_6662 for her taxable_year on brief mr burkes did not make any argument concerning respondent's determination concerning the sec_6662 penalties we treat this omission as a concession that to the extent not conceded by respondent mr burkes is liable for the sec_6662 penalties as determined to reflect the foregoing and to account for agreements and concessions of the parties decisions will be entered under rule


department of the treasury internal_revenue_service washington d c date number release date cc ebeo br frev-120283-98 memorandum for district_counsel from chief branch employee_benefits and exempt_organizations subject position paper rig rentals uilc dollar_figure this is in response to your memorandum of requesting our review of a position paper prepared by the the position paper which is not case specific considers the treatment of amounts an employer pays to employees for use of the employees’ rig welding equipment these payments are commonly called rig rentals specifically you asked us to review the position paper and advise if there are any additional legal or policy issues related to the rig rentals conclusion the position paper suggests an analysis and conclusion that would apply in every case we agree that the primary issue is whether the rig rentals are wages for federal employment_tax purposes and the position paper sets forth an appropriate analysis however we cannot agree that the same conclusion will apply in every case whether the rig rentals are wages depends upon whether the rentals are paid pursuant to an accountable_plan if so paid the payments are not wages for employment_tax purposes thus the issue that must be resolved based upon the facts and circumstances of each case is whether the rig rentals are paid pursuant to an accountable_plan we recommend that the examination_division develop an appropriate case for litigation facts -2- the position paper sets forth typical facts of a rig rental arrangement in general an employer engaged in the business of specialized industrial construction will hire employee rig welders welders are highly skilled workers and when hired to perform welding services that is the only function they perform at the job site they provide all of their own equipment which generally includes a truck welder welding tanks and related items on a non-union job welders are required to provide all their own welding supplies on a union job supplies are generally provided by the employer employers compensate the welders by paying them a small hourly wage such as dollar_figure per hour and treat that amount as wages subject_to employment_taxes in addition the employer will pay the welder an additional_amount per hour such as dollar_figure to rent the employee's welding equipment the position paper specifies that the welder is paid at the end of each week when he turns in his rig ticket which reports the hours worked each day but does not indicate the expenses the welder incurred associated with his equipment thus the amount of rig rentals is based solely on hours worked the employer issues the employee two checks one for wages and one for rig rentals the amount treated as wages will be reported to the employee on form_w-2 and the rig rental if reported will be reported on form_1099 law analysis the position paper accurately discusses the applicable federal employment_tax law however for completeness in responding to your inquiry we include a discussion of the applicable law sec_62 as stated the issue is whether the rig rentals are wages for employment_tax purposes the three federal employment_taxes are the federal_insurance_contributions_act fica_taxes federal_unemployment_tax_act futa_tax and income_tax_withholding in general wages are defined for fica futa and income_tax_withholding purposes as all remuneration for employment unless otherwise excluded sec_3121 sec_3306 and sec_3401 there is no statutory exception from wages for amounts paid_by employers to employees for employee business_expenses however sec_1_62-2 provides that amounts an employer pays to an employee for employee business_expenses under an accountable_plan are excluded from the employee's gross_income are not required to be reported on the employee's form_w-2 and are exempt from the withholding and payment of -3- employment_taxes sec_31_3121_a_-3 sec_31_3306_b_-2 and sec_31_3401_a_-4 of the employment_tax regulations and sec_1_6041-3 of the income_tax regulations whether amounts are paid under an accountable_plan is governed by sec_62 which includes the provisions on employee reimbursement or other expense allowance arrangements sec_62 generally defines adjusted_gross_income as gross_income minus certain above-the-line deductions sec_62 allows an employee an above-the-line deduction for expenses paid_by the employee in connection with his or her performance of services as an employee under a reimbursement or other expenses allowance arrangement with the employer sec_62 provides that an arrangement will not be treated as a reimbursement or other expense allowance arrangement for purposes of sec_62 if the arrangement does not require the employee to substantiate the expenses covered by the arrangement to the person providing the reimbursement or gives the employee with the right to retain any amount in excess of the substantiated expenses covered under the arrangement under sec_1_62-2 of the regulations a reimbursement or other expense allowance arrangement satisfies the requirements of sec_62 if it meets the three requirements of business connection substantiation and returning amounts in excess of expenses set forth in paragraphs d e and f respectively of sec_1_62-2 the three requirements if an arrangement meets the three requirements all amounts paid under the arrangement are treated as paid under an accountable_plan sec_1 c i the regulations further provide that if an arrangement does not satisfy one or more of the three requirements all amounts paid under the arrangement are paid under a nonaccountable_plan amounts paid under a nonaccountable_plan are included in the employee's gross_income for the taxable_year must be reported to the employee on form_w-2 and are subject_to_withholding and payment of employment_taxes sec_1_62-2 sec_31_3121_a_-3 sec_31 b - b and a -4 b sec_62 of the code was enacted by the family support act of publaw_100_485 through enactment of sec_67 of the code by sec_132 of the tax_reform_act_of_1986 act publaw_99_514 c b vol the congress sharpened the distinction between the tax treatment of unreimbursed and reimbursed employee business_expenses among other changes unreimbursed employee business_expenses plus other miscellaneous_itemized_deductions generally were made subject_to a two-percent floor at the same time the congress decided to retain the above-the-line deduction treatment for reimbursements received by an employee -4- an arrangement meets the business connection requirement of sec_1_62-2 if it provides advances allowances including per_diem allowances allowances for meals and incidental expense and mileage allowances or reimbursements for business_expenses that are allowable as deductions by part vi sec_161 through sec_196 subchapter_b chapter of the code and that are paid_or_incurred by the employee in_connection_with_the_performance_of_services as an employee sec_1_62-2 provides that the business connection requirement will not be satisfied if the payor arranges to pay an amount to an employee regardless of whether the employee incurs or is reasonably expected to incur business_expenses described in paragraphs d or d sec_1_62-2 of the regulations provides that the substantiation requirement is met if the arrangement requires each business_expense to be substantiated to the payor the employer its agent or a third party within a reasonable period of time as for the third requirement that amounts in excess of expenses must be returned to the payor the general_rule of sec_1_62-2 provides that this requirement is met if the arrangement requires the employee to return to the payor within a reasonable period of time any amount_paid under the arrangement in excess of the expenses substantiated sec_1_62-2 provides that if a payor's reimbursement or other expense allowance arrangement evidences a pattern of abuse of the rules of sec_62 and the regulation sections all payments made under the arrangement will be treated as made under a nonaccountable_plan revrul_68_624 employers typically rely on revrul_68_624 1968_2_cb_424 as authority for designating a portion of an employee’s compensation as a rental payment and excluding that amount from wages the question raised in revrul_68_624 is what percentage of the total amount_paid by a corporation for_the_use_of a truck and the services of a driver is allocable as wages of the driver for fica purposes the facts specify that the corporation hires a truck and driver to haul stone from its quarry to its river loading dock at a fixed amount per load and allocates one-third of pursuant to a reimbursement arrangement this rationale for allowing an above-the- line deduction to offset true reimbursement amounts does not apply in the case of nonaccountable plans under nonaccountable plans the amount received by the employee from the employer is not determined by the actual amount of expenses_incurred by the employee during the year -5- the amount_paid the employee as wages and two-thirds as payment for_the_use_of the truck the ruling holds that an allocation of the amount_paid to an individual when the payment is for both personal services and the use of equipment must be governed by the facts in each case if the contract of employment does not specify a reasonable division of the total amount_paid between wages and equipment a proper allocation may be arrived at by reference to the prevailing wage scale in a particular locality for similar services in operating the same class of equipment or the fair rental value of similar equipment although revrul_68_624 has not been obsoleted we believe it should not be relied upon to exclude rental payments for equipment from wages the analysis in rev_rul is incomplete under current law because it does not consider whether the rental payments are paid under an accountable_plan under current law the rental payments can be excluded from wages only if they are paid under an accountable_plan an employment contract that merely allocates compensation between wages and rentals will not satisfy the requirements of sec_62 to exclude employee reimbursements or other expense allowance payments from wages an employer must establish an accountable_plan case law the service has not issued any private letter rulings or technical_advice memoranda concerning whether rig rentals are wages for employment_tax purposes in addition to our knowledge no case has considered this specific issue however two recent cases trans-box systems v united_states no c-97- the u s dist lexis n d cal date appeal pending 9th cir and welch v commissioner t c memo are helpful in analyzing the rig rental issue trans-box a courier service paid its courier drivers who used their own cars to make deliveries dollar_figure per hour trans-box treated of the dollar_figure as wages subject_to employment_taxes and treated the remaining as either lease payments or vehicle expense payments the government assessed employment_taxes on the entire dollar_figure in opposing the government’s motion for summary_judgment trans-box’s primary position was that the automobile lease payments or vehicle expenses were paid under an accountable_plan and were exempt from 2in baker v barnard construction co inc wl d n m rig welders prevailed on a summary_judgment motion that they were employees for purposes of the fair labor standards act although this decision is not relevant for tax purposes it is interesting that the facts specify that the affected rig welders filed as independent contractors for tax purposes -6- employment_taxes trans-box asserted that it had substantially complied with the accountable_plan requirements in sec_62 citing 81_tc_709 trans-box raised two alternative arguments first it argued the drivers were independent contractors rather than employees for purposes of the automobile lease payments and thus not subject_to sec_62 second trans-box argued that it was entitled to relief under sec_530 of the revenue act of the government argued that trans-box had treated the drivers as employees for all purposes and the arrangement trans-box established was not an accountable_plan because the drivers were not required to substantiate their expenses or return any amounts received that exceeded their expenses the court concluded that trans-box failed to created a triable issue of fact regarding whether the drivers were at least for some purposes independent contractors the court noted that the facts in the record point to the conclusion that trans-box had treated the owner-operators as employees for all purposes it had paid the drivers hourly wages reported those on form_w-2 and not filed any forms for the automobile payments the court pointed out that trans-box's primary argument was that the drivers were employees for all purposes and that it substantially complied with the requirements of sec_62 while acknowledging that trans-box was free to argue alternative or conflicting legal arguments the court stated serious questions about the veracity of its allegations are raised because trans-box’s alternative argument relies upon conflicting versions of the material facts at issue trans-box systems v united_states u s dist lexis thus the court granted the government's motion for summary_judgment on the plaintiff's claims and summary_judgment on the government's counterclaim for recovery_of unpaid employment_taxes the court did not address the sec_530 argument although the court’s decision rests on trans-box’s failure to create a triable issue of fact on worker classification the decision is significant because the court refused to apply a substantial compliance rule to sec_62 or to allow trans- box to argue different versions of the facts 3although not asserted by the government trans-box also did not satisfy the business connection requirement sec_1_62-2 provides that the business connection is not satisfied if a payor arranges to pay an amount to an employee regardless of whether the employee incurs or is reasonably expected to incur business_expenses -7- in welch v commissioner t c memo the tax_court held that mr welch’s equipment_leasing activities in were not passive activities mr welch a carpenter was hired by movie production companies as a construction coordinator mr welch and the production company would enter into a deal memorandum setting forth the terms of his employment including the rate that he would be paid and the rate at which he rented his equipment to the company typically an inventory of his tools and equipment would be attached to the deal memo the production company would report mr welch’s wages on a form_w-2 and the tool rentals on a form_1099 as construction coordinator he constructed movie sets hired employees arranged for the purchase of materials and furnished all the required tools he was required to purchase maintain transport and repair the tools as needed the facts also specify that in mr welch rented tools to a third party for dollar_figure for a project for which he was not the construction coordinator the court analyzed whether mr welch’s rental_activity was a rental_activity for purposes of sec_469 and concluded it was not because he provided equipment to production companies for an average period of days or less and he performed significant_personal_services in connection with making the property available for use by customers the court noted that he acquired maintained transported and repaired the tools and equipment the court concluded that mr welch provided extraordinary_personal_services and the rental of the tools and equipment by the production companies was incidental to receipt of mr welch’s services as a construction coordinator the court further held that mr welch materially participated in his business as a construction coordinator and therefore was not subject_to the loss limitations imposed by sec_469 although the tax_court was not required to decide whether the rental arrangement was an accountable_plan within the meaning of sec_62 or whether mr welch was an employee or independent_contractor the facts illustrate an arrangement for the rental of equipment that was an arms length transaction memorialized in a writing perhaps the most significant fact is that mr welch actually rented his tools to a third party that did not also employ him as the construction coordinator thus at least in that instance his rental_activity was separate from the services he performed as an employee -8- case development hazards and other considerations it is our view that the best approach to address the rig rental issue is to develop an appropriate case for litigation accordingly we make the following suggestions for case development analyzing whether a rig rental arrangement is an accountable_plan requires factual development including an understanding of the details of the arrangement -9- if you have further questions please call me at jerry e holmes