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-105040-10 date july in re -------------------------------------------- ------------------------------------------------------------- - --------------------- legend ---------------------------- testator -------------------------------------- child a ----------------------------- child b --------------------------------------- child c -------------------------------- stock stock trust ------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------- residuary_trust ------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------ children’s agreement --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------- state state a date date date date date date a b c d ------------------ ---------- -------------------- ------------------- ------------------------- ------------------------- ------------------------- ----------------------- ------ ------- ------ ------ plr-105040-10 ------------------------------------------------------------------------ ------------------------------------------------------------------------ --------------------------------------------------------------------------------- stock trust a ----------------------------------------------------------------------------------------------------------------- residuary_trust a ----------------------------------------------------------------------------------------------------------------------- cite ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------- cite ------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------ cite cite ------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------- cite ----------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------ cite ------------------------------------------------------------------------ ------------------------------------------------------ cite cite ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------- highest court highest court of state a state court ---------------------------------------------------------------------------------------------------------------- state statute ------------------------------------------------------------------------------------------ --------------------------------------------- state governing statute a state governing statute b --------------------------------------------------- --------------------------------- state a statute ---- q ---- r s ---- ---- t -------- u v -------- -------- x ------ y z ------------ ------------------------------------------- ----------------------------------- ------------------------------------------------------------------------ --------------------------------------------------------------------------------- dear -------------------- plr-105040-10 this responds to the date letter from your authorized representative requesting rulings on the income gift estate and generation-skipping_transfer gst tax consequences of a proposed settlement agreement the facts and representations are as follows testator died a resident of state on date he was survived by three children child a child b and child c the children five grandchildren the five grandchildren were then living there were no great-grandchildren at the time under articles third and eighth of testator’s will the will his shares of stock were to be held in trust the stock trust trust income was to be divided equally among the children on a child’s death the child’s income share was to be divided equally among the child’s then living children testator’s grandchildren the stock trust was to terminate twenty-one years after the death of testator’s last surviving grandchild when the principal would be divided equally per capita among testator’s then living great-grandchildren and deceased great-grandchildren whose then living descendants would take by representation under article twenty-second of the will the residue of testator’s estate was to be held in another trust the residuary_trust the residuary_trust provisions were identical to those of the stock trust except that the residuary_trust was to terminate when testator’s youngest great-grandchild reached age twenty-one the rule_against_perpetuities under the state rule_against_perpetuities in effect at testator’s death a bequest of a future_interest was void if considered prospectively at the testator’s death there was a possibility that the interest would not vest by the end of twenty-one years after the death of a life or lives in being at the testator’s death the permissible period a bequest to a class was void if there was a possibility that all the members of the class would not be ascertained and take vested interests within the permissible period a void specific_bequest passed to the testator’s residuary_estate if the testator’s disposition of the residuary_estate was void as well the residuary_estate passed as a reversion by intestacy cite in this case at testator’s death it was possible for the children to have additional children so that there could be grandchildren whose lives were not then in being this was the pivotal factor in determining whether his bequests of stock trust and residuary_trust income and remainders to his grandchildren and great-grandchildren violated the rule_against_perpetuities testator’s bequest of lifetime income interests to the grandchildren was to all of his grandchildren as a class a grandchild born after testator’s death would be part of the certain annuities were also created that have since terminated plr-105040-10 grandchildren’s class and would receive stock trust income_for_life based on this it was considered possible that not all of the grandchildren’s income interests would vest during lives in being at testator’s death testator’s bequests of remainders to his great-grandchildren were to vest only after all of testator’s grandchildren died the life of a grandchild born after testator’s death would also be a measuring life therefore at testator’s death it was possible that the time for vesting of the great-grandchildren’s remainders would be based on a life not in being at testator’s death accordingly the validity of these bequests was in doubt the bequests in the stock trust if void passed to the residuary_trust at testator’s death the bequests in the residuary_trust if void passed to testator’s intestate estate as a reversionary_interest the children’s agreement the children were testator’s heirs at law they acquired his property passing by intestacy consequently on date shortly after testator died the children entered into an agreement the children’s agreement revising the time when the great-grandchildren’s remainders were to vest under the children’s agreement the trusts were to terminate and the great-grandchildren’s remainders were to take effect on the death of the survivor of the children and five grandchildren that is lives in being at testator’s death the children’s agreement also changed the will’s pro_rata distribution of the stock trust and residuary_trust remainder to a per stirpes distribution on termination trust principal would be divided into three equal parts and distributed per stirpes under this revision the great-grandchildren descended from child a would share one third of the principal per stirpes those descended from child b would share a second third per stirpes and those descended from child c would share the last third per stirpes in all other respects the terms of the revised stock trust stock trust a and residuary_trust residuary_trust a were the same as those provided in testator’s will on a date before date testator’s shares of stock were transferred to stock trust a residuary_trust a was not funded it is represented that no additions have been made since then the litigation each trust considered herein ie stock trust and residuary_trust in the will and stock trust a and residuary_trust a under the children’s agreement provided for distribution of the remainder at the end of twenty-one years following the death of the last survivor of the persons whose lives measured the duration of that trust because the perpetuities issue in this case centers on the lives measuring a respective trust’s duration and not on the twenty-one year period following the death of the last survivor the twenty-one year period is hereafter assumed to be a part of each trust’s duration even though it is not specifically stated plr-105040-10 over more than x decades the trust beneficiaries and others have instituted actions for state court determinations regarding testator’s will and the children’s agreement specifically in cite the highest court of state highest court considered testator’s bequests of income interests to the grandchildren the court reasoned that under testator’s will a grandchild’s income_interest would vest when his or her parent child a child b or child c died thus the grandchildren’s class would necessarily close at the death of the last survivor of the children who were in being at testator’s death highest court held that therefore the bequest of lifetime income interests to the grandchildren as a class did not violate the rule_against_perpetuities the court held the stock trust created in the will to be valid through the lives of the grandchildren highest court then considered testator’s bequest of remainders to his great-grandchildren the court reasoned that the grandchildren’s life estates preceded the remainders and the grandchildren’s class was not limited to lives in being at testator’s death because the remainders would take effect only after all of those including afterborn grandchildren died it was possible that the remainders would not vest within lives in being at testator’s death therefore highest court held the stock trust remainders to be void and illegal as violating the rule_against_perpetuities cite state statute the wait and see rule nearly y decades after highest court rendered its decision in cite the state legislature enacted state statute state statute provides a wait and see rule in determining whether a future_interest satisfies the rule_against_perpetuities or is void under the wait and see rule a future_interest does not violate the rule_against_perpetuities if actual events demonstrate that the interest did in fact vest by the end of the permissible period state statute applies retroactively to all interests heretofore created following the enactment of state statute highest court considered the statute’s retroactivity cite in the case before the court the trust was created many decades before state statute was enacted at the time of creation certain interests were void a sec_3 testator’s bequest to the grandchildren though valid did not provide for distribution of a grandchild’s income share when the grandchild died before the trust ended on the death of the first grandchild to die on date the trustees petitioned the state court for instructions the state court held that based on testator’s intent a deceased grandchild’s children succeeded to the income share for the duration of the trust cite by inference highest court also considered testator’s bequest of the residuary_trust remainders highest court in effect confirmed that the stock trust remainder and residuary_trust remainder passed by intestacy to the children however the court did not rule on how the remainder would pass to the great-grandchildren plr-105040-10 violating the rule_against_perpetuities however highest court applied state statute’s wait and see rule to conclude in retrospect that the interests were not void and did not violate the rule_against_perpetuities as a result the courts of state now apply the wait and see rule retroactively to conclude that a future_interest that was void when created many years before state statute was enacted is not void because in hindsight it vested before the permissible period ended accordingly such otherwise void interests are retroactively sustained as not violating the rule_against_perpetuities cite however highest court has not yet addressed due process issues that may be presented the actualities in this case no additional grandchildren were born after testator’s death the lives of the children and the five grandchildren were all in being at testator’s death all of the children have died the last survivor of the five grandchildren died on date at the time there were z great-grandchildren of testator the trust will terminate twenty-one years after date which is date of testator’s z great-grandchildren a descended from child a b descended from child b and c descended from child c if the wait and see rule is applied to validate testator’s bequest of remainders to his great-grandchildren the principal would be divided into z equal shares and distributed under the will alternatively if testator’s disposition of the remainders is considered void the principal would be divided into three equal shares and distributed per stirpes under the children’s agreement the portion of a one-third share distributable to a great-grandchild would depend on the framework of the family line ie child a’s child b’s or child c’s to which that great-grandchild belongs great-grandchildren’s litigation there is a substantial difference between what a great-grandchild would receive in a per capita distribution and what he or she would receive in a per stirpes distribution on date the great-grandchildren benefitting from a per capita distribution the per capita parties instituted their action in state court for adjudication on the distribution of the stock trust remainder the great-grandchildren benefitting from a per stirpes distribution the per stirpes parties opposed the suit and also requested adjudication in contrast the legislature of state a enacted state a statute which like state statute retroactively applies a wait and see rule to determine whether a future_interest that was void at the time it was created before the state a statute was enacted did in fact vest during the permissible period highest court of state a refused to apply the wait and see rule retroactively despite the relevant language in state a statute instead that court addressed issues of constitutionality and held that state a statute could not be applied retroactively to destroy vested or substantive rights created before state a statute was enacted cite plr-105040-10 in addition an action was instituted concerning the distribution of income during the twenty-one year period state court combined the proceedings to consider the income and principal issues together cite over a d-year period guardians ad litem were appointed there was extensive discovery counsel filed three voluminous sets of briefs and the court heard two days of oral arguments the per capita parties argued that the wait and see test of state statute now applies under that test testator’s the will’s disposition of the stock trust remainder does not violate the rule_against_perpetuities therefore the stock trust principal is distributable per capita to testator’s living great-grandchildren and deceased great-grandchildren whose living descendants would take by representation the per stirpes parties argued that the highest court’s determinations were final and those rulings can not now be constitutionally impaired by a later-in-time state statute or judicial_ruling because highest court determined the remainders in the will to be void they passed as reversionary interests by intestacy to the children as such the remainders passed per stirpes under the children’s agreement some parties argued that trust income should be distributed per stirpes through the roots of the children for the duration of the stock trust others argued that the income is distributable per capita the court encouraged the parties to explore ways to resolve their differences through negotiation and compromise rather than through continued litigation among the potential outcomes regarding trust principal was a judicial_ruling that i ii iii principal is distributable per capita on date under the terms of the stock trust in the will or principal is distributable per stirpes on date under the terms of the children’s agreement or principal was distributable as of the last surviving grandchild’s death under the residuary_trust in the will which vested or will vest in the takers under the residuary_trust among the potential outcomes regarding trust income was a judicial_ruling that iv v income is distributable per stirpes from the death of the last surviving grandchild to date under either the will or the children’s agreement or income is distributable per capita from the death of the last surviving grandchild to date under the will or the children’s agreement or plr-105040-10 vi all rights to receive stock trust income terminated when the last surviving grandchild died at which time the stock trust principal was distributable under the residuary_trust of the will the great-grandchildren’s settlement agreement the parties negotiated extensively at the outset they agreed that the issues could be settled using a fractional difference settlement based on an assessment of the relative strengths of their adverse positions under the general framework of the compromise the great-grandchildren’s settlement agreement the ggc agreement provides for the stock trust principal to be divided into z separate shares based on the number of testator’s then living great-grandchildren and deceased great-grandchildren with then living children the share of a deceased great-grandchild will be divided per stirpes among that great-grandchild’s living descendants the stock trust assets will be divided in accordance with certain percentages the formula of the compromise provides for a q per stirpes r per capita fractional difference as to income and an s per stirpes t per capita fractional difference as to principal after the division into separate shares u of each great-grandchild’s share will be distributed outright to the great-grandchild if living or if the great-grandchild is deceased to his or her living descendants per stirpes the remaining v of each share will continue in trust for such great-grandchild or such descendants until the termination_date date each share will be a separate trust the respective great-grandchild or deceased great-grandchild’s descendants will be the sole beneficiary of the share for distributions of income and principal a sophisticated algorithm taken to thirteen decimal places will be used in the pro_rata division and outright distributions the division will take into account both the market_value and respective tax bases of the assets the ggc agreement was presented to state court for consideration the state court approved the settlement and ordered the division and distribution of the stock trust as set forth in the ggc agreement the ggc agreement is subject_to a favorable ruling from the internal_revenue_service you have asked for the following rulings the terms of the ggc agreement will not cause distributions from the stock trust or the continuing separate settlement trusts to become subject_to the generation-skipping_transfer_tax for purposes of describing the ggc agreement the stock trust and stock trust a are considered to be the same trust plr-105040-10 the terms of the ggc agreement will not cause any party to the agreement to make a gift to any other party to the ggc agreement the terms of the ggc agreement will not cause any party to the agreement to be required to include trust assets in his or her gross_estate unless such assets are distributable or have been distributed to such party prior to his or her death the terms of the ggc agreement will not cause any party to the agreement to realize income from the sale_or_exchange of any trust assets or interests ruling generation-skipping_transfer gst tax sec_2601 of the internal_revenue_code 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 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 corpus 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 gst tax under sec_26_2601-1 will not cause the trust to lose its exempt status these rules are applicable only for purposes of determining whether an exempt trust retains exempt status for gst 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 court-approved settlement of a bona_fide issue regarding the administration of the trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject_to chapter if the settlement is the product of arm's length negotiations and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement a settlement that results in a compromise between the positions of the litigating parties and reflects the parties' assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes in this case the stock trust was irrevocable on date further it is plr-105040-10 represented that there have been no actual or constructive additions to the stock trust after date accordingly the stock trust is exempt from gst tax under sec_26_2601-1 the terms of the ggc agreement including the proposed division of the stock trust into separate shares and partial distributions of principal are the result of a settlement of substantial issues between the per capita parties and the per stirpes parties these issues have been tenaciously litigated over more than x decades highest court rendered opinions regarding these trusts many years ago however state statute has since been enacted with retroactive effect and highest court has affirmed state statute’s retroactive application to a similarly-created trust in light of this that court’s earlier determinations of the issues in this case are now in question we conclude that the ggc agreement constitutes a settlement of bona_fide issues concerning the provisions of the stock trust and its administration we also conclude that the terms of the ggc agreement are the product of arm's length negotiations they represent a compromise between the positions of the parties and reflect the parties' assessments of the relative strengths of their positions we further conclude that the ggc agreement is within the range of reasonable outcomes under the governing instruments and the applicable state law addressing the issues resolved in the ggc agreement accordingly based upon the facts submitted and the representations made we rule that the division of the stock trust into the z separate great-grandchildren’s trusts and the distributions to the living great-grandchildren and the descendants by representation of a deceased great-grandchild made in accordance with the ggc agreement will not cause the stock trust the continuing separate stock trusts or the distributions as described above to be subject_to the generation-skipping_transfer_tax ruling gift_tax issue sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year sec_2511 provides that the gift_tax applies 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_25_2511-1 of the gift_tax regulations provides that as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in him or her no power to change its disposition whether for his or her own benefit or for the benefit of another the gift is complete sec_25_2511-1 provides that any transaction in which an interest in property is plr-105040-10 gratuitously passed or conferred upon another regardless of the means or device employed constitutes a gift subject_to tax whether an agreement settling a dispute is effective for gift_tax purposes depends on whether the settlement is based on a valid enforceable claim asserted by the parties and to the extent feasible produces an economically fair result see 674_f2d_761 9th cir citing 387_us_456 thus state law must be examined to ascertain the legitimacy of each party's claim if it is determined that each party has a valid claim the service must determine that the distribution under the settlement reflects the result that would apply under state law if there is a difference it is necessary to consider whether the difference may be justified because of the uncertainty of the result if the question were litigated the proposed settlement is a mediated settlement and is based on arm's length negotiations among all the parties all interested parties who hold or may hold an interest in the trusts including any minors and unborn heirs have been represented in the negotiations as discussed above the ggc agreement represents the resolution of a bona_fide controversy between the parties the terms of the ggc agreement are the product of arm's length negotiations and represent i a compromise between the positions of the per capita parties and the per stirpes parties and ii reflect the parties' assessments of the relative strengths of their positions we further conclude that the ggc agreement is within the range of reasonable outcomes under the governing instruments and applicable state law accordingly based on the facts submitted and representations made we conclude that the terms of the ggc agreement as described above will not cause any of the beneficiaries to have made a taxable gift_for purposes of the federal gift_tax under sec_2501 ruling estate_tax issue sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2033 provides that the value of the gross_estate includes the value of all property to the extent of the interest therein of the decedent at the time of death sec_2035 provides that if the decedent transferred an interest in property or relinquished a power with respect to any property during the 3-year period ending on the date of death and the value of the property or interest therein would have been included in the gross_estate under sec_2036 sec_2037 sec_2038 or sec_2042 if the interest or power had been retained by the decedent on the date of death then the value of the gross plr-105040-10 estate includes the value of the property or interest that would have been so included sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period that does not in fact end before his death 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 from the property sec_2037 provides that the value of the gross_estate includes 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 if possession or enjoyment of the property can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property and the value of such reversionary_interest immediately before the death of the decedent exceed sec_5 percent of the value of such property sec_2038 provides that the value of the gross_estate includes 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 fine sale for 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 either by the decedent alone or in conjunction with any person to alter amend or revoke or where the decedent relinquished any such power during the 3-year period ending on the date of the death sec_2041 provides that the value of the gross_estate shall include the value of all property with respect to which the decedent possessed a general_power_of_appointment at the time of death sec_2041 defines the term general_power_of_appointment as a power that is exercisable in favor of the decedent the decedent's_estate the decedent's creditors or the creditors of the decedent's_estate in order for sec_2035 through to apply a decedent must have made a transfer of property or an interest therein except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth under which the decedent retained an interest in or power over the income or corpus of the transferred property as discussed above the ggc agreement represents the resolution of a bona_fide controversy between the parties it is a settlement of bona_fide issues and is the product of arm's length negotiations it reflects the parties' assessments of the relative plr-105040-10 strengths of their positions no great-grandchild or deceased great-grandchild’s descendants by representation has made a transfer to the stock trust or to any other great-grandchild by reason of the settlement agreement accordingly based upon the facts submitted and representations made we conclude that the terms of the ggc agreement will not cause any party to the agreement to have made a transfer within the meaning of sec_2035 through however once the ggc agreement becomes effective any trust property actually distributed or receivable by a beneficiary or his or her assignee would generally be included in the beneficiary’s federal transfer_tax base see eg sec_2033 sec_2041 sec_2501 ruling income_tax issue sec_61 provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1001 provides that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained 499_us_554 addresses the issue of whether a sale_or_exchange that has taken place results in the realization of gain_or_loss under sec_1001 in cottage savings a financial_institution exchanged its interests in one group of residential mortgage loans for another lender's interests in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution the supreme court in cottage savings u s pincite concluded that sec_1_1001-1 reasonably interprets sec_1001 and stated that an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or plr-105040-10 extent cottage savings u s pincite the court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans cottage savings u s pincite in the present case state governing statute a allows the court for cause shown to authorize the division of a_trust into two separate trusts on such terms and conditions and with such notice as the court directs in addition state governing statute b gives trustees the power to distribute in cash or in_kind or partly in each and allocate particular assets in proportionate or disproportionate shares in this case the court order approving the ggc agreement orders the division and distribution of the stock trust as set forth in the ggc agreement accordingly the court approved the non-pro rata distributions called for in the ggc agreement and further authorized the trustees to make the necessary transfers and assignments of the unconverted investment securities t herein awarded in_kind accordingly the submission concludes that the distribution scheme in this case is authorized by state law we agree the stock trust will be divided into z trusts on a non pro-rata basis under the state statutes cited above the court has the authority to authorize the trustees to make this type of non pro-rata apportionment thus the proposed division and distribution of the stock trust assets among the z trusts will not result in a material difference in_kind or extent of the legal entitlements enjoyed by the beneficiaries within the meaning of cottage savings accordingly based upon the facts submitted and representations made we conclude that the division of the stock trust into the z great-grandchildren’s trusts will not result in the recognition of gain_or_loss under sec_1001 by the stock trust any beneficiary of the stock trust or any separate great-grandchild’s trust the rulings in this letter pertaining to the federal estate and or generation-skipping_transfer_tax apply only to the extent that the relevant sections of the internal_revenue_code are in effect during the period at issue except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours leslie h finlow acting senior technician reviewer branch office of the associate chief_counsel plr-105040-10 passthroughs special industries enclosure copy for purposes


t c memo united_states tax_court alacare home health services inc petitioner v commissioner of internal revenue respondent docket no filed date robert c walthall for petitioner marshall r jones for respondent memorandum findings_of_fact and opinion colvin judge respondent determined deficiencies in petitioner’s federal_income_tax of dollar_figure for and dollar_figure for and accuracy-related_penalties under sec_6662 of dollar_figure for and dollar_figure for - - after concessions the issues for decision are whether petitioner an accrual-basis taxpayer may expense in and the cost of assets that each cost less than dollar_figure and that have a useful_life of more than one year or whether petitioner must capitalize the cost of those assets we hold that it must capitalize those costs whether petitioner is liable for the accuracy-related_penalty for substantial_understatement of income under sec_6662 for and we hold that it is not section references are to the internal_revenue_code in effect during the years in issue and rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and are so found a petitioner petitioner is a medicare-certified home health care agency whose principal_place_of_business was in birmingham alabama when it filed the petition in this case petitioner uses the accrual_method of accounting ' respondent concedes that the adjustment for office expenses should be dollar_figure rather than dollar_figure due toa mathematical error in the notice_of_deficiency the computer expenses adjustment should be dollar_figure rather than dollar_figure b medicare guidelines the federal health care financing administration hcfa reimburses certified home health care agencies such as petitioner for the reasonable costs of providing home health care services to medicare beneficiaries about percent of petitioner’s revenues are medicare reimbursements petitioner must comply with accounting guidelines contained in the medicare provider reimbursement manual hcfa publication the manual and must submit to annual compliance audits of its books_and_records by one of medicare’s fiscal intermediaries the manual contains guidelines concerning providers’ capitalization and expensing policies those guidelines state guidelines for capitalization of historical costs and improvement costs of depreciable asset sec_108 acgquisitions -if a depreciable asset has at the time of its acquisition an estimated_useful_life of at least years and a historical_cost of at least dollar_figure its costs must be capitalized and written off ratably over the estimated_useful_life of the asset using one of the approved methods of depreciation ifa depreciable asset has a historical_cost of less than dollar_figure or if the asset has a useful_life of less than years its cost is allowable in the year it is acquired xk kek the provider may if it desires establish a capitalization policy with lower minimum criteria but under no circumstances may the above minimum limits be exceeded for example a provider may elect to capitalize all assets with an estimated_useful_life of at least months and a historical_cost of at least s400 however it may not elect to only capitalize assets with a useful_life of at least years anda historical_cost of more than dollar_figure - - cc medicare guidelines and petitioner’s expensing policy petitioner was incorporated in since then petitioner has expensed all capital items for which it paid less than dollar_figure petitioner followed that practice in and its expensing policy complies with medicare guidelines for the capitalization of depreciable assets described above the following chart shows the number total cost and average cost of office items petitioner bought in and which have an expected useful_life of one year or longer and which cost less than dollar_figure the disputed assets number of office and computer items costing less than dollar_figure each big_number big_number total cost of office and computer items dollar_figure dollar_figure average cost per item dollar_figure dollar_figure petitioner’s office items included bookcases chairs credenzas desks organizers file cabinets hutches refrigerators microwaves serving carts panels and accessories tables telephones and typewriters petitioner’s computer items included modems cd roms hard drives keyboards motherboards memory modules outlets processors servers software and terminals --- - d petitioner’s income_tax returns petitioner hired pearlman nebben associates an accounting firm that specializes in the health care industry to prepare its and federal corporate_income_tax returns petitioner’s director of accounting and chief financial officer reviewed those returns for accuracy petitioner reported gross_receipts of dollar_figure and dollar_figure and taxable_income of dollar_figure and dollar_figure on its and returns respectively eb the notice_of_deficiency respondent determined that petitioner’s policy of expensing assets that cost less than dollar_figure was not a proper method_of_accounting and that petitioner must capitalize the cost of the disputed assets over their useful lives ’ opinion a whether petitioner must capitalize the cost of the disputed assets we must decide whether petitioner an accrual basis taxpayer must capitalize the cost of items that cost less than dollar_figure and that have a useful_life of more than one year sec_263 and sec_446 in general amounts paid to acquire machinery and equipment furniture and fixtures and similar_property having a useful_life respondent allowed_depreciation for the disputed assets of dollar_figure for and dollar_figure for -- - substantially beyond the taxable_year must be capitalized see sec_263 73_tc_671 affd without published opinion 665_f2d_1053 9th cir sec_1_263_a_-2 income_tax regs sec_446 provides in pertinent part sec_446 general_rule --taxable income shall be computed under the method_of_accounting on the basis of which the taxpayer regularly computes his income in keeping his books b exceptions --if no method_of_accounting has been regularly used by the taxpayer or if the method used does not clearly reflect income the computation of taxable_income shall be made under such method as in the opinion of the secretary does clearly reflect income petitioner’s position petitioner relies on 424_f2d_563 and 524_f2d_1343 the taxpayers in cincinnati and union pacific were required by the interstate commerce commission icc to expense purchases of certain property costing less than dollar_figure ie the minimum rule expenses see cincinnati new orleans tex pac ry co v united_states supra pincite union pac r r co v united_states supra pincite the court of claims held in both cases that the taxpayer may deduct a dé minimis amount of expenses for low-cost capital assets having a useful_life greater than year if the accounting_method established by the icc - jj - clearly reflects income see cincinnati new orleans tex pac ry co v united_states supra pincite union pac r r co v united_states supra pincite8 the court of claims in cincinnati relied on our prior rejection of the commissioner’s contention that sec_263 is dispositive without considering sec_446 we reject as without merit respondent’s contention that sec_263 of the code is in and of itself dispositive of the issue before us by requiring the capitalization of amounts paid out for new buildings or for permanent improvements or betterments made to increase the value of any property such section begs the very question we are asked to answer we are satisfied that under the circumstances involved herein sec_263 and sec_446 are inextricably intertwined cincinnati new orleans tex pac ry co v united_states supra pincite quoting 49_tc_275 the court of claims in cincinnati also said that the determinative question therefore is not what is the useful_life of the asset in question although that inquiry is relevant but does the method_of_accounting employed clearly reflect income id pincite the court noted that the disputed items were a minute fraction of the taxpayer’s net_income yearly operating_expenses and yearly depreciation deduction see id pincite the court concluded that the icc’s minimum expensing rule was in accordance with generally_accepted_accounting_principles see id pincite and that the taxpayer’s financial statements clearly reflected income see id pincite in union pac r r co v united_states supra pincite8 the court of claims rejected the commissioner’s attempt to distinguish cincinnati petitioner contends that like the taxpayers in cincinnati and union pacific its method_of_accounting clearly reflected its income within the meaning of sec_446 and that respondent’s attempt to change petitioner’s accounting_method was an abuse_of_discretion petitioner also contends that respondent cannot change its method_of_accounting because petitioner has consistently used an accounting_method that clearly reflects income comparison of facts in cincinnati union pacific and this case the following chart compares petitioner to the taxpayers in cincinnati and union pacific to the extent a comparison can be made based on the record in this case and the court of claims’ opinions in cincinnati’ and union pacific cincinnati union pacific petitioner and and disputed items disputed dollar_figure items big_number dollar_figure big_number dollar_figure big_number see cincinnati new orleans tex pac ry co v united_states ct_cl the numerical data from cincinnati can be found only in the court of claims reports taxable_income taxpayer’s net taxable_income disputed items net taxable_income capital expenses taxpayer’s total capital expenses disputed items total capital expenses operating_expenses ’ taxpayer’s total operating_expenses disputed items yearly operating expense total investment account taxpayer’s total investment account disputed items total investment account depreciation’ disputed items total depreciation expenses gross_receipts taxpayer’s gross_receipts disputed items gross_receipts big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number oe co oo od oe oe big_number big_number big_number big_number big_number big_number big_number big_number big_number -- - ' the ratio of the taxpayer’s expenses for disallowed minimum rule items to its net taxable_income was considered in cincinnati new orleans tex pac ry co v united_states f 2d pincite the ratio of the taxpayer’s expenses for disallowed minimum rule items to its yearly operating_expenses was considered in cincinnati new orleans tex pac ry co v united_states f 2d pincite and union pac r r co v united_states f 2d pincite the ratio of the taxpayer’s expenses for disallowed minimum rule items to its total investment account was considered in union pac r r co v united_states f 2d pincite the ratio of the taxpayer’s expenses for disallowed minimum rule items to its yearly depreciation expenses was considered in cincinnati new orleans tex pac ry co v united_states f 2d pincite whether petitioner’s method_of_accounting clearly reflects income as discussed next we conclude that the cincinnati and union pacific cases do not establish that petitioner’s expensing of capital items costing less than dollar_figure results in a clear reflection of its income see eg 743_f2d_781 11ith cir court used mathematical analysis to decide that the taxpayer’s accounting_method did not clearly reflect income first the above chart shows that the ratios of disputed items to various measures of petitioner’s size are substantially larger than in cincinnati and union pacific for example in cincinnati the taxpayer’s disputed items were less than one percent of the taxpayer’s net_income in the years at issue see cincinnati new orleans tex pac ry co v united_states f 2d pincite in the instant case the disputed items were percent of petitioner’s taxable_income and percent of its taxable_income in cincinnati the taxpayer’s disputed items were less than percent of its total deduction for depreciation for the years in issue in contrast petitioner’s disputed items were percent and percent of its total depreciation deduction for and petitioner contends that comparing the disputed items to its gross_receipts shows that its accounting_method did not materially distort its income we disagree first the disputed items of the taxpayer in cincinnati were dollar_figure percent dollar_figure percent and dollar_figure percent of itss gross_receipts in the years at issue whereas petitioner’s disputed items were dollar_figure percent and percent of its gross_receipts in and thus petitioner’s ratios were to times larger than those in cincinnati petitioner points out that the court in cincinnati compared the taxpayer’s disputed items to its total operating_expenses and contends that we should compare petitioner’s disputed items to its total expenses we disagree that this helps petitioner in cincinnati the taxpayer’s disputed items were dollar_figure percent dollar_figure percent and dollar_figure percent of its total operating_expenses for the years in issue petitioner’s disputed items were dollar_figure percent and dollar_figure percent of its total expenses petitioner’s ratios are to times larger than those in cincinnati second additional factors were present in cincinnati that have not been shown to be present here the court in cincinnati considered years of data such as the taxpayer’s gross_receipts capital expenses total investment net taxable_income total operating_expenses total depreciation and the disputed minimum items in deciding that the taxpayer’s method_of_accounting clearly reflected income see id pincite petitioner did not offer evidence from its years other than the years at issue the court in cincinnati noted that the record there contained evidence that the icc had adopted the minimum rule after concluding that imposition of the minimum rule would not distort income or cause the railroads' financial statements not to clearly reflect income see id pincite in contrast here petitioner offered no evidence that hcfa considered whether a minimum expensing policy would cause financial statements of home health care agencies not to clearly reflect income the taxpayer’s expensing method in cincinnati was in accordance with generally_accepted_accounting_principles gaap see id pincite petitioner contends that its minimum expensing rule also complies with gaap but offered no evidence to support that contention the icc required the taxpayers in cincinnati and union pacific to expense the items that were the subject of the disallowed deductions in contrast medicare guidelines permit but do not reguire petitioner to expense the disputed assets cf 418_us_1 where a taxpayer’s generally accepted method_of_accounting is made compulsory by a regulatory agency and that method clearly reflects income it is almost presumptively controlling for federal tax purposes 108_tc_384 petitioner contends that we have sanctioned the use of a minimum expensing rule citing galazin v commissioner tcmemo_1979_206 in which we allowed the taxpayer to deduct the cost of a calculator due to the small amount of the expenditure dollar_figure and the relatively short 2-year useful_life of the asset here respondent disallowed deductions of dollar_figure and dollar_figure for the disputed items these amounts are not comparable to the amount at issue in galazin cf 66_tc_515 taxpayer must capitalize dollar_figure bar examination fees and expenses to practice law in california because amount was too large to disregard its capital nature affd 591_f2d_1273 9th cir we conclude that petitioner has not shown that its accounting_method clearly reflected income nor that it was an abuse_of_discretion for respondent to require petitioner to change that method_of_accounting thus we hold that petitioner may not expense the cost of its assets that cost less than dollar_figure and that have a useful_life greater than year b whether petitioner is liable for the penalty under sec_6662 for substantial_understatement respondent determined that petitioner is liable for the accuracy-related_penalty for substantial_understatement for and under sec_6662 the accuracy-related_penalty may not apply if the taxpayer reasonably relied on the advice of a professional such as an accountant and acted in good_faith see sec_6664 sec_1_6664-4 income_tax regs the understatement is reduced to the extent that it is based on substantial_authority or is attributable to an item that was adequately disclosed and that has a reasonable basis see sec_6662 b respondent contends that petitioner offered no evidence that it gave its tax preparer all of the information needed to correctly prepare its and tax returns or that its preparer and petitioner thoroughly reviewed petitioner’s return_information we disagree petitioner relied on pearlman nebben a c p a firm with experience in the health care industry to prepare petitioner’s tax returns for the years in issue petitioner has consistently followed a minimum expensing policy since it was incorporated pearlman nebben prepared petitioner’s tax returns for those years which reasonably led petitioners to believe that it agreed with petitioner’s minimum expensing policy cf 94_tc_126 accountant's failure to sign the tax_return should - - have put the taxpayer on notice that he was not backing the advice embodied in the return affd 992_f2d_1132 11th cir respondent contends that petitioner did not have substantial_authority or reasonable_cause for its minimum expensing position because petitioner’s chief financial officer pamela rau rau did not discuss the deductibility of the disputed assets with petitioner’s tax_return_preparer for and we disagree rau reasonably explained that she did not discuss petitioner’s expensing policy with the preparer because petitioner’s expensing policy in and was the same as it had been in previous years petitioner's reliance on its preparer was reasonable_cause for expensing the disputed assets in and we hold that petitioner is not liable for the accuracy- related penalty under sec_6662 for and to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index numbers --------------------------------------------------- ------------------------------- ------------------------------------------------------- --------------------------------------------- --------------------- 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 b03 plr-106571-11 date august x --------------------------------------------------------------------------------------------------- ----------------------- legend country ---------------- date -------------------------- dear -------------- this letter responds to a letter dated date submitted on behalf of x by its authorized representative requesting that x be granted an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as a disregarded_entity under sec_301_7701-3 facts x was formed under the laws of country on date x represents that it is a foreign_entity eligible to elect to be classified as a disregarded_entity for federal tax purposes x intended to be classified as a disregarded_entity effective date however due to inadvertence form_8832 entity classification election was not timely filed law sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as plr-106571-11 either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301 b unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides in part that for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides in part that except as provided in sec_301_7701-3 and v an eligible_entity may elect to be classified other than as provided in sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides in part that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 plr-106571-11 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as a disregarded_entity effective date a copy of this letter should be attached to the form_8832 this ruling is contingent on the owner of x filing within days of this letter all required returns and amended income_tax returns consistent with the requested relief being effective date to the extent appropriate these returns must include but are not limited to forms information_return of u s persons with respect to foreign disregarded entities such that these forms reflect the consequences of the relief granted in this letter except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative 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 plr-106571-11 by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely associate chief_counsel passthroughs special industries by _____ s _________________ mary beth carchia senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


t c summary opinion united_states tax_court dan vladimir nicolas petitioner v commissioner of internal revenue respondent docket no 28343-09s filed date dan vladimir nicolas pro_se john d davis for respondent vasquez judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any unless otherwise indicated all section references are to the code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure other court and this opinion shall not be treated as precedent for any other case respondent determined a dollar_figure deficiency in petitioner’s federal_income_tax the issue for decision is whether petitioner is entitled to deduct as alimony under sec_215 court-ordered payments of attorney’s fees and costs to his former wife background some of the facts have been stipulated and are so found the stipulations of facts and the attached exhibits are incorporated herein by this reference petitioner resided in oregon when the petition was filed petitioner was formerly married to marta eugenia nicolas ms nicolas in the oregon circuit_court for multnomah county state court entered judgment dissolving their marriage dissolution judgment the dissolution judgment ordered petitioner to pay spousal support to ms nicolas of dollar_figure per month from march through date the dissolution judgment also contained a provision allowing the parties to request attorney’s fees and costs in the state court granted ms nicolas’ request for attorney’s fees and issued a supplemental judgment for attorney fees supplemental judgment ordering petitioner to pay ms nicolas attorney’s fees and costs of dollar_figure the state court concluded such an award was appropriate because petitioner had more funds available and was in a better position to pay than ms nicolas the supplemental judgment states that the award of attorney’s fees and costs is in addition to and not in lieu of the judgments granted in the dissolution judgment the supplemental judgment does not state whether petitioner’s obligation to pay the attorney’s fees and costs would continue if ms nicolas were to pass away petitioner was not required to pay the attorney’s fees and costs until months after the supplemental judgment was signed but once the payment became due interest accrued until paid during petitioner paid dollar_figure of the attorney’s fees and costs he deducted this amount on his form_1040 u s individual_income_tax_return for respondent determined in a notice_of_deficiency that petitioner was not entitled to deduct as alimony the dollar_figure of attorney’s fees and costs petitioner paid to ms nicolas discussion deductions are a matter of legislative grace and the taxpayer bears the burden of proving his entitlement to the claimed deductions rule a 503_us_79 292_us_435 sec_215 permits a deduction for the payment of alimony during a taxable_year sec_215 defines alimony as alimony which is includable in the gross_income of the recipient under sec_71 sec_71 defines alimony as any cash payment meeting the four criteria provided in subparagraphs a through d of that section accordingly if any portion of the payments made by petitioner fails to meet any one of the four enumerated criteria that portion is not alimony and petitioner cannot deduct it the parties agree that the requirements of subparagraphs a b and c have been satisfied they disagree solely about whether the payments satisfy subparagraph d ie whether the obligation to pay the court-ordered attorney’s fee sec_2 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 and costs would have terminated in the event of the death of ms nicolas under sec_71 in order to deduct a payment as alimony the payor must have no liability to continue making payments after the recipient’s death otherwise the payor may not deduct any required related payments see 541_f3d_973 9th cir affg tcmemo_2006_105 407_f3d_186 3d cir affg tcmemo_2003_163 if the divorce instrument is silent as to the existence of a postdeath obligation the requirements of sec_71 may still be satisfied if the payments terminate upon the payee spouse’s death by operation of state law johanson v commissioner supra pincite if state law is ambiguous in this regard however a ‘federal court will not engage in complex subjective inquiries under state law rather the court will read the divorce instrument and make its own determination based on the language of the document ’ id quoting 102_f3d_842 6th cir affg t c memo the supplemental judgment is silent as to whether petitioner’s obligation to pay the attorney’s fees and costs would terminate in the event of ms nicolas’ death thus we consider whether the payments terminate by operation of oregon law or rev stat sec_107 j authorizes a court granting a dissolution of marriage to order one party to pay reasonable attorney’s fees and costs to the other party or the other party’s attorney there is no provision in or rev stat sec_107 j or any related statute terminating the payor’s obligation to pay attorney’s fees upon the death of the payee spouse furthermore rule of the oregon rules of civil procedure which governs the procedure for the allowance of attorney’s fees does not state whether the payor’s obligation to pay attorney’s fees ceases on the death of the payee the parties point us to no authority and we have discovered none that expressly states whether the obligation of court-ordered payment of attorney’s fees and costs ceases upon the death of the payee spouse additionally caselaw provides no assistance as there is uncertainty under oregon law whether spousal support payments terminate upon the death of the payee spouse see linder v dept of revenue or tax n oregon tax_court noting the disagreement under oregon law as to whether spousal support payments terminate upon the death of the payee spouse therefore we conclude that oregon state law is ambiguous finally faced with a silent court order and no state law resolution of the question we independently review the judgment itself to make our own determination as to the satisfaction of the sec_71 requirement see hoover v commissioner supra pincite nothing in the judgment indicates that petitioner’s obligation to pay ms nicolas’ attorney’s fees would terminate on her death in fact the supplemental judgment specifically requires petitioner to pay interest on the attorney’s fees until paid such payment is not made contingent on any factor or event we have no reason to conclude that petitioner’s obligation to pay ms nicolas’ attorney’s fees terminates on her death hence the payments do not satisfy the requirements of sec_71 and petitioner is not entitled to deduct as alimony the payments to ms nicolas for attorney’s fees and costs to reflect the foregoing decision will be entered for respondent


t c memo united_states tax_court debra heydon-grauss petitioner and bryan grauss intervenor v commissioner of internal revenue respondent docket no filed date debra heydon-grauss pro_se bryan grauss pro_se gary r shuler jr and louis h hill for respondent memorandum findings_of_fact and opinion goeke judge debra heydon-grauss seeks review of respondent’s determination that she was entitled only to partial relief from joint_and_several liability under sec_6015 f innocent spouse relief for and and was not entitled to innocent spouse relief for and a notice_of_determination concerning the request for relief was sent to petitioner on date for through and a timely petition was filed the petition also included a claim for relief for the abatement of additions to tax for over which we have jurisdiction under sec_6015 bryan grauss filed a notice of intervention findings_of_fact the stipulated facts are included by this reference petitioner and intervenor were both residents of california when the petition was filed during the years at issue petitioner and intervenor were married intervenor began living outside the marital home in and a divorce petition was filed in their marriage was dissolved in they have three children 1all section references are to the internal_revenue_code in effect for the relevant times and all rule references are to the tax_court rules_of_practice and procedure 2if a spouse petitions the court for sec_6015 relief the nonrequesting spouse has a right to intervene in the case under sec_6015 rule 123_tc_135 by doing so the intervenor becomes a party 127_tc_214 since petitioner has been self-employed as a salesperson of a women’s retail and fashion business called cabi llc cabi during through intervenor operated grauss co a recruiting business during he operated a direct sales business intervenor also received wage income reported on forms w-2 wage and tax statement for through with federal_income_tax withheld petitioner and intervenor filed a delinquent joint_return for each year at issue they filed late for and in date for and in date and for in date they did not remit payment of the tax reported as due on their returns for through they remitted full payment of their reported tax_liability with the filing of their return their unpaid liability at issue here is attributable to amounts due for additions to tax for late filing and failure to timely pay tax petitioner reported income from her cabi business on schedule c profit or loss from business for each year at issue she maintained a separate bank account for her business into which she deposited gross_receipts and from which she paid expenses_incurred in her business except for tax_liabilities intervenor was not involved in petitioner’s retail sales business petitioner maintained financial independence from intervenor with respect to her business she prepared profit and loss statements for her business that the return preparer used to prepare the joint tax returns consequently she was in a better position to know the profitability of her business and its tax obligations than intervenor in every year at issue except the net profit of petitioner’s business exceeded the net profit generated by intervenor’s business petitioner’s profits generated the tax_liabilities in part for through and in full for and petitioner had the financial means to pay the tax_liabilities with funds held in her business bank account but she made no attempt to do so on schedules c for and petitioner reported gross_receipts from her cabi business in the respective amounts of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure she claimed deductions for expenses in the respective amounts of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for and finally she reported net profit in the respective amounts of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for and for petitioner also reported gross_receipts of dollar_figure from stella and dot a retail sales business on a separate schedule c this business realized net profit of dollar_figure for petitioner made no effort to pay the tax_liabilities including self-employment_tax generated by her earnings during petitioner received a taxable early distribution from a qualified_retirement_plan of dollar_figure she did not have tax withheld on this distribution petitioner had various stocks and bonds held by charles schwab in her own name she realized capital_gain from the sale of assets held in the charles schwab account for the income from intervenor’s recruiting business was also reported on schedules c for through however the schedules c mistakenly listed petitioner as the owner of the business for and intervenor’s business reported gross_receipts in the respective amounts of dollar_figure dollar_figure dollar_figure dollar_figure and zero he reported expenses in the respective amounts of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for and and reported net profit loss in the respective amounts of dollar_figure dollar_figure dollar_figure dollar_figure and negative dollar_figure for intervenor reported gross_receipts of dollar_figure from a schedule c business of direct sales and claimed deductions for expenses of dollar_figure resulting in a net_loss of dollar_figure petitioner was not involved in intervenor’s businesses during through petitioner and intervenor jointly opened the bank account intervenor used in his business they also maintained a joint bank account from which they paid household expenses petitioner and intervenor consistently failed to pay the tax shown on their returns petitioner knew the joint tax returns were not being filed timely for all the years at issue they filed their and joint returns late in date petitioner did not learn that the tax due was not paid with the return filings until the irs began collection actions in date their and joint returns were not filed until date when petitioner became aware of their failure to pay for prior years the tax_return was not filed until date thus petitioner also knew of the underpayments at the time of the return’s filing by date petitioner knew that intervenor had insufficient funds to pay the tax_liability as he transferred the marital home to her because of his financial problems in addition the internal_revenue_service irs had undertaken collection actions for past due tax obligations from intervenor’s default on an installment_agreement including levying on a bank account petitioner and intervenor were in serious credit card debt when the delinquent returns were filed they were living beyond their means after the returns were filed and the unpaid tax shown on the returns was assessed the irs began collection actions resulting in intervenor’s making numerous payments intervenor paid the liability including interest and additions to tax in full the tax_liability was satisfied but interest and additions to tax remained unpaid for partial payments were made for other years by judgment filed on date the superior court of california county of contra costa ordered petitioner to pay intervenor dollar_figure reimbursing him for half of the amount that he paid towards their debt to the irs specifically intervenor made payments to the irs toward their tax_liabilities as follows dollar_figure in dollar_figure in dollar_figure in dollar_figure in dollar_figure in and dollar_figure paid beginning in through petitioner did not pay any amount on their joint tax_liabilities on date respondent received from petitioner form_8857 request for innocent spouse relief with various attachments on form_8857 petitioner requested innocent spouse relief for and respondent issued preliminary determinations to petitioner for and denying her request for innocent spouse relief under sec_6015 in full respondent sent a letter to petitioner stating that he was considering her form_8857 for as a request for abatement of penalties petitioner replied to the letter and provided various documents on date petitioner submitted to respondent form statement of disagreement with attachments subsequently petitioner submitted form_843 claim_for_refund and request for abatement dated date requesting abatement of penalties for on date the office of appeals issued petitioner a final appeals determination for and allowing partial relief under sec_6015 for and for and respondent allowed petitioner partial relief for tax_liabilities of dollar_figure dollar_figure and dollar_figure respectively and denied relief for dollar_figure dollar_figure and dollar_figure respectively for each year of these years he also allowed relief from the proportionate amounts of additions to tax and interest associated with the partial relief from tax_liability granted he denied relief for the liabilities associated with petitioner’s income and deductions for and respondent denied relief in full with respect to respondent denied petitioner relief under sec_6015 because intervenor had paid the tax additions to tax and interest in full and no liability remained to be collected for respondent denied relief under sec_6015 because the unpaid tax was attributable to her own income on date the irs informed petitioner that it was denying her request to abate the additions to tax for because she did not establish a sufficient reason for her failure to timely file or pay tax the marriage in this case was obviously not a happy one in the later years before the court but there is no evidence of physical abuse by intervenor intervenor admits to drug use and alcohol abuse neither petitioner nor intervenor made estimated_tax payments on his or her schedule c business during through they also had a very large credit card balance by the end of their marriage and used their income to maintain their lifestyles opinion a taxpayer may request relief from joint_and_several_liability on a joint_return under sec_6015 c or f under sec_6015 and c relief is available only from an understatement_of_tax ie a proposed or assessed deficiency sec_6015 and c does not authorize relief from an underpayment_of_tax reported on a joint_return sec_6015 allows relief from an understatement or an underpayment petitioner filed joint income_tax returns with her spouse but they failed to remit full payment of the tax shown thereon for through as this case involves underpayments for and petitioner is not eligible for relief under sec_6015 or c if the requesting spouse is not eligible for relief under either subsection b or c the spouse may be eligible for equitable relief under subsection f sec_6015 provides a requesting spouse may be relieved of joint liability if taking into account all the facts and circumstances it would be inequitable to hold the requesting spouse liable for any unpaid tax or deficiency or any portion thereof see sec_1_6015-4 income_tax regs sec_6015 authorizes granting such equitable relief under procedures prescribed by the secretary the standards followed by respondent in determining equitable relief under sec_6015 are found in revproc_2013_34 2013_43_irb_397 modifying and superseding revproc_2003_61 2003_2_cb_296 the requirements for relief under revproc_2013_34 supra are categorized into a three-step procedure threshold conditions streamlined conditions and equitable factors to qualify for innocent spouse relief a requesting spouse must meet all of the threshold conditions id sec_4 i r b pincite then if those conditions are met the irs will consider whether the requesting spouse can receive relief under a streamlined determination id sec_4 i r b pincite if the requesting spouse is not granted relief through the streamlined determination the irs will consider whether the requesting spouse should nevertheless be granted relief under the equitable factors id sec_4 i r b pincite the tax_court reviews claims for relief under sec_6015 using a de novo standard and scope of review 132_tc_203 this court may consider the irs guidelines but is not bound by them in evaluating the facts and circumstances of a case molinet v commissioner tcmemo_2014_109 at see 136_tc_432 except as otherwise provided in sec_6015 the taxpayer requesting sec_6015 relief bears the burden_of_proof rule a 119_tc_306 aff’d 101_fedappx_34 6th cir petitioner seeks innocent spouse relief for through intervenor fully paid the tax_liabilities for and but additions to tax and interest remain unpaid for petitioner seeks a refund of the amounts paid_by intervenor she did not pay these liabilities herself thus even if she were entitled to innocent spouse relief for which she is not a refund of tax that she did not pay is not permissible see cutler v commissioner t c memo see also revproc_2013_34 sec_4 i r b pincite to be eligible for sec_6015 relief the requesting spouse must satisfy the following seven threshold conditions threshold test the taxpayers filed a joint_return relief is not available under sec_6015 or c the claim for relief is timely no assets were transferred between spouses as part of a fraudulent scheme the nonrequesting spouse did not transfer disqualified assets to the requesting spouse the requesting spouse did not knowingly participate in filing a fraudulent joint_return and the income_tax_liability is attributable in full or in part to an item of the nonrequesting spouse or an underpayment resulting from the nonrequesting spouse’s income revproc_2013_34 sec_4 the record establishes that the first six conditions are met so we focus only on the seventh where an underpayment is attributable in full or in part to the requesting spouse the irs will nevertheless consider granting relief if any of the following exceptions applies attribution due solely to the operation of community_property law nominal ownership misappropriation of funds abuse or fraud committed by the nonrequesting spouse id sec_4 where the tax_liability is attributable to both spouses the irs will grant relief only for the portion of the tax_liability attributable to the nonrequesting spouse and not for the portion attributable to the requesting spouse unless an exception applies id for tax fully attributable to a requesting spouse the irs will grant relief only if an exception applies id for each of and a portion of the underpayment is attributable to intervenor’s income respondent concedes that petitioner satisfies the threshold test for these three years for the tax attributable to intervenor’s income and has granted relief for the portions of the liabilities attributable to his income respondent did not grant relief for the liabilities attributable to petitioner’s income petitioner is generally not eligible for innocent spouse relief on the tax attributable to her income-producing activities see ellison v commissioner tcmemo_2004_57 in such a case she would not meet the threshold test see holliman v commissioner tcmemo_2015_157 at for and petitioner failed to establish that any of either underpayment is attributable to intervenor the underpayments are solely attributable to petitioner’s income accordingly she cannot satisfy the seventh condition of the threshold test where the liability is attributable to the requesting spouse she may be entitled to relief if an exception applies that could entitle her to relief for tax on her own income abuse is one such exception in her request for innocent spouse relief in her petition and at trial petitioner alleges that she was abused by intervenor and thus she should be relieved of liability for tax attributable to her own income for each year to satisfy the abuse exception to the seventh condition of the threshold test the requesting spouse must establish that as a result of abuse she was unable to question the payment of the tax due on a return for fear of retaliation from the nonrequesting spouse revproc_2013_34 sec_4 d abuse includes efforts to control isolate humiliate and intimidate the requesting spouse or to undermine her ability to reason independently id sec_4 c iv i r b pincite such allegations should not be treated lightly but the court should not accept a taxpayer’s uncorroborated abuse claims at face value see eg pullins v commissioner t c pincite johnson v commissioner tcmemo_2014_240 although excessive use of drugs or alcohol could lead to abuse petitioner did not provide specific testimony supporting a pattern of abuse specifically she testified that there was abuse in the household there was alcohol there were drugs there were gambling there were sexual affairs there was mismanagement of money risky investments gambling she also testified that t here was a lot of anger and yelling in the household she testified that documents from the domestic relations court indicated that intervenor abused the children specifically she testified that intervenor had supervised visits of the children and the court documents reference the alcohol and drug testing intervenor specifically denied physical abuse of petitioner and his children we found his testimony in this regard to be credible petitioner’s testimony and the stipulated exhibits fall short of the substantiation needed to sustain an abuse allegation accordingly petitioner does not meet the requirements for innocent spouse relief for the tax_liabilities on her own income and is not entitled to relief for the tax_liability attributable to her own income for any year at issue she fails to qualify for an exception to the threshold conditions for and where the underpayments are attributable solely to her income in addition she does not qualify for an exception to the threshold test for the tax attributable to her own income for and she is entitled to innocent spouse relief for and to the extent respondent allowed in his final appeals determination 3as petitioner does not satisfy any of the exceptions to the threshold condition relating to her own income we do not address the streamlined determination or equitable factors respondent conceded that petitioner would qualify for the streamlined determination for all years except except to the extent the tax is attributable to her own income in reaching our holdings herein we have considered all arguments the parties made and to the extent we did not mention them above we conclude they are moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent


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 b03 plr-126514-12 date august x sub ------------------------------------------------------------------------------------------------------ ------------------------ ------------------------------------------------------------------------------------------------------ ------------------------ state ------------------ a d1 d2 d3 ------------------------------------------------------------------------------------------------------ -------------------------- ---------------------- ------------------- -------------------------- dear -------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representatives requesting a ruling under sec_1362 of the internal_revenue_code facts the information submitted states that x was incorporated in state and made an election to be treated as an s_corporation effective d1 also effective d1 x elected to treat sub as a qualified_subchapter_s_subsidiary qsub plr-126514-12 x's election was inadvertently invalid on d1 because shares of x stock were owned by an individual_retirement_account ira an ineligible shareholder under sec_1361 instead of a on or about d2 x learned that its s_corporation_election was inadvertently invalid subsequently ira transferred all of its shares of x stock to a an eligible shareholder under sec_1361 x represents that a has reported the full amount of income and losses for the shares that ira owned from d1 through d3 x represents that its invalid s_corporation_election was not motivated by tax_avoidance or retroactive tax planning x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that for purposes of subchapter_s the term small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not among other requirements have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual revrul_92_73 1992_2_cb_224 provides that a_trust that qualifies as an ira under sec_408 is not a permitted shareholder of an s_corporation under sec_1361 sec_1361 defines a qsub as any domestic_corporation which is not an ineligible_corporation if percent of the stock of the corporation is held by the s_corporation and the s_corporation elects to treat the corporation as a qsub sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the plr-126514-12 corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary sec_1_1362-4 of the income_tax regulations provides that for purposes of sec_1_1362-4 the determination of whether a termination or invalid election was inadvertent is made by the commissioner the corporation has the burden of establishing that under the relevant facts and circumstances the commissioner should determine that the termination or invalid election was inadvertent the fact that the terminating event or invalidity of the election was not reasonably within the control of the corporation and in the case of a termination was not part of a plan to terminate the election or the fact that the terminating event or circumstance took place without the knowledge of the corporation notwithstanding its due diligence to safeguard itself against such an event or circumstance tends to establish that the termination or invalidity of the election was inadvertent sec_1_1362-4 provides that the commissioner may require any adjustments that are appropriate in general the adjustments required should be consistent with the treatment of the corporation as an s_corporation or qsub during the period specified by the commissioner in the case of stock held by an ineligible shareholder that causes an inadvertent termination or invalid election for an s_corporation under sec_1362 the commissioner may require protective adjustments that prevent the loss of any revenue due to the holding of stock by an ineligible shareholder for example a non-resident alien conclusion based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election was ineffective for the taxable_year beginning d1 because the ira was an ineligible shareholder of x we conclude that the ineffectiveness of x's s_corporation_election constituted an inadvertent invalid election within the meaning of sec_1362 we further conclude that the inadvertent invalid s_corporation_election does not affect the status of sub as a qsub under the provisions of sec_1362 x will be treated as making a valid s_corporation_election effective from d1 and thereafter provided that x's s_corporation_election was otherwise valid and has not otherwise terminated under sec_1362 in addition sub will be treated as a qsub from d1 and thereafter provided that sub’s qsub election was otherwise valid and has not otherwise terminated the shareholders of x including a must include their pro-rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions plr-126514-12 made by x as provided in sec_1368 if x or its shareholders fail to treat themselves as describe above this ruling is null and void except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code including whether x was or is a small_business_corporation under sec_1361 or whether sub is otherwise eligible to be a qsub this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s authorized representative sincerely richard probst senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes ------------------------------------ ---------------------------------- -------------------------------------- ------------------------------------------- ------------------------ --------------------------------------------------------- ------------------------------ 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