department of the treasury internal_revenue_service washington d c date cc dom fs it a uilc number release date internal_revenue_service national_office field_service_advice memorandum for district_counsel from deborah a butler assistant chief_counsel field service cc dom fs subject this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend x corp y corp z corp m n insurance a states a term c term d firm a firm b report a report b a b dollar_figurec dollar_figured issues whether the entities properly claimed abandonment losses with regard to their subscriber-based intangible and assembled workforce if abandonment losses were properly claimed on either asset the amount of the loss was properly calculated conclusions the entities may not deduct abandonment losses under sec_165 with regard to either their subscriber-based intangible and assembled workforce if abandonment losses were properly claimed on either asset we agree with the agent’s criticisms of the calculation of the amount of the loss facts overview - z corp dba x corp and y corp collectively the taxpayers were m entities incorporated in their respective states to provide insurance a and related_services they use the accrual_method of accounting and using a calendar taxable_year y corp has merged with the m organizations in states a and is now known as n the taxpayers offer group policies to employers and individual policies to individuals in addition they provide administrative services to certain other types of medical programs such as medicare x corp and y corp were formerly tax exempt entities under sec_501 as were other m entities to determine their stepped-up_basis under the transitional rule x corp and y corp hired outside accounting firms to value certain of their intangible assets based on these valuations and other computations performed in connection with such valuations x corp and y corp have filed claims for refunds alleging additional loss deductions attributable to the termination of subscribers employees and contracts with providers in regard to the subscriber based intangible assembled workforce and provider base intangible respectively under sec_165 x corp ’s claims cover term c y corp ’s claims filed thus far cover term d the terminations of subscribers resulted from normal and routine cancellations and nonrenewals that is employers and individuals dropped plans lost coverage because of nonpayment of premiums changed plans and changed jobs the losses were not the result from x corp ’s or y corp ’s withdrawal from a line_of_business or the cancellation of a plan type or insurance product x corp - x corp ’s claim is based only on its subscriber base intangible subscribers are the individuals and employers contracting with x corp for insurance a firm a performed a valuation of subscribers as of and also calculated the amount of loss for each year firm a's report known as report a covers the fair_market_value of x corp ’s subscriber base as of and the loss in subscribers from term c report a uses an income approach for its valuation a present_value was calculated based on the discounted cash_flow over the estimated useful lives of plans and individual enrollees using a a discount rate report a determined that the fair_market_value of the subscriber list was dollar_figurec as of the discount rate of a is derived from x corp ’s weighted average cost of capital y corp - y corp ’s narrative portion of its claim refers to losses under sec_165 related to software workforce in place coverage of member subscribers and contractual expirations with provider organizations which were valued as of although y corp ’s claim also covers expiration of provider contracts and software the agent examining the claims indicates that in fact the loss amount is based on subscriber base and assembled workforce y corp has indicated to the agent that the narrative is protective since the only information available at this time concerns y corp ’s subscriber base and assembled workforce our discussion is limited to those assets y corp ’s subscriber base and assembled workforce intangibles were valued by firm b in report b it covered y corp ’s assembled workforce and subscriber base report b uses a discounted_cash_flow_method to value the subscriber base and a cost-to-create method to value the workforce an obsolescence factor of b was applied to the estimated costs on the theory that the workforce was b through its useful_life on average although no empirical evidence for this assumption is cited report b places a value of dollar_figured on the workforce in place as of the valuation_date law and analysis issue - abandonment_loss abandonment losses are deductible under sec_165 which allows any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise the requirements for a loss are found in the regulations under sec_165 specifically sec_1_165-2 allows a loss incurred in a business and arising from the sudden termination of the usefulness of any nondepreciable_property in a case where the business is discontinued or where the property is permanently discarded from use therein as a deduction under sec_165 for the taxable_year in which the loss is actually sustained sec_1_165-1 requires that to be allowable as a deduction under sec_165 a loss must be evidenced by closed and completed transactions and fixed by identifiable events normally an abandonment_loss requires an intention on the part of owner to abandon the asset and an affirmative act of abandonment a j industries inc v united st503_f2d_660 9th cir citron t c pincite 92_tc_1249 aff’d 909_f2d_1146 8th cir it is clear that intangible assets may be the subject of an abandonment_loss 351_f2d_619 ct_cl see 59_tc_220 acq 1973_2_cb_2 solar nitrogen chemicals inc v commissioner tcmemo_1978_486 the most essential issue in the present case is the resolution of whether subscribers or employees can be abandoned individually or whether the individual components must be treated as part of an indivisible whole ie the subscriber- based intangible or assembled workforce which itself is the only proper subject for an abandonment_loss there have been numerous decisions holding that assets indistinguishable from the subscriber-based intangible and assembled workforce involved in the present case are single indivisible assets and not an aggregation of individual assets 550_f2d_548 9th cir customer list 519_f2d_781 9th cir 420_f2d_266 6th cir contracts for vending machine locations 64_f2d_890 8th cir cert_denied 290_us_646 magazine subscription list 373_f2d_938 ct_cl customer list 97_tc_253 aff’d f 3d 4th cir cert_denied 513_us_821 workforce 50_tc_78 acq 1974_2_cb_3 customer list 35_tc_720 aff’d 307_f2d_339 9th cir medical service contracts 33_tc_1038 aff’d 287_f2d_1 2d cir customer contracts 22_tc_1029 nonacq on another issue 1958_2_cb_9 customer list 12_bta_655 insurance policyholders nickisch v commissioner tcmemo_1984_275 customer list illinois cereal mills inc v commissioner tcmemo_1983_469 aff’d 789_f2d_1234 7th cir cert_denied 479_us_995 customer list some of these cases directly held that the loss of an individual component of the indivisible asset could not be separately deducted as an abandonment_loss thus for example as in the present case taxpayers could not deduct amounts attributable to each customer the taxpayer lost ralph w fullerton supra sunset fuel supra golden state towel supra anchor cleaning supra illinois cereal mills supra see skilken supra boe supra the facts of the present case are clearly distinguishable from the circumstances where the taxpayer abandons a portion the indivisible asset which has distinct transferrable value that is reasonably severable from the whole the pivotal case on this issue is 100_fsupp_803 n d cal where the taxpayer was permitted an abandonment_loss on a portion of a customer list that was attributable to a specific geographic area the taxpayer had purchased the customer lists of several laundry businesses in san francisco and oakland during world war ii the government seized the taxpayer’s san francisco plant for military purposes after the war the taxpayer had trouble reestablishing its business and abandoned its san francisco routes while it continued its operations in oakland the district_court recognized that a list of customers is not to be regarded as an aggregation of disconnected individual subscribers and were instead treated as unitary structures irrespective of incidental fluctuations or alterations metropolitan laundry f_supp pincite however the court noted that a taxpayer could dispose_of its business in a particular area or in respect to a particular product or service along with incidental goodwill without abandoning its entire business id pincite and so long as the business and the goodwill disposed of may be assigned a distinct transferable value the transaction may properly be recognized for tax purposes as a closed one id pincite the court found that the costs attributable to the abandoned san francisco customer lists met this test and were deductible similarly massey-ferguson held that the taxpayer could deduct the abandonment of a line_of_business it had purchased from another party and operated at a distinct location even though the taxpayer continued to manufacture similar products under a different trade_name at another location see also parmelee transportation 199_fsupp_845 w d la the taxpayers in the present case have not abandoned a segment of their business that is analogous to either metropolitan laundry or massey-ferguson the distinction between the facts similar to the present case from those found in metropolitan laundry has been explicitly recognized by the courts see skilken f 2d pincite anchor cleaning t c pincite our conclusion regarding the claimed abandonment losses is left unchanged by the supreme court’s decision in 507_us_546 where the supreme court held that a comparable asset a newspaper subscriber list was amortizable in coming to this conclusion the court reaffirmed the mass asset or indivisible asset rule that has underscored many of the intangible asset cases we have cited the rule provides that certain kinds of intangible assets are properly grouped and considered as a single entity even though the individual components of the asset may expire or terminate over time they are replaced by new components thereby causing only minimal fluctuations and no measurable loss in the value of the whole newark morning ledger u s pincite the court also quoted a portion of golden state towel f 2d pincite as the usually accepted definition of a mass asset u s pincite the quote included the following the whole is equal to the sum of its fluctuating parts at any given time but each individual part enjoys no separate capital standing independent of the whole for its disappearance affects but does not interrupt or destroy the continued existence of the whole newark morning ledger u s pincite quoting golden state towel f 2d pincite from this the court concluded that t he mass-asset rule prohibits the depreciation of certain customer-based intangibles because they constitute self- regenerating assets that may change but never waste newark morning ledger u s pincite the definition of the mass_asset_rule quoted from golden state towel also stated that its customer list is indistinguishable from - and the principal element of - goodwill whose ultimate value lies in the expectancy of continued patronage through public acceptance newark morning ledger u s pincite quoting golden state towel f 2d pincite the supreme court traced the precedents linking intangibles to goodwill it then discussed the argument that the intangibles were not depreciable because they were indistinguishable from goodwill which itself is not depreciable it noted that traditionally goodwill was not depreciable because it does not suffer wear_and_tear does not become obsolescent is not used up in the operation of the business newark morning ledger u s pincite quoting 15_f2d_626 8th cir cert_denied 273_us_763 the court concluded that it must follow that if a taxpayer can prove with reasonable accuracy that an asset used_in_the_trade_or_business or held_for_the_production_of_income has value that wastes over an ascertainable period of time that asset is depreciable under sec_167 regardless of the fact that its value is related to the expectancy of continued patronage newark morning ledger u s pincite the court found the subscription list amortizable because it met these criteria any relation it might have to goodwill was irrelevant in order to understand the impact of newark morning ledger on the present case it is important to note that some of the cases we have cited regarding whether an intangible asset could be abandoned piecemeal also addressed whether the asset could be amortized see eg ralph w fullerton supra manhattan co supra thrifticheck supra illinois cereal mills supra these were alternative arguments made by the taxpayer which were clearly distinct the holding of newark morning ledger only addresses the second issue ie amortization however the rationale of newark morning ledger in its discussion of the mass_asset_rule relates directly to the issue of abandonment of intangible assets like those in the present case first it is clear under newark morning ledger that if an intangible asset self- regenerates the mass_asset_rule applies to have the asset treated indivisibly workforce and subscriber lists are clearly self-regenerating further if the assets are self-regenerating there is an argument that the asset as a whole is not abandoned so long as the taxpayer remains in business on the other hand as indicated by the quotation from golden state the mass_asset_rule has also been linked to goodwill in the context of abandonment since the supreme court rejected the importance of this link in the context of amortization it is important to examine the importance of the link in the context of abandonment the issue for abandonment losses is summarized in massey-ferguson which states some confusion has developed as to whether there can be an abandonment of a part of goodwill as long as the business continues to operate however there seems to be no real disagreement in the cases at least now it seems to be generally recognized that if there is a clearly identifiable and severable asset its abandonment entitles the taxpayer to a loss deduction t c pincite citations omitted thus while goodwill cannot be amortized it can be abandoned under the same test as is applicable to the intangible asset see metropolitan laundry f_supp pincite solar nitrogen chemicals supra therefore the traditional link to goodwill in the context of abandonment losses does raise the same problems as in the context of amortization where goodwill is still not amortizable further the issue of whether an asset is indivisible has also been seen to be ultimately severable from the goodwill issue thus thrifticheck t c pincite found that wholly aside from any goodwill element the acquisition of the contracts with customers should be treated as the acquisition of a single asset see also ralph w fullerton at id manhattan co t c pincite boe t c pincite lastly that partial abandonment and amortization are alternative arguments demonstrates that their practical results are almost the same in one instance the taxpayers were attempting to recognize their actual loss and in the other they were estimating that loss through the use of amortization thus allowing the taxpayers to deduct portions of these assets each year amounts to the allowance of amortization without meeting the prerequisites therefor so long as the intangible asset is deemed to be a whole rather than the sum of any of its parts the ability to deduct any part of it as an abandonment_loss rests ultimately on whether there has been a recognition event under facts like the present case courts have found that the loss of any individual component only reduces the value of the whole asset sunset fuel f 2d pincite manhattan co t c pincite thrifticheck t c pincite the mere diminution in value of property is not enough to establish an abandonment_loss 30_fedclaims_739 109_tc_450 see 274_us_398 specifically diminution in value fails to satisfy the requirement under the regulations that a loss be evidenced by closed and completed transactions fixed by identifiable events sunset fuel f 2d pincite see s s white dental at id instead the taxpayer normally must wait until the entire indivisible asset is abandoned before it can take any deduction under sec_165 see massey-ferguson t c pincite anchor cleaning t c pincite nickisch v commissioner tcmemo_1984_275 further as indicated above the intention to abandon standing alone is not sufficient to establish a recognition event instead there must be an affirmative act of abandonment see 692_f2d_152 1st cir cert_denied 462_us_1106 261_f2d_176 9th cir citron t c pincite zurn v commissioner tcmemo_1996_386 as a result there is arguably an inherent requirement for an abandonment_loss that the taxpayer rather than some other party take the action to abandon permanently the property in question further an abandonment does not result simply from cessation of use beus at id citron at id thus participation in a government program which required the taxpayer to discontinue his dairy operation was not an abandonment where there was no showing of the irrevocable intent to abandon or never use the property again strandley v commissioner 99_tc_259 aff'd on another issue aftr 2d ria 9th cir similarly in denying an abandonment_loss for the individual members of a customer list the court in anchor cleaning t c pincite noted that the taxpayer had not put itself in a position where it would be unable to solicit or to serve such customers should they later decide to return to it golden state towel f 2d pincite also relied upon this language in denying an abandonment_loss for the loss of individual customers there is no showing in the present case that given the chance the entities would not become similarly involved with these subscribers and employees or that the taxpayers were in any way prevented from doing so similarly other cases have held that the actions of another party only affect the value of the property the taxpayer continues to hold see crst t c pincite 37_bta_576 aff’d 101_f2d_813 9th cir 46_tc_835 lastly the way in which the taxpayers have valued their assets may argue against the abandonment of individual subscribers or employees as stated in sunset fuel f 2d pincite the indivisible asset rule prevents a loss deduction when the nature of the purchased asset is such that the individual assets cannot be accurately valued thus sunset fuel made clear that valuation of customer accounts by resort to a formula applied indiscriminately to all accounts does not sufficiently establish the portion of the purchase_price allocable to the individual accounts so as to avoid the application of the mass ie indivisible asset rule indeed resort to a formula was felt to be an indication that the individual value of the accounts cannot be satisfactorily ascertained ralph w fullerton f 2d pincite similar conclusions are reached in skilken f 2d pincite golden state towel f 2d pincite and boe t c pincite compare 367_f2d_646 9th cir where the taxpayer was able to establish the cost of a particular account lost issue - valuation we understand that the examination of taxpayers’ valuation is currently assigned to an irs agent engineer by ____________________ clifford m harbourt senior technician reviewer income_tax and accounting branch


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-110264-14 date date legend date grantor_trust child child child child individual individual individual ------------------------ ----------------------------------------------------------------------------------- -------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------------------------------- ------------------------------------------------------------------ ----------------------------------------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------------------------------------- ---------------------------------------------------------------------- ----------------------------------------------------------------------------------- -------------------------------------------------------------- ----------------------------------------------------------------------------------- --------------------------------------------------------------- ----------------------------------------------------------------------------------- ------------------------------------ -------------------------------- plr-110264-14 ---------- ----------------------------------------------------------------------------------- ---------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------- ----------------------------------------------------------------------------------- ---------------------------------------------------------------------- state co-trustees guardian guardian dear --------------- this responds to a letter dated date and subsequent correspondence requesting rulings under sec_671 sec_2041 sec_2501 and sec_2514 of the internal_revenue_code facts the information and representations submitted state that on date grantor created trust an irrevocable_trust for the benefit of himself his issue his spouse spouse individual individual and individual grantor will transfer property to trust the trust agreement refers to grantor’s issue individual individual and individual as beneficiaries trust is sited in state and pursuant to the trust agreement is governed by the laws of state trust provides that during grantor’s lifetime co-trustees must distribute such amounts of net_income and principal as directed by the power_of_appointment committee committee and or grantor as follows at any time the co-trustees pursuant to the direction of the majority of the committee members with the written consent of grantor shall distribute to grantor or beneficiaries such amounts of the net_income or principal as directed by committee grantor’s consent power at any time co-trustees pursuant to the direction of all of the committee members other than the grantor shall distribute to grantor or beneficiaries such amounts of the net_income or principal as directed by the committee unanimous consent power and plr-110264-14 grantor has the power in a nonfiduciary capacity at any time to appoint to any one or more of beneficiaries such amounts of the principal including the whole thereof as grantor deems advisable to provide for such beneficiary’s health maintenance support and education grantor’s sole power further upon grantor’s death the remaining balance of trust shall be distributed to such person or persons or entity or entities other than grantor his estate his creditors or the creditors of his estate as grantor may appoint by will grantor’s testamentary_power_of_appointment in default of the exercise of this limited_power_of_appointment the balance of trust will be divided into as many equal parts as are necessary to satisfy certain dispositions either outright or in trust for grantor’s then living issue individual individual and individual trust provides that committee may direct that distributions be made equally or unequally and to or for the benefit of any one or more of beneficiaries to the exclusion of others any net_income not distributed by the co-trustees will be accumulated and added to principal the members of the committee serve and act in a non-fiduciary capacity committee is initially composed of grantor child child individual individual guardian and guardian if at any time committee consists of at least three or more members other than grantor all the members of committee including grantor may by unanimous vote add one or more members to committee provided that such members are beneficiaries if at any time committee does not include at least one member other than grantor committee shall immediately cease to exist in any event committee shall cease to exist upon grantor’s death you requested the following rulings so long as the power_of_appointment committee is serving no portion of the items of income deductions and credits against tax of trust shall be included in computing under sec_671 the taxable_income deductions and credits of grantor or any members of the power_of_appointment committee the contribution of property to trust by grantor will not be a completed_gift for federal gift_tax purposes any distribution_of_property by committee from trust to grantor will not be a completed_gift subject_to federal gift_tax by any member of committee any distribution_of_property by committee from trust to any beneficiary other than grantor will not be a completed_gift subject_to federal gift_tax by any member of committee other than grantor and plr-110264-14 committee members do not possess a general_power_of_appointment within the meaning of sec_2041 and accordingly trust will not be includible in any committee member’s gross_estate under sec_2041 ruling law and analysis sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter in computing taxable_income or credits against the tax of an individual sec_672 provides for purposes of subpart e the term adverse_party means any person having a substantial_beneficial_interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust sec_673 through specify the circumstances under which the grantor is treated as the owner of a portion of a_trust sec_673 provides that the grantor shall be treated as the owner of any portion of a_trust in which the grantor has a reversionary_interest in either the corpus or the income therefrom if as of the inception of that portion of the trust the value of such interest exceeds five percent of the value of such portion sec_674 provides in general that the grantor shall be treated as the owner of any portion of a_trust in respect of which the beneficial_enjoyment of the corpus or the income therefrom is subject_to a power of disposition exercisable by the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to a power exercisable only by will other than a power in the grantor to appoint by will the income of the trust where the income is accumulated for such disposition by the grantor or may be so accumulated in the discretion of the grantor or a nonadverse_party or both without the approval or consent of any adverse_party under sec_675 and applicable regulations the grantor is treated as the owner of any portion of a_trust if under the terms of the trust agreement or circumstances attendant on its operation administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiary of the trust plr-110264-14 sec_676 provides that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under any other provision of part i subchapter_j chapter where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a nonadverse_party or both sec_677 provides in general that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under sec_674 whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a nonadverse_party or both may be distributed to the grantor or the grantor’s spouse held or accumulated for future distribution to the grantor or the grantor’s spouse or applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse sec_678 provides a general_rule that a person other than a grantor shall be treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself based solely on the facts and representations submitted we conclude an examination of trust reveals none of the circumstances that would cause grantor or any other person to be treated as the owner of any portion of trust under sec_673 sec_674 sec_676 sec_677 or sec_678 we further conclude that an examination of trust reveals none of the circumstances that would cause administrative controls to be considered exercisable primarily for the benefit of grantor or any other person under sec_675 thus the circumstances attendant on the operation of trust will determine whether grantor or any other person will be treated as the owner of any portion of trust under sec_675 this is a question of fact the determination of which must be deferred until the federal_income_tax returns of the parties involved have been examined by the office with responsibility for such examination ruling sec_2 and sec_2501 provides for the imposition of a gift_tax on the transfer of property by gift 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 person tangible or intangible sec_25_2511-2 of the gift_tax regulations provides that a gift is complete as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave the donor with no power to change the disposition of the property whether for the donor’s own benefit or for the benefit of another but if plr-110264-14 upon a transfer or property whether in trust or otherwise the donor reserves any power over its disposition the gift may be wholly incomplete or may be partially complete and partially incomplete depending upon all the facts in the particular case accordingly in every case of a transfer of property subject_to a reserved power the terms of the power must be examined and its scope determined sec_25_2511-2 provides an example of where the donor transfers property to another in trust to pay the income to the donor or accumulate it in the discretion of the trustee and the donor retains a testamentary power to appoint the remainder among the donor’s descendants the regulation concludes that no portion of the transfer is a completed_gift however if the donor had not retained testamentary_power_of_appointment but had instead provided that the remainder should go to x or his heirs the entire transfer would be a completed_gift sec_25_2511-2 provides that a gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title in himself or herself a gift is also incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed_or_ascertainable_standard under sec_25_2511-2 a donor is considered as himself having a power if it is exercisable by the donor in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom sec_25_2511-2 provides that the relinquishment or termination of a power to change the beneficiaries of transferred property occurring otherwise than by death of the donor is regarded as the event which completes the gift and causes the gift_tax to apply sec_25_2511-2 provides that if a donor transfers property to himself as trustee or to himself and some other person not possessing a substantial adverse_interest as trustees and retains no beneficial_interest in the trust property and no power over it except fiduciary powers the exercise or nonexercise of which is limited by a fixed_or_ascertainable_standard to change the beneficiaries of the transferred property the donor has made a completed_gift and the entire value of the transferred property is subject_to the gift_tax sec_25_2511-2 does not define substantial adverse_interest sec_25_2514-3 provides in part that a taker in default of appointment under a power has an interest that is adverse to an exercise of the power sec_25_2514-3 also provides that a co-holder of a power is considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate plr-110264-14 in 308_us_39 the taxpayer created a_trust for the benefit of named beneficiaries and reserved the power_to_revoke the trust in whole or in part and to designate new beneficiaries other than himself six years later in the taxpayer relinquished the power_to_revoke the trust but retained the right to change the beneficiaries in the taxpayer relinquished the right to change the beneficiaries the court stated that the taxpayer’s gift is not complete for purposes of the gift_tax when the donor has reserved the power to determine those others who would ultimately receive the property accordingly the court held that the taxpayer’s gift was complete in when he relinquished his right to change the beneficiaries of the trust the retention of a power to change the beneficial interests in a_trust causes the transfer to the trust to be incomplete for gift_tax purposes even though the power may be defeated by the actions of third parties 37_tc_897 see also 51_tc_352 in this case grantor retained the grantor’s consent power over the income and principal of trust under sec_25_2511-2 a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom the committee members are not takers in default for purposes of sec_25_2514-3 they are merely co-holders of the power the committee ceases to exist upon the death of grantor under sec_25_2514-3 a co-holder of a power is only considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in this case committee ceases to exist upon grantor’s death accordingly the committee members do not have interests adverse to grantor under sec_25_2514-3 and for purposes of sec_25_2511-2 therefore grantor is considered as possessing the power to distribute income and principal to any beneficiary himself because he retained the grantor’s consent power the retention of this power causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes grantor also retained the grantor’s sole power over the principal of trust under sec_25_2511-2 a gift is incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries in this case the grantor’s sole power gives grantor the power to change the interests of the beneficiaries accordingly the retention of the grantor’s sole power causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes further grantor retained grantor’s testamentary power to appoint the property in trust to any person or persons or entity or entities other than grantor’s estate grantor’s creditors or the creditors of grantor’s estate under sec_25_2511-2 the retention of a testamentary power to appoint the remainder of a_trust is considered a plr-110264-14 retention of dominion and control_over the remainder accordingly the retention of this power causes the transfer of property to trust to be incomplete with respect to the remainder in trust for federal tax purposes finally committee possesses the unanimous member power over income and principal this power is not a condition_precedent to grantor’s powers grantor’s powers over the income and principal are presently exercisable and not subject_to a condition_precedent grantor retains dominion and control_over the income and principal of trust until the committee members exercise their unanimous member power accordingly this power does not cause the transfer of property to be complete for federal gift_tax purposes see 37_tc_897 estate of goelet v commissioner t c accordingly based on the facts submitted and the representations made we conclude that the contribution of property to trust by grantor is not a completed_gift subject_to federal gift_tax any distribution from trust to grantor is merely a return of grantor’s property therefore we conclude that any distribution_of_property by the committee from trust to grantor will not be a completed_gift subject_to federal gift_tax by any member of the committee further upon grantor’s death the fair_market_value of the property in trust is includible in grantor’s gross_estate for federal estate_tax purposes ruling sec_4 and sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power sec_2514 provides that the term general_power_of_appointment means a power which is exercisable in favor of the individual possessing the power possessor the possessor’s estate the possessor’s creditors or the creditors of the individual’s estate sec_25_2514-1 provides in part that a power_of_appointment is not a general power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the possessor or his creditors or the possessor’s estate or the creditors of the estate sec_2514 provides that in the case of a power_of_appointment created after date if the power is exercisable by the possessor only in conjunction with the creator of the power such power is not deemed a general_power_of_appointment plr-110264-14 sec_2514 provides that in the case of a power_of_appointment created after date if the power is not exercisable by the possessor except in conjunction with a person having a substantial interest in the property subject_to the power which is adverse to the exercise of the power in favor of the possessor such power shall not be deemed a general_power_of_appointment for purposes of sec_2514 a person who after the death of the possessor may be possessed of a power_of_appointment with respect to the property subject_to the possessor’s power which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the possessor’s power sec_25_2514-3 provides in part that a co-holder of a power_of_appointment has no adverse_interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power however a co-holder of a power is considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditor or the creditors of his estate thus for example if x y and z held a power jointly to appoint among a group of persons which includes themselves and if on the death of x the power will pass to y and z jointly then y and z are considered to have interests adverse to the exercise of the power in favor of x similarly if on y’s death the power will pass to z z is considered to have an interest adverse to the exercise of the power in favor of y sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power by a disposition which is of such nature that if it were a transfer or property owned by the decedent such property would be includible in the decedent’s gross_estate under sec_2035 to inclusive under sec_2041 the term general_power_of_appointment is defined in relevant part to mean a power which is exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_2041 provides however that in the case of a power_of_appointment created after date which is exercisable by the decedent only in conjunction with another person if the power is not exercisable by the decedent except in conjunction with a person having a substantial interest in the property subject_to the power which is adverse to the exercise of the power in favor of the decedent - such power shall not be deemed a general_power_of_appointment for purposes of sec_2041 a person who after the death of the decedent may be possessed of a power_of_appointment with respect to the property subject_to the decedent’s power which he may exercise in his own favor shall be deemed as having an interest in the plr-110264-14 property and such interest shall be deemed adverse to such exercise of the decedent’s power sec_20_2041-3 of the estate_tax regulations provides in part that a co-holder of a power_of_appointment has no adverse_interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power however a co-holder of a power is considered as having an adverse_interest where he may possess the power after the decedent’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate thus for example if x y and z held a power jointly to appoint among a group of persons which includes themselves and if on the death of x the power will pass to y and z jointly then y and z are considered to have interests adverse to the exercise of the power in favor of x similarly if on y’s death the power will pass to z z is considered to have an interest adverse to the exercise of the power in favor of y the powers held by the committee members under the grantor’s consent power are powers that are exercisable only in conjunction with the creator grantor accordingly under sec_2514 and sec_2041 the committee members do not possess general powers of appointment by virtue of possessing this power further the powers held by the committee members under the unanimous member powers are not general powers of appointment for purposes of sec_2514 and sec_2041 as in the examples in sec_25_2514-3 and sec_20_2041-3 the committee members have substantial adverse interests in the property subject_to this power accordingly any distribution made from trust to a beneficiary other than grantor pursuant to the exercise of these powers the grantor’s consent power and the unanimous member powers are not gifts by the committee members instead such distributions are gifts by grantor based upon the facts submitted and representations made we conclude that any distribution_of_property by the committee from trust to any beneficiary of trust other than grantor will not be a completed_gift subject_to federal gift_tax by any member of the committee further we conclude that any distribution_of_property from trust to a beneficiary other than grantor will be a completed_gift by grantor finally we conclude that the powers held by the committee members are not general powers of appointment for purposes of sec_2041 and accordingly the possession of these powers by the committee members will not cause trust property to be includible in any committee member’s gross_estate under sec_2041 plr-110264-14 except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the 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 copies of this letter are being sent to the taxpayer’s authorized representative sincerely joy c spies joy c spies senior technician reviewer branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division uil no feb date contact person identification_number telephone number e0183 employer_identification_number legends foundation llc charity a b x t l e w o w d o o w dear sir or madam this is in reference to your ruling_request dated date as supplemented by your date letter concerning the treatment of a proposed grant by the foundation to a public charity involving sec_4941 sec_4942 and sec_4945 of the internal_revenue_code code facts foundation has received a determination_letter stating it is exempt from federal_income_tax as an organization described in sec_501 of the code and is classified as a private_foundation under sec_509 the purposes for which the foundation is organized as stated in its articles of incorporation are reaching the world for christ by supporting christian missionary activities here and abroad making scholarship grants in accordance with and after approval under sec_4945 and making distributions to or for_the_use_of organizations exempt at the time under sec_501 foundation proposes to make a grant of dollar_figurex to charity to be paid in four installments over a ‘period of three years charity is exempt from federal_income_tax as an organization described in sec_501 of the code and is classified as a public charity under sec_509 and sec_170 charity’s purposes as stated in its declaration of trust are operating of a training facility for pastors preservation of a historic home and distributions to or for_the_use_of organizations exempt at the time under sec_501 a and b in addition to being substantial contributors to foundation also control llc a limited_liability_company a b and llc are disqualified persons with respect to foundation within the meaning of sec_4946 of the code charity proposes to pay at fair_market_value a lease payment to llc for real_property that llc owns the property includes an historic home and approximately acres of land it is represented that charity will use this property as a training facility for pastors in furtherance of its exempt purposes foundation represents that the proposed grants to charity will specify that the funds are not to be used for any payments to or for llc and that the grant will only be used by charity for purposes and expenses unrelated to the lease foundation has represented that charity has agreed to such restriction and has agreed to use the funds accordingly as a condition of the proposed grant therefore charity will lease the property using independent sources of funds it is represented that charity has sufficient funds without the grants to pay for the lease foundation represents that neither a nor b or anyone related to a or b is a trustee director employee or officer of charity and will not be so long as charity receives and has not expended grant funds from the foundation a and b are advisory non-voting trustees of charity and are entitled to attend the meetings of trustees but would not be able to vote or otherwise control charity foundation also represents that a and b will not participate in any discussion involving the property or lease or any other dealings the foundation has with llc it is represented that charity will maintain the grant funds in a separate_account until the first to occur of termination of the lease i complete expenditure by charity of the granted funds or ii the expiration or rulings requested the foundation has requested the following rulings the proposed grants from foundation to charity will not result in self-dealing as defined in sec_4941 of the code and the regulations thereunder the proposed grants from foundation to charity will not be taxable_expenditures as defined in sec_4945 of the code and the regulations thereunder the proposed grant from foundation to charity will be qualifying distributions as defined in sec_4942 of the code and the regulations thereunder law sec_4941 of the code provides for the imposition of tax on each act of self-dealing between a disqualified_person and a private_foundation sec_4941 of the code states that the term self dealing means any direct or indirect transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_4946 of the code provides in part that the term disqualified person’ shall not include any organization which is described in sec_501 other than an organization described in sec_509 sec_4942 of the code imposes an excise_tax on a private_foundation that fails to meet the distribution_requirements set forth in sec_4942 sec_4942 of the code provides that a qualifying_distribution means a any amount including that portion of reasonable and necessary administrative expenses paid to accomplish one or more purposes described in sec_170 other than any contribution to i an organization controlled directly or indirectly by the foundation or one or more disqualified persons as defined in sec_4946 with respect to the foundation except as provided in sec_4942 or ii a private_foundation which is not an operating_foundation as defined in sec_4942 except as provided in sec_4942 or b any amount_paid to acquire an asset used or held for use directly in carrying out one or more purposes described in sec_170 sec_170 purposes include religious educational and charitable purposes sec_4945 of the code imposes certain excise_taxes on the amount of each taxabie expenditure made by a private_foundation sec_4945 of the code provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation as a grant to an organization unless such organization is described in paragraph or of sec_509 or is an exempt_operating_foundation or the private_foundation exercises expenditure_responsibility with respect to such grant sec_4945 of the code provides that the term taxable_expenditure does not include amounts paid_or_incurred by a private_foundation as a grant to another organization for purposes specified in sec_170 sec_4945 of the code provides that the expenditure_responsibility referred to in subsection d means that the private_foundation is responsible to exert all reasonable efforts and to establish adequate procedures to see that the grant is spent solely for the purpose for which made to obtain full and complete reports from the grantee on how the funds are spent and to make full and detailed reports with respect to such expenditures to the secretary sec_53 d -1 b of the foundation and similar excise_taxes regulations regulations states that the term indirect self-dealing shall not include a transaction engaged in with a government_official by an intermediary organization which is a recipient of a grant from a private_foundation and which is not controlled by such foundation within the meaning of _ subparagraph of this paragraph if the private_foundation does not earmark the use of the grant for any named government_official and there does not exist an agreement oral or written whereby the grantor foundation may cause the selection of the government_official by the intermediary organization a grant by a foundation is earmarked if such grant is made pursuant to an agreement either oral or written that the grant will be used by any named individual thus a grant by a private_foundation shall not constitute an indirect act of self- dealing even though the foundation had reason to believe that certain government officials would derive benefits from such grant so long as the intermediary organization exercises control in fact over the selection process and actually makes the selection completely independently of the private_foundation example of sec_53 d -1 b illustrates the application of this provision sec_53 d -2 f of the regulations provides in part that the fact that a disqualified_person receives an incidental or tenuous benefit from the use of a foundation of its income or assets will not by itself make such use an act of self dealing sec_53_4942_a_-3 of the regulations provides that an organization is controlled by a foundation or one or more disqualified persons with respect to the foundation if any of such persons may by aggregating their votes or positions of authority require the donee organization to make an expenditure or prevent the donee organization from making an expenditure regardless of the method by which the control is exercised or exercisable sec_53_4942_a_-3 of the regulations provides that excess qualifying distributions may be carried over and used to reduce the private foundation's minimum distribution requirement for any subsequent taxable_year within the specified five-year adjustment period sec_53_4946-1 of the regulations provides that for purposes of sec_4941 of the code only the term disqualified_person does not include any organization described in sec_501 other than an organization described in sec_509 like sec_4941 sec_4945 employs similar language regarding the earmarking of grants by a private_foundation to an intermediary with respect to certain earmarked grants sec_53_4945-5 provides that a grant by a private_foundation to a grantee organization which the grantee organization uses to make payments to another organization the secondary grantee shall not be regarded as a grant by the private_foundation to the secondary grantee if the foundation does not earmark the use of the grant for any named secondary grantee and there does not exist an agreement oral or written whereby such grantor foundation may cause selection of the secondary grantee by the organization to which it has given the grant for purposes of this subdivision a grant described therein shall not be regarded as a grant by the foundation to the secondary grantee even though such foundation has reason to believe that certain organizations would derive benefits from such grant so long as the original grantee organization exercises control in fact over the selection process and actually makes the selection completely independently of the private_foundation if a grant is earmarked and the intermediary grantee does not exercise control_over the funds the grant is treated for purposes of sec_4945 of the code as if it had been made directly by the donor to the secondary grantee unlike the regulations under sec_4941 the regulations under sec_4945 do not include an example of the use of intermediaries and government officials in the clear intent of congress with the enactment of chapter was to put an end to transactions using an intermediary congress in enacting sec_4941 of the code intended to replace the then existing arms-length standards regarding certain self- dealing transactions with a general prohibition on such transactions s rep no 91st cong ist sess c b indirect self-dealing is not defined in sec_4941 of the code or the regulations thereunder it was not feasible to draft a comprehensive definition because of the great variety of possible situations which could be called indirect self-dealing memorandum dated date from johnnie m walters commissioner to the assistant secretary for tax policy t d lr-1611 as noted in g_c_m date instead the regulations provide four examples of situations that do not constitute indirect self-dealing sec_53_4941_d_-1 of the regulations provides four exceptions in areas that otherwise would be considered indirect self-dealing one of the exceptions under sec_53 d - b provides for an intermediaries exception that is limited to government officials a separate and distinct class of disqualified persons under sec_4946 of the code government officials do not otherwise have a vested familial or economic_interest with a related private_foundation there is no stated exception from indirect self- dealing under the regulations for private_foundation grants to intermediary organizations where other types of disqualified persons are involved similar to the special exception and example describing government officials under sec_53 d -1 b of the regulations indirect self-dealing therefore may result in transactions between other disqualified persons and intermediary organizations that involve the use of private_foundation assets otherwise an intermediary organization could be used to avoid sec_4941 and thereby undermine congressional intent to prohibit self-dealing the proposed grants do not result in the imposition of tax as direct acts of self-dealing under sec_4941 of the code the excise_tax on self-dealing is imposed where a private_foundation and a disqualified_person engage in prohibited_transactions such as the sale_or_exchange of property an organization described in sec_501 is not a disqualified_person for purposes of sec_4941 the proposed grants are not acts of self-dealing because the charity has received a determination_letter stating that it is a tax-exempt_organization under sec_501 the proposed grants are also not indirect acts of self-dealing because foundation will restrict the use of the grant funds to charity’s general charitable purposes and charity will use separate funds to lease the property from llc the proposed grants do not result in the imposition of tax for a taxable_expenditure under sec_4945 of the code because the grants will be to an organization described in paragraph of sec_509 of the code and will be used exclusively for purposes specified in section - c b in addition because the grants will not be earmarked for a secondary grantee foundation need not exercise expenditure_responsibility under sec_4945 in order to be a qualifying_distribution the expenditure must be among other things be in pursuit of a charitable purpose pursuant to sec_4942 of the code here the grants are made to charity a publicly_supported_organization and since charity is not controlled by a and b the contributions are qualifying distributions under sec_4942 therefore we rule that the proposed grants from foundation to charity will not result in self-dealing as defined in sec_4941 of the code and the regulations thereunder the proposed grants from foundation to charity will not be taxable_expenditures as defined in sec_4945 of the code and the regulations thereunder the proposed grants from foundation to charity will be qualifying distributions as defined in sec_4942 of the code and the regulations thereunder this ruling is directed only to the organization that requested it sec_61 k of the code provides that this ruling may not be used or cited by others as precedent this ruling is limited to the applicability of the provisions of the sections of the code as noted above this ruling is based on the understanding that there will be no material changes in the facts upon which it is based if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely to hast c kans robert c harper jr manager exempt_organizations technical group


t c summary opinion united_states tax_court heather lee comeau sliwinski petitioner v commissioner of internal revenue respondent docket no 9620-01s filed date heather lee comeau sliwinski pro_se cynthia j olson and james gehres for respondent vasquez judge this case was heard pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax the issues for decision are whether during unless otherwise indicated all section references are to the internal_revenue_code and all rule references are to the tax_court rules_of_practice and procedure the taxable_year year at issue petitioner is entitled to a dependency_exemption deduction head-of-household filing_status and the earned_income_credit eic background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time she filed the petition petitioner resided in wolf creek montana petitioner was born in petitioner has three biological children jacob rebekah and michael the father of these children is not involved with them nor does the father claim these children as dependents petitioner does not receive assistance from the state to support these children in petitioner purchased from her father a 2-acre tract of land within his 20-acre ranch during the year at issue petitioner lived with her children in a cabin located on this acre tract petitioner paid the monthly expenses which included at trial petitioner raised for the first time that she is entitled to a dependency_deduction for two of her biological children as a general_rule we do not consider an issue raised for the first time at trial because it has not been properly pleaded 64_tc_61 when issues not raised by the pleadings are tried by implied consent of the parties however the issues shall be treated as if they had been raised in the pleadings rule b the parties satisfied rule b when they introduced the issue at trial and acquiesced in the introduction of evidence on that issue without objection 103_tc_525 affd 100_f3d_778 10th cir see also 691_f2d_449 10th cir expenses for propane and gas for the generators to provide electricity petitioner’s family has picked nuts for about years petitioner has led this activity for the last or years during the nut-picking season petitioner and her children go to utah or nevada to pick nuts and stay in a small trailer petitioner then sells the nuts on a cash_basis and earns about dollar_figure per season during the year at issue petitioner also worked at goodwill industries denny’s restaurant and southern utah pecan ranch on her tax_return petitioner filed under head_of_household filing_status and claimed her stepbrother brendin sliwinski and her stepsister anna sliwinski as dependents petitioner reported dollar_figure on the schedule c profit or loss from business as self-employment_income from the nut picking and dollar_figure in wages after claiming the eic petitioner claimed a refund of dollar_figure in the notice_of_deficiency respondent determined that petitioner was not the custodial_parent of the claimed dependents changed her filing_status to single disallowed her schedule c self-employment_income and denied her claim to the eic as a result respondent denied petitioner’s refund the notice_of_deficiency reports that the year at issue i sec_2001 we note that the year at issue is as shown on petitioner’s tax_return the petition and forms attached to the petitioner filed a timely petition disputing respondent’s determinations after the petition was filed petitioner filed an amended tax_return in which she claimed two of her biological children rebekah and michael as dependents petitioner received the birth certificates and social_security numbers for rebekah and michael after she filed her original tax returns the birth certificates state that rebekah was born on date and michael was born on date discussion at trial petitioner conceded that she is not entitled to dependency_exemption deductions for her stepbrother and stepsister petitioner however argues that she is entitled to dependency_exemption deductions for two of her biological children rebekah and michael and is entitled to the eic petitioner bears the burden_of_proof rule a as an initial matter we found petitioner’s testimony to be credible notice_of_deficiency ie form 4549-cg-s income_tax examination changes form 886-a explanation of items further the notice_of_deficiency was issued on date petitioner did not argue that the burden_of_proof should be shifted pursuant to sec_7491 further we do not find that the resolution of this case depends on which party has the burden_of_proof we resolve the issues on the basis of a preponderance of evidence in the record dependency_exemption deduction sec_151 allows a deduction for exemptions provided by that section sec_151 a taxpayer is allowed an exemption for each dependent as defined in sec_152 if the dependent for the taxpayer’s calendar_year has gross_income less than the exemption_amount or is a child of the taxpayer and has not attained the age of or is a student who has not attained the age of sec_151 a dependent is an individual listed in sec_152 over half of whose support is received from the taxpayer sec_152 in order to qualify as a dependent the individual must be related to the taxpayer in one of the ways enumerated in sec_152 through or if the individual is unrelated to the taxpayer the individual must live with the taxpayer and be a member of the taxpayer’s household throughout the entire taxable_year of the taxpayer sec_152 268_f2d_208 9th cir affg 30_tc_879 turay v commissioner tcmemo_1999_315 butler v commissioner tcmemo_1998_355 sec_1_152-1 income_tax regs we conclude that rebekah and michael are dependents of petitioner because they are the daughter and son respectively of petitioner as shown by their birth certificates and petitioner credibly testified that she provided more than half of their support in sec_152 see lilley v commissioner tcmemo_1989_602 taxpayer is entitled to dependency_exemption based upon his credible testimony that he supplied over half of the support for his daughter further we hold that petitioner is entitled to a deduction for the exemption_amount for rebekah and michael because rebekah and michael are children of petitioner who have not attained the age limits provided for in sec_151 head-of-household filing_status in order to qualify for head-of-household filing_status petitioner must satisfy the requirements of sec_2 pursuant to sec_2 and as relevant therein an individual qualifies as a head_of_household if the individual is not married or a surviving_spouse at the close of the taxable_year and maintains as his home a household that constitutes for more than one-half of the taxable_year the principal_place_of_abode of a son or daughter sec_2 further a taxpayer maintains a household if over half of the cost of maintaining the household is furnished by the taxpayer sec_2 we conclude that petitioner qualifies for head-of-household filing_status because she is not married or a surviving_spouse her home was a household that constituted for more than one-half of the principal_place_of_abode for her son and daughter michael and rebekah respectively and petitioner credibly testified that she provided over half the cost of maintaining her household earned_income_credit sec_32 allows an eligible_individual an eic against the individual’s tax_liability an eligible_individual is any individual who either has a qualifying_child as defined by sec_32 or has no qualifying_child and meets the requirements of sec_32 briggsdaniels v commissioner tcmemo_2001_321 a qualifying_child includes a child who satisfies the relationship_test has the same principal_place_of_abode as the taxpayer for more than one-half of the taxable_year and satisfies the age requirements sec_32 we conclude that petitioner’s children meet these requirements to entitle petitioner to the eic for a qualifying_child respondent argues that petitioner is not allowed the eic however because petitioner did not prove that she made the income specifically the dollar_figure of self-employment_income to support the claimed eic we found petitioner’s testimony to be credible and sufficient to establish that she earned dollar_figure of self- employment income through her nut picking to support the claimed eic this testimony is corroborated by an invoice which reports that petitioner received income from nut picking during the year at issue in reaching our holdings herein we have considered all arguments made and to the extent not mentioned above we conclude them to be moot irrelevant or without merit to reflect the foregoing decision will be entered for petitioner


internal_revenue_service number release date index number ----------------------------------------------------------- ------------------------------------------------- ---------------------------------------------------- ----------------------------------------- legend legend 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-146454-07 date date ------------------------- ------------------------- --------------------------- -------- ----------------- ------------------------------------------------- ------- ------------------ x a b d1 state ------------ dear ------------------- correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code this letter responds to a letter dated date and subsequent ----------------------- facts x was incorporated under state law on d1 x’s shareholders a and b intended for x to be an s_corporation effective d1 however x’s form_2553 election by a small_business_corporation was not filed timely x requests a ruling that it will be recognized as an s_corporation effective d1 plr-146454-07 law and analysis sec_1362 provides that except as provided in sec_1362 a small sec_1362 provides that an election under sec_1362 may be made by a business corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation small_business_corporation for any taxable_year a at any time during the preceding_taxable_year or b at any time during the taxable_year and on or before the 15th day of the 3rd month of the taxable_year sec_1362 provides that if a a small_business_corporation makes an election under sec_1362 for any taxable_year and b such election is made after the 15th day of the 3rd month of the taxable_year and on or before the 15th day of the 3rd month of the following taxable_year then the election shall be treated as made for the following taxable_year any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for the taxable_year and sec_1362 shall not apply sec_1362 provides that if a an election under sec_1362 is made for conclusion based solely on the facts submitted and representations made we conclude that x has established reasonable_cause for failing to make a timely s_corporation_election thus we conclude that x is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 effective d1 within days following the date of this letter the election shall be treated as timely made the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether x is otherwise eligible to be an s_corporation for federal tax purposes except as expressly provided herein we express or imply no opinion concerning in accordance with a power_of_attorney on file with this office a copy of this letter this ruling is directed only to the taxpayer who requested it sec_6110 plr-146454-07 is being sent to your authorized representative of the code provides that it may not be used or cited as precedent sincerely s tara p volungis senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c date number info release date uilc cc tege eoeg et1 genin-144463-02 memorandum for director internal_revenue_service center kansas city mo attn entity control from subject office of division counsel associate chief_counsel tax exempt and government entities cc tege eoeg et1 - genin-144463-02 railroad retirement act tax status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that the following business ceased to be an employer under the railroad retirement act and the railroad unemployment insurance act effective date we have reviewed the opinion of the rrb and based upon the information submitted to the rrb we also conclude that ceased to be an employer under the railroad_retirement_tax_act effective date please take the appropriate action regarding this business will e mcleod cc


id uilc cca_2016052416400604 number release date from sent tuesday date pm to cc bcc subject sec_6601 -------- i am following up on an email i sent you on march 21st discussing whether a claim_for_refund made by a withholding_agent on a form_1042 for amounts that it paid to the irs is subject_to the 180-day interest free period in sec_6611 i discussed the issue with acc i and they indicated that such refunds to a withholding_agent do not arise from overpayments resulting from tax deducted and withheld under either chapter_3 or as stated in e this is because in these situations in which the withholding agents are entitled to refunds or credits they have not actually withheld the amounts for which the refund is claimed rather the withholding_agent should only be receiving a refund if it paid the taxes from its own funds withholding is actually applied then a refund_or_credit should be provided only to the beneficial_owner or the taxpayer subject_to_withholding ie a case in which sec_6611 would apply note that this advice does not apply to claims for refund made by certain withholding agents on form_1042 to the extent permitted for chapter_3 or purposes that make claims for collective refund on form_1042 on behalf of their account holders partners owners or beneficiaries for amounts that were actually withheld in a case in which the the above conclusion with respect to a withholding agent’s claim_for_refund is based on sec_1464 which states that when there has been an overpayment_of_tax under chapter_3 any refund_or_credit made under chapter shall be made to the withholding_agent unless the amount of such tax was actually withheld by the withholding_agent sec_1_1464-1 similarly provides that the refund_or_credit of an overpayment actually withheld at the source under chapter_3 shall be made to the taxpayer from whose income the amount of such tax was in fact withheld to the extent that the overpayment was not in fact withheld at the source but was paid_by the withholding_agent the overpayment shall be made to the withholding_agent with respect to chapter_4 sec_1474 generally provides that refunds for amounts deducted and withheld are to be made to the beneficial_owner of the payment to which the tax is attributable and those refunds should be made as if such tax had been deducted and withheld under chapter_3 given this legal background and the fact that overpayments refunded to withholding agents for amounts paid out of their own funds do not actually result from amounts deducted and withheld under chapter_3 or we now conclude that the 180-day period in sec_6611 should not be applied to withholding agents that make refund claims for amounts that they have paid from their own funds rather than by withholding as required under chapter_3 or and instead the 45-day period of sec_6611 should be applied please let me know if you would like to discuss thanks --------------- ---------------------- --------------------------------------- -------------- ------------------------------------- -------------------------------- --------------------


t c memo united_states tax_court brian hilvety petitioner v commissioner of internal revenue respondent docket no filed date brian hilvety pro_se kathleen c schlenzig for respondent memorandum opinion chiechi judge respondent determined the following defi- ciency in and additions to petitioner’s federal_income_tax tax 1respondent also determined interest on the amounts of those items as provided by law year deficiency dollar_figure additions to tax sec_6651 sec_6654 sec_6651 dollar_figure dollar_figure dollar_figure the issues remaining for decision are does petitioner have unreported wage income for his taxable_year we hold that he does is petitioner liable for his taxable_year for an addition_to_tax under sec_6651 we hold that he is is petitioner liable for his taxable_year for an addition_to_tax under sec_6654 we hold that he is background some of the facts have been stipulated and are so found petitioner had a mailing address in moweaqua illinois at the time he filed the petition during r w p enterprises inc d b a rat’s whole place paid petitioner wages of dollar_figure that company withheld from those wages fica tax and medicare_tax of dollar_figure and dollar_figure respectively during trading specialties international inc paid petitioner wages of dollar_figure that company withheld from those 2all section references are to the internal_revenue_code in effect for the year at issue all rule references are to the tax_court rules_of_practice and procedure 3respondent concedes that petitioner is not liable for his taxable_year for an addition_to_tax under sec_6651 respondent conceded in the parties’ stipulation of facts that petitioner had prepaid credits in excess of those determined in the notice_of_deficiency notice issued to him for that year wages federal_income_tax fica tax and medicare_tax of dollar_figure dollar_figure and dollar_figure respectively during world of powersports inc paid petitioner wages of dollar_figure that company withheld from those wages fica tax of dollar_figure during petitioner did not make any estimated_tax payments to the internal_revenue_service petitioner did not file a tax_return for his taxable_year on date petitioner filed the petition in this case the petition contains allegations contentions arguments and questions that the court finds to be frivolous and or ground- less on date respondent submitted respondent’s trial memorandum in this case attached to respondent’s trial memoran- dum was a copy of a draft of a stipulation of facts proposed by petitioner petitioner’s proposed stipulation of facts as well as petitioner’s cover letter dated date transmit- ting such proposed stipulation of facts to respondent’s counsel petitioner’s date transmittal letter in an order dated date date order the court ordered respondent’s trial memorandum including the attachments thereto to be filed as of the date of receipt by the court in that order the court found that certain statements and arguments set forth in petitioner’s proposed stipulation of facts and petitioner’s date transmittal letter are frivolous and or groundless in the date order the court reminded petitioner about sec_6673 and admonished him that in the event he continued to advance frivolous and or groundless contentions and arguments the court would be inclined to impose a penalty not in excess of dollar_figure on him under sec_6673 on date petitioner submitted petitioner’s trial memorandum to the court in an order dated date date order the court ordered petitioner’s trial memorandum to be filed as of the date of receipt by the court in that order the court found that petitioner’s trial memorandum set forth issues statements contentions and arguments that are frivolous and groundless in the court’s date order the court reminded petitioner about its date order and issued a second reminder to petitioner about sec_6673 and a second admonition to him that in the event he continued to advance frivolous and or groundless statements contentions and arguments the court would be inclined to impose a penalty not in excess of dollar_figure on him under sec_6673 on date at the call of this case from the calen- dar calendar call at the court’s trial session in chicago illinois the court again reminded petitioner that in the event he advanced frivolous and or groundless contentions and arguments at trial the court would impose a penalty on him under sec_6673 the court also advised petitioner at the calendar call that in the event he advanced such types of contentions and arguments at trial as opposed to presenting facts that are relevant to resolving the issues remaining in the instant case the court would probably not allow him to testify about such frivolous and or groundless contentions and arguments on date this case was called for trial peti- tioner was the only witness the following colloquy took place between the court and petitioner during petitioner’s testimony the court mr hilvety you may now testify to any facts that are relevant to resolving the deter- minations in the notice_of_deficiency that remain at issue in this case the witness well the fact is that the notice_of_deficiency is deficient on its face because it has no section listed for the deficiency the court that’s a legal argument i want any facts that you want to testify to that are relevant to resolving the issues that remain in this case the witness well the internal_revenue_service is required to state what the tax is derived from under section the court that’s an argument and it’s a frivo- lous argument and i told you this morning and i’ll tell you now i’ll give you one more chance and unless you’re going to start testifying to facts that are relevant to resolving the issues in this case as opposed to making frivolous and or groundless conten- tions and arguments you will be excused from testify- ing altogether and i will entertain a motion to dis- miss for failure to properly prosecute this case do you understand what i’m saying to you the witness yes i do the court okay now what facts that are rele- vant to resolving the issues that remain in this case do you want to testify about the witness in light of what you’ve just said i have nothing else on cross-examination the following dialogue took place between respondent’s counsel and petitioner q mr hilvety you did not file a tax_return for taxable_year did you a i could not find in the internal_revenue_code anywhere where i was required_by_law written by con- gress to file a return q sir did you or did you not file a tax_return for the witness no i did not the court did not order any posttrial briefs in this case nonetheless on date petitioner submitted to the court a document that the court had filed as petitioner’s supplement to petitioner’s trial memorandum petitioner’s supplement peti- tioner’s supplement contains questions statements contentions and arguments that the court finds to be frivolous and or ground- less petitioner’s supplement also argues for the first time that respondent mailed the notice to him with respect to his taxable_year after the period of limitations prescribed by sec_6501 for that year had expired discussion petitioner has introduced no credible_evidence with respect to any factual issue relevant to ascertaining whether the deter- minations in the notice are erroneous we find that petitioner has the burden of proving that those determinations are wrong rule a 290_us_111 sec_7491 petitioner proffered no evidence and advanced no argument establishing that respondent’s determination that he had wage income for totaling dollar_figure is in error indeed petitioner concedes in the parties’ stipulation of facts in this case that he had that amount of wage income for that year nor has petitioner proffered any evidence or advanced any argument establishing that respondent is wrong in determining that he is liable for his taxable_year for additions to tax under sec_6651 and sec_6654 we now turn to sec_6673 a provision that the court brought to petitioner’s attention several times both before and during the trial in this case the court specifically advised petitioner before and during trial that the questions 4petitioner conceded on cross-examination at trial and in petitioner’s supplement to petitioner’s trial memorandum that he did not file a return for his taxable_year we conclude that respondent has satisfied respondent’s burden of production under sec_7491 statements contentions and arguments that he was advancing in his trial memorandum and that he attempted to advance at trial were frivolous and or groundless moreover the court reminded petitioner before and during trial about sec_6673 and admonished him that in the event he continued to make frivolous and or groundless statements contentions and arguments the court would be inclined to impose a penalty on him under that section nonetheless petitioner persisted throughout the course of the proceedings in this case in advancing frivolous and or groundless questions statements contentions and arguments sec_6673 authorizes the court to impose a penalty in favor of the united_states in an amount not to exceed dollar_figure whenever it appears that a taxpayer’s position in a proceeding is frivolous and or groundless or that the taxpayer institutes or maintains a proceeding in the court primarily for delay on the instant record we find that petitioner’s position in this case is frivolous and or groundle sec_5 and that he instituted and maintained this proceeding primarily for delay accordingly we shall impose a penalty on petitioner under sec_6673 in the amount of dollar_figure 5although not pled in the petition petitioner argues for the first time in petitioner’s supplement to petitioner’s trial memorandum that the period of limitations under sec_6501 with respect to his taxable_year has expired that argument is groundless petitioner did not file a tax_return for we hold that the period of limitations for that year has not ex- pired sec_6501 we have considered all of petitioner’s contentions argu- ments and requests that are not discussed herein and we find them to be without merit and or irrelevant to reflect the foregoing and respondent’s concession decision will be entered under rule


t c memo united_states tax_court richard henry and carmen m strickland petitioners v commissioner of internal revenue respondent docket no filed date richard h strickland pro_se steven m roth for respondent memorandum findings_of_fact and opinion gerber judge respondent determined a deficiency in petitioners’ federal_income_tax of dollar_figure a sec_6651 addition_to_tax of dollar_figure and a sec_6662 penalty unless otherwise stated all section references are to the internal_revenue_code in effect for the taxable years in issue and all rule references are to the tax_court rules_of_practice and procedure - - of dollar_figure respondent also determined a deficiency in petitioners’ federal_income_tax of dollar_figure and a sec_6662 penalty of dollar_figure after concessions the only substantive issue for our consideration is whether petitioners are entitled to deduct any of the schedule c car and truck expenses petitioners also allege that the audits and resulting deficiency determinations were improperly conducted and they ask that damages be awarded for any injuries they may have suffered as a result findings_of_fact petitioners richard h and carmen m strickland resided in west covina california at the time their petition was filed carmen m strickland is a petitioner in this case because she filed a joint_return with richard strickland subsequent references to petitioner refer only to richard strickland petitioner filed his federal_income_tax return on date petitioner did not receive an extension nor did he offer an explanation for the late filing the tax_return included a deduction on schedule c for car and truck expenses in the amount of dollar_figure respondent disallowed the dollar_figure deduction that disallowance along with respondent has conceded the deficiency and related penalty the stipulation of facts and the exhibits attached thereto are incorporated herein by this reference - - an income adjustment resulted in a dollar_figure income_tax deficiency petitioner admits that there was an error in his return requiring the income adjustment he has offered no evidence to either substantiate the schedule c expenses or to show that they were ordinary and necessary opinion petitioner does not seek to show that respondent’s adjustments to income and deductions were in error instead he asks the court to waive the deficiency and award dollar_figure in damages from respondent petitioner contends that the above relief is justified due to respondent’s alleged improper audit procedures and actions petitioner contends that respondent’s following actions were improper violation of the privacy_act of publaw_93_579 88_stat_1896 the privacy_act when respondent’s agent informed petitioner that his was a routine audit failure to meet the burden of production allegedly imposed by sec_6201 and lack of substantial justification to begin the audit that led to the deficiency determination petitioner claims that he was injured by these alleged improprieties and should be compensated by being relieved from the deficiency he also claims that he is entitled to sec_7435 civil damages because respondent’s counsel intentionally misstated facts in his proposed stipulation of facts included in his motion under rule f to show cause why q4e- such facts should not be stipulated said facts were deemed to be admitted as a sanction for petitioner’s failure to comply with the court’s order dated date this court is a court of limited jurisdiction see 85_tc_527 two of petitioner’s claims fall outside that jurisdiction actions under the privacy_act codified a sec_5 u s c 552a and pursuant to sec_7435 are both properly brought in u s district courts see 102_tc_683 the exclusive remedy for individuals seeking redress for a violation of the privacy_act is a civil_action in federal district_court pursuant to u s c sec_552a g sec_7435 taxpayer must bring sec_7435 action in a district_court and such civil_action shall be the exclusive remedy for recovering damages we do not have the authority to address these claims petitioner also contends that he was injured by respondent’s alleged failure to meet a burden of production under sec_6201 when respondent did not produce a requested form_1099 discussed during the audit assuming that respondent ever had such a burden the document was related only to the deficiency which respondent has conceded petitioner’s only remaining claim of injury is that the deficiency_notice was the result of an audit that was not substantially justified this allegation stems from petitioner’s --- - theory of a third party’s malicious information instigating the audit as a general_rule we do not look behind the deficiency_notice see greenberg’s express inc v commissioner t1t c the court_of_appeals for the ninth circuit has recognized an exception to this rule and has looked behind the notice_of_deficiency in cases involving unreported income where the commissioner introduced no substantive evidence but rested on the presumption of correctness and the taxpayer challenged the notice_of_deficiency on the grounds that it was arbitrary see 596_f2d_358 9th cir revg 67_tc_672 this exception to the rule is not applicable to the instant case therefore we shall not look behind the deficiency_notice to evaluate the audit procedure there is no inherent evil residing in the fact that the commissioner may institute an audit based on information received from a third party we find petitioner’s claims of injury and request for damages to be either without merit or without our jurisdiction the remaining matter in this case is whether petitioner is entitled to the schedule c car and truck expense deductions he claimed initially we observe that petitioner bears the burden of proving by a preponderance of evidence that the commissioner’s disallowance was in error see 592_f2d_272 sth cir citing 293_us_507 petitioner has presented no -- - evidence regarding these expenses therefore we hold for respondent on this issue respondent also determined an accuracy-related_penalty under sec_6662 which imposes an addition_to_tax in the amount of percent of any underpayment attributable to negligence to avoid this negligence_penalty petitioner has the burden of showing that his actions were not careless reckless or made with intentional disregard of rules or regulations see 743_f2d_670 9th cir affg tcmemo_1982_666 because petitioner has presented no evidence as to why his actions were reasonable petitioners are liable for the sec_6662 penalty for the taxable_year see lyszkowski v commissioner tcmemo_1995_235 affd 79_f3d_1138 3d cir in addition petitioner’s allegations that respondent’s actions were improper do not constitute reasonable_cause respondent also determined that petitioners were subject_to an addition_to_tax for failure to timely file a tax_return this addition is imposed by sec_6651 unless petitioner can show that the late filing was due to reasonable_cause see 58_tc_757 petitioner has offered no evidence to show that respondent’s determination of the addition_to_tax was in error accordingly petitioners are liable for the sec_6651 addition_to_tax for their tax_year in light of the foregoing decision will be entered for petitioners with respect to the tax_year and for respondent for the tax_year