t c memo united_states tax_court lakeisha renee figures petitioner v commissioner of internal revenue respondent docket no filed date r determined tax deficiencies and accuracy-related_penalties pursuant to sec_6662 for p’s and taxable years r disallowed p’s fictitious business_losses and unsubstantiated gambling_losses for all taxable years at issue adjusted p’s business income for disallowed a deduction for taxes for and disallowed the american opportunity_credit p claimed for at trial p conceded the disallowance of the business_losses and the adjustment to business income leaving only the disallowance of gambling loss deductions for all years deductions for taxes the education credit and the accuracy-related_penalties in dispute held r’s disallowance of the gambling_losses for all years and the american opportunity_credit for is sustained held further p is entitled to an itemized_deduction for taxes of dollar_figure for held further p is liable for the sec_6662 penalties lakeisha renee figures pro_se vivian bodey for respondent memorandum findings_of_fact and opinion wherry judge this case is before the court on a petition for redetermination of income_tax deficiencies and sec_6662 accuracy-related_penalties for the and taxable years at trial petitioner conceded business_expense deductions of dollar_figure for dollar_figure for and dollar_figure for petitioner also conceded respondent’s adjustment to business income for from dollar_figure to zero the remaining issues before the court are whether petitioner is entitled to certain claimed itemized_deductions for and of dollar_figure dollar_figure and dollar_figure respectively which include gambling 1unless otherwise indicated all section references are to the internal_revenue_code_of_1986 code as amended and in effect for the taxable years at issue and all rule references are to the tax_court rules_of_practice and procedure losses of dollar_figure dollar_figure and dollar_figure for and respectively and tax for of dollar_figure whether petitioner is entitled to the claimed american opportunity_credit of dollar_figure and whether petitioner is liable for an accuracy-related_penalty under sec_6662 other adjustments to petitioner’s taxable_income and credits are computational findings_of_fact some of the facts have been stipulated the stipulation of facts with accompanying exhibits is incorporated herein by this reference at the time the petition was filed petitioner resided in california petitioner was employed as a correctional officer for the state of california for the taxable years in issue in her spare time petitioner decorated cakes as a hobby she did not consider this hobby a business though she sometimes received some payment to cover her costs and she did not report the payments as taxable_income she also attended at least one class involving cake decorating in addition petitioner would go to casinos with her friends and play the slot machines petitioner never won much and whatever she did win she played right 2we note that one of these computational adjustments the disallowance of the hope scholarship credit for is erroneously included in respondent’s explanation of items for back into the machines petitioner did not use a slot club card nor did she provide any records of her winnings and losses at some point petitioner made the ill-fated decision to use nationwide tax solution also known as vaughn’s tax services to prepare her and income_tax returns bertha r vaughn also known as bertha r milton owned and operated nationwide tax solution in preparing petitioner’s form_1040 u s individual_income_tax_return ms vaughn advised petitioner that she could deduct expenses related to her cake decorating hobby petitioner provided ms vaughn with some information regarding supplies she had purchased petitioner never told ms vaughn that she decorated cakes professionally or that she ever considered her hobby a business nonetheless ms vaughn prepared a schedule c profit or loss from business listing petitioner as having a business of catering and cake decorating the schedule c listed a series of fictitious expenses for a total business loss of dollar_figure in addition petitioner told ms vaughn that she had gambling_losses ms vaughn included an dollar_figure deduction for gambling_losses under miscellaneous deductions as casino on petitioner’s schedule a itemized_deductions in total petitioner’s return for showed she had no tax_liability and was due a refund of dollar_figure margarita oregon an employee for vaughn’s tax service prepared petitioner’s form_1040 which was filed electronically petitioner did not review the form_1040 before it was filed ms vaughn also prepared petitioner’s form_1040 again ms vaughn prepared a schedule c this time ms vaughn created a fake janitorial business for the return listing petitioner’s business as janitorial on the schedule c petitioner never told ms vaughn that she had a janitorial business nor did she ever have a janitorial business the schedule c listed a number of fictitious expenses for a total business loss of dollar_figure ms vaughn also prepared a schedule a that listed a dollar_figure deduction for gambling_losses also of note is that line titled recovery rebate credit on petitioner’s form_1040 was blank meaning that she was not claiming the credit in total petitioner’s return showed she had a tax_liability of dollar_figure but was due a dollar_figure refund because of dollar_figure of claimed income_tax_withholding and dollar_figure of claimed additional_child_tax_credit the return was filed electronically and again petitioner did not review the return before its filing ms vaughn also prepared petitioner’s form_1040 federal tax_return again ms vaughn prepared a schedule c for a fictitious janitorial business this time the imaginary business generated imaginary income but expenses more than offset that income the schedule c reported a net business loss of dollar_figure ms vaughn prepared a schedule a that claimed a dollar_figure deduction for gambling_losses and a dollar_figure deduction for taxes petitioner’s form_1040 also claimed a dollar_figure refundable american opportunity_credit in total petitioner’s return showed that she had no tax_liability for the year and that she was due a dollar_figure refund the claimed refund arose from the american opportunity_credit and three other improperly claimed credits the additional_child_tax_credit for dollar_figure the earned_income_credit for dollar_figure and the making_work_pay_credit for dollar_figure for the third year in a row petitioner did not review her tax_return before it was filed electronically in or petitioner filed for bankruptcy to complete the process petitioner needed to obtain copies of her tax returns when she approached nationwide tax solution and ms vaughn to get copies of her returns petitioner got the runaround it was around this time that petitioner learned that something was wrong with her returns because she was being told that she had a janitorial business petitioner stated that she never received from ms vaughn an explanation about the janitorial business and was never able to get copies of her tax returns or supporting documentation for her bankruptcy proceeding for respondent’s audit or for the trial in this case not surprisingly the department of justice took an interest in ms vaughn perhaps because of her clients received refunds ms vaughn pleaded guilty in federal court on date to four counts of aiding and assisting in the presentation of a false income_tax return to the internal_revenue_service irs under sec_7206 ms vaughn admitted in her plea agreement that she had fabricated material items on tax returns which created more complex returns and generated refunds so that she could charge her clients higher fees and get recommendations for new clients respondent issued a notice_of_deficiency dated date determining the following deficiencies and sec_6662 penalties year deficiency dollar_figure big_number big_number penalty sec_6662 dollar_figure big_number big_number for the through tax years respondent disallowed the schedule c losses and the schedule a deductions for gambling_losses for the taxable_year respondent also disallowed the claimed america opportunity_credit adjusted petitioner’s business income and disallowed the schedule a deduction for taxes respondent also adjusted petitioner’s tax_liability by dollar_figure by disallowing the recovery rebate credit because of computational adjustments petitioner timely petitioned this court a trial was held on date in los angeles california opinion as an initial matter the commissioner’s determinations are presumed correct and the taxpayer bears the burden of proving that they are incorrect rule a 290_us_111 in certain circumstances sec_7491 shifts the burden_of_proof to the commissioner petitioner has not alleged that sec_7491 applies and has not established that she is in compliance with the substantiation and recordkeeping requirements of that section see sec_7491 and b therefore petitioner bears the burden of proving entitlement to the claimed deductions deductions and credits are a matter of legislative grace and taxpayers must prove entitlement to the deductions and credits claimed rule a 503_us_79 94_tc_733 taxpayers are required to identify each deduction and credit show that they have met all requirements and keep books_or_records to substantiate all claimed deductions and credits sec_6001 62_tc_834 sec_1_6001-1 income_tax regs i gambling loss deductions petitioner claimed itemized_deductions for gambling_losses of dollar_figure dollar_figure and dollar_figure for and respectively these deductions are allowable if at all under sec_165 taxpayers who are not in the trade_or_business of gambling and who choose to calculate their taxable_income using itemized_deductions in lieu of the standard_deduction sec_63 sec_161 may deduct gambling_losses under certain circumstances sec_165 provides that losses from wagering transactions shall be allowed only to the extent of the gains from such transactions thus petitioner faces a dual burden see rodriguez v commissioner tcmemo_2001_36 citing 68_tc_867 first petitioner must prove she had losses during the years at issue see rios v commissioner tcmemo_2012_128 citing 429_f2d_182 6th cir aff’g t c memo second even if petitioner could substantiate her gambling_losses she would still have to show gambling winnings which would be includible in her gross_income see eg park v commissioner 136_tc_569 rodriguez v commissioner tcmemo_2001_36 petitioner has not reported or paid tax on any gambling income for the years at issue at trial petitioner stated that she never won large prizes and made no attempt to substantiate or report as gross_income the amounts that she did win whether a taxpayer has substantiated gambling_losses is a question of fact to be decided on the basis of all the evidence schooler v commissioner t c pincite petitioner offered only her testimony that she played the slots quite often and that she incurred some losses while this court may estimate the amounts of allowable deductions the taxpayer must first provide some credible_evidence upon which to base the estimate 85_tc_731 see also rios v commissioner tcmemo_2012_128 petitioner did not keep any records that would help us to determine the amounts of gambling_losses or winnings for the years at issue she did not testify as to the number of times she played or as to the amount of money she lost at any given visit thus we do not have enough evidence upon which to base an estimate as to petitioner’s gambling_losses we affirm respondent’s disallowance of the gambling deductions ii taxes respondent disallowed petitioner’s taxable_year schedule a deduction for taxes of dollar_figure sec_164 provides the rules under which taxpayers choosing to use itemized_deductions may deduct certain taxes petitioner deducted general sales_taxes of dollar_figure real_estate_taxes of dollar_figure and other taxes of dollar_figure of which dollar_figure was labeled dmv petitioner bears the burden_of_proof with respect to this deduction see rule a indopco inc v commissioner u s pincite petitioner did not present any evidence that she was entitled to the deduction claimed with respect to the real_estate_taxes and other taxes the deduction for the general sales_taxes however is different in sec_164 allowed taxpayers to elect to deduct state and local sales_taxes in lieu of deducting state_and_local_income_taxes a taxpayer may deduct the actual 3on her schedule a petitioner claimed a total deduction for taxes of dollar_figure although the total of the individual tax amounts shown is dollar_figure respondent’s worksheets attached to form 4549-a income_tax discrepancy adjustments list dollar_figure as the deduction for taxes found per exam this perplexing negative finding resulted in respondent’s adjustment of dollar_figure an amount greater than the dollar_figure petitioner claimed on her return we do not see and respondent has not explained how this extra disallowance is possible and absent explanation from respondent we limit the disallowance to dollar_figure which is the amount claimed on the return dollar_figure minus the amount we found petitioner is entitled to dollar_figure perhaps the dollar_figure was a refund of taxes paid in a prior taxable_year if so it would normally be reported on line or on the first page of the form_1040 and not as a contra item on schedule a amount of sales_taxes paid which would require substantiation alternatively the commissioner as a matter of administrative convenience permits taxpayers to calculate the amount of the deduction by using the guidelines known as optional state and certain local sales_tax tables which the irs publishes sec_164 instructions for schedule a form_1040 at a-3 petitioner elected to deduct state and local sales_taxes in lieu of state_and_local_income_taxes and she used the commissioner’s tax_tables to arrive at a deduction of dollar_figure instructions for schedule a form_1040 at a-12 this deduction becomes computational and petitioner did not need to further substantiate the deduction see roberts v commissioner tcmemo_1996_346 finding that the taxpayers were entitled to a deduction for general_sales_tax which in the absence of substantiation of actual expenditure could be claimed based on tables promulgated by respondent based upon reported income because respondent increased petitioner’s relevant income to dollar_figure petitioner with three claimed exemptions for herself and two children is now entitled to a greater deduction of dollar_figure according to the tax_tables instructions for schedule a form_1040 at a-12 thus for we sustain respondent’s determination with respect to the deduction of real_estate and other taxes but find petitioner is entitled to a deduction for general sales_taxes of dollar_figure iii education credit respondent disallowed petitioner’s claimed american opportunity_credit for the american opportunity_credit is a modified version of the hope scholarship credit and is in effect for tax years to sec_25a the american opportunity_credit provides for a credit against tax equal to a percent of so much of the qualified_tuition_and_related_expenses paid_by the taxpayer during the taxable_year as does not exceed dollar_figure plus b percent of such expenses so paid as exceeds dollar_figure but does not exceed dollar_figure sec_25a the credit phases out for taxpayers whose modified adjusted_income exceeds dollar_figure or dollar_figure for married taxpayers filing joint returns sec_25a in addition up to of this credit may be refundable sec_4petitioner may be entitled to a greater deduction if there were additional local general sales_taxes in place for the taxable_year see instructions for schedule a form_1040 at a-5 instructing residents of california to make an additional calculation if their combined state and local general_sales_tax rate exceeds 25a i even with respondent’s other adjustments to petitioner’s return petitioner still met the income requirements to receive a credit but petitioner bears the burden of proving entitlement to the credit see lapoint v commissioner t c pincite tax_credits like deductions are a matter of legislative grace petitioner did not produce any evidence tending to show she was eligible for this credit she did not produce any records of tuition payments or related educational expenses thus petitioner has not met her burden of proving entitlement to the american opportunity_credit we sustain respondent’s disallowance of this credit iv recovery rebate credit respondent also disallowed a dollar_figure recovery rebate credit for form 886-a explanation of items attached to respondent’s notice_of_deficiency stated because we changed your adjusted_gross_income and or your earnings and those changes affected your modified_adjusted_gross_income or earned_income we have also adjusted your recovery rebate the recovery rebate was a one-time credit of up to dollar_figure for single individual taxpayers who met certain requirements sec_6428 and b the credit is increased by dollar_figure per qualifying_child of the taxpayer and decreased by of the taxpayer’s adjusted_gross_income that exceeds dollar_figure or in the case of joint returns dollar_figure sec_6428 d this credit is treated as a refundable_credit sec_6428 because petitioner had two qualifying children her total credit was dollar_figure before the limit of sec_6428 and g however because of her adjusted_gross_income in excess of dollar_figure as determined by respondent exceeds dollar_figure petitioner is not eligible for the credit that would be the end of any inquiry save one small detail petitioner did not claim the credit on her form_1040 line where a taxpayer is supposed to enter the amount of the credit claimed is blank the irs did offer to take the onus of calculating the amount of the rebate off taxpayers instructing them to write rrc on line to have the irs calculate the amount of the credit form_1040 instruction sec_61 petitioner however did not write or type rrc or any other notation indicating she was claiming the credit we are thus left with the question of whether petitioner actually received this credit respondent clearly thinks so but did not provide any evidence in fact it may have been irs practice to calculate a rebate even if the taxpayer entered zero on line or left that line blank see i r s news_release ir-2009-10 date if there is any question at all as to the amount that should be reported for the recovery rebate credit the taxpayer or preparer should enter a zero on the appropriate line above and the irs will determine whether a recovery rebate credit is due and if so how much if the irs calculated recovery rebate credits for a taxpayer who entered zero it is not beyond comprehension that they would do the same for a taxpayer who left the line blank we are reluctant to determine this adjustment to be correct solely on the cursory assertion in the notice_of_deficiency absent other proof in the record but in any event this adjustment is a correlative computational adjustment to be resolved in the rule computation v accuracy-related_penalty respondent bears the burden of production with regard to the sec_6662 penalties see sec_7491 to meet this burden respondent must produce sufficient evidence establishing that it is appropriate to impose the penalties see 116_tc_438 petitioner retains the burden of establishing that the underpayments were due to reasonable_cause and that she acted in good_faith see id pincite 5the irs later revised this news_release to read rrc instead of zero i r s news_release ir-2009-10 updated date we cite these documents and the form_1040 instructions not as authority but merely to point out our confusion and maybe the irs’ own confusion as to how respondent credited petitioner with the recovery rebate credit in the first place we are also mindful that in this case the person who prepared the return is a criminal and any examination of this return was necessarily complicated by that fact sec_6662 imposes a penalty on an underpayment_of_tax required to be shown on the return if the underpayment is due to one or more of the causes specified in subsection b respondent contends that petitioner is liable for the penalty for each year in issue because of negligence or disregard of rules or regulations or alternatively because the underpayment is due to a substantial_understatement_of_income_tax sec_6662 and we first address the underpayment on which this penalty is assessed sec_6664 defines underpayment as follows sec_6664 underpayment --for the purposes of this part the term underpayment means the amount by which any_tax imposed by this title exceeds the excess of-- the sum of-- a the amount shown as the tax by the taxpayer on his return plus b amounts not so shown previously assessed or collected without assessment over the amount of rebates made the imposition of the penalty for on the portion of the underpayment attributable to the disallowance of the recovery rebate credit is troubling we see no need to engage in an in-depth statutory analysis and only note that the phrase the amount shown by the taxpayer on his return must have some meaning the credit is not an amount shown on the return an amount not so shown previously assessed or a rebate sec_6664 therefore respondent cannot impose the accuracy-related_penalty on an amount not shown on petitioner’s return as in this context such an amount does not constitute an underpayment we turn next to respondent’s assertion of the penalty on the grounds of negligence n egligence includes any failure to make a reasonable attempt to comply with the provisions of this title ie the internal_revenue_code sec_6662 negligence has also been defined as ‘a lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances ’ 89_tc_849 quoting marcello v commissioner 380_f2d_499 5th cir aff’g on this issue 43_tc_168 and t c memo aff’d 904_f2d_1011 5th cir aff’d 501_us_868 negligence is ‘strongly indicated’ when ‘ a taxpayer fails to make a reasonable attempt to ascertain the correctness of a deduction credit or exclusion on a return which would seem to a reasonable and prudent person to be ‘too good to be true’ under the circumstances ’ 471_f3d_1021 9th cir quoting sec_1 b ii income_tax regs aff’g tcmemo_2004_269 disregard of rules or regulations includes careless reckless or intentional disregard of code provisions or regulations sec_6662 sec_1_6662-3 income_tax regs see also park v commissioner 136_tc_569 the failure to keep adequate books_and_records or to review a tax_return before filing it also constitutes negligence 136_tc_585 sec_1_6662-3 income_tax regs there is an exception to the sec_6662 penalty when a taxpayer can demonstrate that there was reasonable_cause for the underpayment and the taxpayer acted in good_faith with respect to the underpayment sec_6664 regulations provide that the determination of reasonable_cause and good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances sec_1_6664-4 income_tax regs a taxpayer’s reasonable and good-faith reliance on the advice of a professional may be a factor tending to show reasonable_cause id respondent has met his burden of production petitioner did not maintain records substantiating her deductions and losses as required by sec_6001 in addition petitioner did not seek to review her return nor did she question why her returns generated large refunds compared to her wage income and withholding in short they were too good to be true see sec_1_6662-3 income_tax regs petitioner contends that her reliance on her tax preparer constitutes reasonable_cause for petitioner relied upon ms vaughn’s advice that certain expenses relating to her cake decorating hobby were deductible and ms vaughn on her own initiative characterized petitioner’s hobby as a business for and ms vaughn went a step further creating a fictitious janitorial business but unconditional reliance on a preparer or adviser does not always by itself constitute reasonable reliance owen v commissioner tcmemo_2012_21 as criminal as ms vaughn’s behavior may have been petitioner is not without fault here taxpayers have a duty to review their tax returns before signing and filing them 70_tc_465 aff’d 651_f2d_1233 6th cir by her own admission petitioner did not review any of the returns in question before signing the forms authorizing ms vaughn to electronically file the returns thus petitioner cannot place the full blame on her return preparer see 88_tc_654 as a general_rule the duty_of filing accurate returns cannot be avoided by placing responsibility on a tax_return_preparer because petitioner did not make a reasonable effort to ensure her returns were accurate by reviewing them she has not met her burden_of_proof with respect to reasonable_cause see woodsum v commissioner t c pincite sandoval v commissioner tcmemo_2001_310 aff’d 67_fedappx_252 5th cir therefore we sustain respondent’s application of the sec_6662 penalty for each year at issue the court has considered all of petitioner’s contentions argument requests and statements to the extent not discussed herein we conclude that they are moot irrelevant or without merit to reflect the foregoing and concessions by the parties decision will be entered under rule


office_of_chief_counsel internal_revenue_service memorandum number release date cc ita b04 jpbaumgarten postf-106359-11 uilc date date to reid m huey associate area_counsel large business international from christina m glendening assistant to the branch chief branch office of associate chief_counsel income_tax accounting subject conflicting state law classifications of exchange properties in sec_1031 transactions this memorandum responds to your request for advice dated date issue how do state law characterizations of property as real or personal affect whether the property is of like_kind for purposes of sec_1031 of the internal_revenue_code conclusions federal_income_tax law rather than state law controls whether exchanged properties are of like_kind for purposes of sec_1031 under the income_tax regulations of sec_1031 properties are generally of like_kind if they are of the same nature and character state law property classifications while relevant for determining if property is real or personal_property are not determinative of whether properties are of the same nature and character rather all facts and circumstances should be considered in determining whether properties are of the same nature and character and thus are of like_kind facts case a natural_gas pipeline in state a constructed along a right of way on real_property that is classified as personal_property in state a is exchanged for a state b postf-106359-11 natural_gas pipeline that is constructed along a right of way on real_property and that is classified as real_property in state b the right of ways associated with the exchanged pipelines in state a and state b are also exchanged case a steam turbine attached as a fixture in a state a land improvement a building as a component of a system for the commercial production of electricity that is treated as real_property in state a is exchanged for a steam turbine attached as a fixture in a state b land improvement as a component of a system for the commercial production of electricity that is treated as personal_property in state b the land and buildings associated with the steam turbines in both state a and state b are also exchanged case a steam turbine that is attached as a fixture in a state a land improvement a building as a component of a system for the commercial production of electricity and that is treated as real_property in state a is exchanged for raw land in state b the land and building associated with the steam turbine were also exchanged as part of the transaction case a steam turbine that is attached as a fixture in a state a land improvement a building as a component of a system for the commercial production of electricity and a state a natural_gas pipeline constructed along a right of way on real_property both treated as real_property in state a are exchanged for a state b natural_gas pipeline constructed along a right of way on real_property and that is identical in all material physical respects to the state a natural_gas pipeline that is treated as personal_property in state b the land buildings and right of ways associated with the steam turbine and pipelines were also exchanged as part of this transaction applicable law and analysis sec_1031 of the code provides that no gain_or_loss shall be recognized on the exchange of property held for productive use in a trade_or_business or for investment if such property is exchanged solely for property of like_kind which is to be held either for productive use in a trade_or_business or for investment sec_1_1031_a_-1 of the regulations provides that the words like_kind have reference to the nature or character of the property and not to its grade or quality one kind or class of property may not under sec_1031 be exchanged for property of a different kind or class the fact that any real_estate involved is improved or unimproved is not material for that fact relates only to the grade or quality of the property and not to its kind or class sec_1_1031_a_-1 provides examples of exchanges of property of a like_kind stating that no gain_or_loss is recognized if a taxpayer exchanges property held for productive use in his trade_or_business together with cash for other_property of like_kind for the same use such as a truck for a new truck or a passenger_automobile for a new postf-106359-11 passenger_automobile to be used for a like purpose or a taxpayer who is not a dealer in real_estate exchanges city real_estate for a ranch or farm or exchanges a leasehold of a fee with years or more to run for real_estate or exchanges improved real_estate for unimproved_real_estate or a taxpayer exchanges investment_property and cash for investment_property of a like_kind the earliest clear authority for the principle that state law is determinative of the classification of property rights as real or personal is in morgan v commissioner 309_us_424 as amended on denial of rehearing see also aguilino v united_states 363_us_509 in morgan the supreme court specifically acknowledged that state law creates legal interests and rights morgan pincite in addition a number of cases use state law real_property and personal_property classifications in determining whether exchanged property is of like_kind for example in 122_f2d_181 5th cir the 5th circuit determined that a mineral right is real_property under louisiana state law and thus of like_kind to other real_property similarly in 126_tc_261 the tax_court determined that under new mexico law coal supply contracts constituted real_property interests and were of like_kind to the relinquished gold mine see also 20_tc_192 which held that a taxpayer’s transfer of a fee interest in property in exchange for timber cutting rights in property is not an exchange of like_kind property because the tax_court held the timber cutting rights to be personal_property some may argue that property classified as real_property in state a cannot be of like_kind to property classified as personal_property in state b we disagree although the above-cited opinions in crichton peabody and oregon lumber include discussions of state law characterizations the courts relied on more than just the state law classifications in their analysis of whether the exchanged properties are of like_kind the court in oregon lumber stated the following it is our conclusion that the right to cut and remove standing timber is so intrinsically different from a fee in land that an exchange of one for the other is not an exchange of property within the predecessor of sec_1031 the right to cut and remove is transient and depends upon the affirmative action of the holder of that right the fee is permanent and depends only on the original grant t c pincite thus the court considered not just state law classifications but also whether the properties were substantially_similar or substantially different similarly the tax_court in peabody citing to sec_1_1031_a_-1 stated that in making a like-kind determination consideration should be given to the respective interests in the physical properties the nature of the title conveyed the rights of the parties the duration of the interests and any other factor bearing on the nature or character of the properties as distinguished from the grade and quality t c pincite moreover the supreme court in morgan supra noted the importance of federal_law by stating that federal revenue acts designate what interests or rights so created shall be taxed and federal_law must prevail no matter what name is given the interest or right by state law id pincite postf-106359-11 other cases also demonstrate that the sec_1031 like-kind determination is a question of federal_law rather than state law for example 24_tc_818 revd 241_f2d_78 5th cir revd sub nom commissioner v p g lake inc held that carved-out oil payments although characterized as real_property under state law are not of like_kind to a fee interest_in_real_property in clemente inc v commissioner tcmemo_1985_367 an eight acre parcel of land was held not of like_kind to gravel extraction rights on other_property see also revrul_68_331 1961_1_cb_352 interest in producing mineral lease is of like_kind to improved ranch and revrul_55_749 1955_2_cb_295 perpetual water rights are of like_kind to land sec_48 sec_263a and sec_1245 of the internal_revenue_code and the regulations thereunder are informative as to whether property is real or personal for federal_income_tax purposes for example sec_1_263a-8 of the regulations provides in part that real_property includes land unsevered natural products of land buildings and inherently permanent structures sec_1_263a-8 describes inherently permanent structures as including property that is affixed to real_property and that will ordinarily remain affixed for an indefinite period of time such as swimming pools roads bridges tunnels telephone poles power generation and transmission facilities permanently installed telecommunications cables broadcasting towers oil_and_gas pipelines derricks and storage equipment sec_1_263a-8 generally provides that machinery that is not a structural_component of an inherently_permanent_structure is not real_property while machinery that is a structural_component to a building or inherently_permanent_structure is real_property sec_1_48-1 of the regulations provides in part that for purposes of sec_1_48-1 the term tangible_personal_property means any tangible_property except land and improvements including structural_components of such buildings or structures it further provides that production machinery printing presses transportation and office equipment contained in or attached to a building constitutes tangible_personal_property for purposes of the credit allowed by sec_38 also a gasoline pump hydraulic car lift or automatic vending machine although annexed to the ground shall be considered as tangible_personal_property finally sec_1245 provides that sec_1245 property is any property which is or has been subject_to depreciation under sec_167 and which is either personal_property or other tangible_property used as an integral part of certain activities including manufacturing production or extraction electrical energy gas water or sewage disposal service relying solely on state property classifications can lead to absurd results and would make federal tax law dependent on state laws and state policies for example a conclusion that the exchange of identical pipelines as in case is not an exchange of like-kind_property merely because of a conflict in the classification of property between the states where the pipelines happen to located would be difficult to justify factors and considerations used by states to classify property as real or personal such as postf-106359-11 revenue considerations or other state law policies are generally irrelevant to the federal tax law question of what is of like_kind further some states classify property as real for some purposes and personal for others if state laws were determinative this would raise the question of to which purpose federal tax law should look accordingly state law property classifications are not determinative of whether property is of like_kind rather the service should consider all facts and circumstances including state law and federal tax law classifications as appropriate in case whether the natural_gas pipelines are deemed to be realty or personalty for state or federal tax law purposes does not override the basic nature and character of the property involved the natural_gas pipelines are of the same nature and character and are of like_kind for purposes of sec_1031 in addition the natural_gas pipelines should be treated as real_property because they are inherently permanent structures that are affixed to real_property that will ordinarily remain for an indefinite period of time and they are transferred as part of the land to which they are affixed thus the pipelines are of the same nature and character as land and improvements or other real_property therefore in applying sec_1_1031_j_-1 relating to exchanges of multiple properties the natural_gas pipelines in this case should be treated as real_property and included in the real_property exchange_group in case the steam turbines in both state a and state b are of the same nature and character and therefore of like_kind the steam turbines as machinery used in the commercial production of electricity and not as structural_components are personal_property therefore the steam turbines in state a and state b are of like_kind but should not be a treated as part of the real_property exchange_group when applying sec_1_1031_j_-1 in case a steam turbine in state a is not of the same nature and character as raw land in state b therefore the steam turbine and the raw land exchanged are not of like_kind also as in case the steam turbine should not be treated as real_property and should not be treated as part of the real_property exchange_group when applying sec_1_1031_j_-1 in case the steam turbine and the natural_gas pipeline the taxpayer exchanges are not of like_kind however the exchanged natural_gas pipelines are of like_kind in addition as in case the natural_gas pipelines should be treated as real_property and part of the real_property exchange_group when applying sec_1_1031_j_-1 as in case steam turbines should be treated as personal_property and thus should not be included as part of the real_property exchange_group pursuant to sec_6110 of the code this document may not be used or cited as precedent please call if you have further questions


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 corp plr-153880-12 date date legend parent ------------------------------------------------------------------- ------------------------------------------------------------ ---------------------------------------------------- sub ------------------------------------------------------------------------------------------------------------ ----------------------------------------------------------------- ------------------------------------------------------------ -------------------------------------------------------------------------------- sub ------------------------------------------------------------------- ------------------------------------------------------------ ------------------------------------------------------ foreign corp state a state b country a date date ------------------------------------------ ------------- ---------- ------------ ---------------------- --------------------------- plr-153880-12 date date date date date date date return preparer service_center notice ------------------ ----------------- -------------------------- ------------------------- -------------------------- -------------------------- ------------- -------------------- ------------------------------ -------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- ------------------------------------------------- accounting firm ------------------- dear -------------- this letter is in response to a letter dated date submitted on behalf of parent requesting that the commissioner make a determination under sec_1_1502-75 of the income_tax regulations that sub and sub joined in the making of the initial consolidated_return filed by the parent affiliated_group for the taxable_year ended date and joined in the filing of the consolidated_returns of parent affiliated_group for all taxable years subsequent to taxable_year ended date the information submitted in that request and in a supplement submission dated date is summarized below summary of facts parent is a state a corporation that was incorporated on date as a wholly-owned subsidiary of foreign corp a company organized under the laws of country a sub is a state b corporation that was incorporated on date sub is a state a corporation that was incorporated on date plr-153880-12 parent was inactive until date when foreign corp contributed all of the outstanding_stock of sub to parent also on date parent acquired all of the outstanding_stock of sub from an unrelated third party parent engaged return preparer to prepare the consolidated_return for taxable_year ended date for the parent affiliated_group consisting of parent sub and sub the consolidated_return for taxable_year ended date filed on behalf of the parent affiliated_group checked the consolidated box on the face of the return and was prepared on a basis consistent with parent affiliated_group having validly elected to join in the making of a consolidated_return with the exception that no form_851 affiliations schedule and no forms authorization consent of subsidiary_corporation to be included in a consolidated_income_tax_return were filed with the return on date parent received a notice from the service_center requesting a copy of the form_851 for the taxable_year ended date after receiving the notice return preparer prepared the form_851 for parent affiliated_group and faxed a copy of the form_851 to the service_center on date for taxable_year ended date and the taxable years thereafter parent affiliated_group intended to file consolidated_returns all items of income gain deduction and loss of each member of the parent affiliated_group were included on the consolidated_returns filed for taxable_year ended date and the taxable years thereafter no separate_return was filed for any member of the parent affiliated_group for the taxable_year ended date or any taxable_year thereafter on or about date accounting firm was engaged to perform a due diligence search of parent affiliated_group by an unrelated third party that was contemplating the acquisition of the outstanding_stock of foreign corp accounting firm discovered that parent affiliated_group had not attached form sec_851 and to the consolidated_return filed for taxable_year ended date parent affiliated_group then filed this request representations the parent affiliated_group has made the following representations a the parent affiliated_group intended to file a valid election to join in the making of a consolidated_return for its taxable_year ended date and relied on return preparer to prepare and include any required forms or election statements necessary to make such election with the consolidated_return for taxable_year ended date plr-153880-12 b except for the failure to timely file forms by sub and sub the parent affiliated_group was eligible to file a consolidated u s federal_income_tax return for its taxable_year ended date c all of the items of income gain loss and deduction of each member of the parent affiliated_group were included in the timely filed consolidated_return for taxable_year ended date d no member of the parent affiliated_group filed a separate u s federal_income_tax return for the taxable_year ended date and none of the items of any member of the parent affiliated_group for the taxable_year ended date were reported on a separate_return within the meaning of sec_1_1502-1 e the members of the parent affiliated_group were included on the form_851 filed with the service_center in response to the notice f the internal_revenue_service did not discover the failure of the parent affiliated_group to make a valid election to join in the making of a consolidated_return for its taxable_year ended date g the parent affiliated_group is not seeking to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 h the parent affiliated_group is not using hindsight in requesting this relief no specific facts have changed since the original due_date for making the consolidated_return election that makes the consolidated_return election advantageous i the requested relief will not result in a lower tax_liability for any affected taxpayer in the aggregate for all taxable years affected by the consolidated_return election than they would have had if the consolidated_return election had been timely made j except for the taxable years ended date and date the period of limitations on assessment under sec_6501 has not expired for any member of the parent affiliated_group for the taxable_year in which the consolidated_return election should have been filed or for any taxable_year s that would have been affected by the consolidated_return election had it been timely filed applicable law plr-153880-12 sec_1_1502-75 provides in part that an affiliated_group_of_corporations that did not file a consolidated_return for the immediately preceding_taxable_year may file a consolidated_return in lieu of separate returns for the taxable_year provided that each corporation that has been a member of the group during any part of the taxable_year for which the consolidated_return is to be filed consents to the regulations under sec_1502 in accordance with sec_1_1502-75 if a group wishes to exercise its privilege of filing a consolidated_return such return must be filed not later than the last day prescribed by law including extensions of time for the filing of the common parent's tax_return with regard to a corporation's consent for a group's first consolidated_year sec_1 b provides as a general_rule that the corporation's consent shall be made by such corporation joining in the making of the consolidated_return for such year a corporation shall be deemed to have joined in the making of such return if it files a form_1122 in the manner specified in sec_1_1502-75 sec_1_1502-75 provides that if a group wishes to file a consolidated_return for a taxable_year a form_1122 must be executed by each subsidiary for taxable years relevant to this ruling_request the group must attach to the consolidated_return for the taxable_year either executed forms or unsigned copies of the completed forms and retain the signed originals in its records in the manner required by sec_1 e form_1122 is not required for a taxable_year if a consolidated_return was filed or was required to be filed by the group for the immediately preceding_taxable_year sec_1_1502-75 provides that if a member of the group fails to file form_1122 the commissioner may under the facts and circumstances determine that such member nevertheless has joined in the making of a consolidated_return by such group factors that the commissioner will take into account in making this determine include i whether or not the income and deductions of the member for such taxable_year were included in the consolidated_return ii whether or not a separate_return was filed by the member for that taxable_year and iii whether or not the member was included in the affiliations schedule form_851 if the commissioner determines under the facts and circumstances that the member has joined in the making of the consolidated_return such member will be treated for purposes of sec_1_1502-75 as it if had filed a form_1122 for such year ruling based solely on the information submitted and representations made we rule that sub and sub are treated under sec_1_1502-75 as if they had filed forms with the consolidated federal_income_tax return filed by the parent affiliated_group for taxable_year ended date sec_1_1502-75 procedural statements plr-153880-12 except as expressly provided herein no opinion is expressed or implied concerning the tax treatment of any other aspect of any transaction or item discussed or referenced in this letter or about the tax treatment of any condition existing at the time of or effects resulting from any transaction or item that is not specifically covered by the above ruling the ruling contained in this letter is based upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the taxpayer’s ruling_request verification of the information representations and other data may be required as part of the audit process 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 a copy of this letter must be attached to each federal_income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching to the return a statement that provides the date and control number of this letter_ruling pursuant to the power_of_attorney on file in this office a copy of this letter is being sent to your authorized representative sincerely mark s jennings branch chief branch corporate


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc psi b01-plr-122440-00 date date x state date date property a b c d e this letter responds to your submission of date together with subsequent correspondence in which x is requesting a ruling that the rental income received by x from the properties is not passive_investment_income within the meaning of sec_1362 of the internal_revenue_code facts x was organized in state on date and intends to elect under sec_1362 to be an s_corporation effective date x has c_corporation earnings_and_profits x is engaged in owning leasing and operating and maintaining property an office building with an average of a tenants x leases space to tenants under leases ranging in length from two to five years or under tenant-at-will arrangements tenants pay fixed minimum rental plus a percentage of operating_expenses they are responsible for keeping leased space in a safe and sanitary condition and for paying separately metered utilities x is responsible for inspecting maintaining and repairing all structural plr-122440-00 portions of the building including the roof walls floors ceilings foundation wiring plumbing hvac elevators and similar equipment except for equipment and alterations owned or made by the tenant x is also responsible for all outside and common area maintenance and performs work for the tenants such as replacing light fixtures painting and replacement of carpeting in addition to the services provided to tenants x handles the usual leasing and administrative functions involved in managing real_estate x’s gross rental income for the and taxable years totaled b and c respectively and its related expenses excluding depreciation and amortization totaled d and e respectively law and analysis except as provided in sec_1362 sec_1362 provides that a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 terminates whenever the corporation i has accumulated_earnings_and_profits at the close of each of three consecutive tax years and ii has gross_receipts for each of such tax years more than percent of which are passive_investment_income except as otherwise provided in sec_1362 sec_1362 provides that the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities sec_1_1362-2 provides that rents means amounts received for_the_use_of or the right to use property whether real or personal of the corporation sec_1_1362-2 provides that rents does not include rents derived in the active trade_or_business of renting property rents received by a corporation are derived in an active trade_or_business of renting property only if based on all the facts and circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including the number of persons employed to provide the services and the types and amounts of costs and expenses_incurred other than depreciation conclusion based solely on the facts as represented by x in this ruling_request we conclude that the rents x received from property are not passive_investment_income under plr-122440-00 sec_1362 the ruling in this letter is based on information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request_for_ruling it is subject_to verification on examination except for the specific ruling above no opinion is expressed or implied concerning the federal_income_tax consequences of the facts of this case under any other provision of the code specifically no opinion is expressed regarding x’s eligibility to elect s_corporation status further the passive_investment_income rules of sec_1362 are completely independent of the passive_activity rules of sec_469 unless an exception under sec_469 applies the rental_activity remains passive for purposes of sec_469 this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative s david r haglund sincerely senior technician reviewer branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


washington dc department of the treasury internal_revenue_service number release date index number person to contact telephone number refer reply to cc psi - plr-119786-02 date date legend a b c d e f g h i j k l m n o p plr-119786-02 q r s t u v w x y z country1 country2 country3 d1 d2 d3 d4 d5 dear this letter responds to a letter dated date and subsequent correspondence submitted on behalf of b c d e f g h i j k l m n o p q r s t u v w x y and z by their authorized representatives requesting a ruling that b c d e f g h i j k l m n o p q r s t u v w x y and z each be given an extension of time to elect under sec_301_7701-3 of the procedure and plr-119786-02 administration regulations to be classified as a disregarded_entity for federal tax purposes facts the information submitted states that a is a us partnership owned by us investors b a wholly owned subsidiary of a was formed on d1 pursuant to the laws of country1 c a wholly owned subsidiary of b was formed on d2 pursuant to the laws of country2 d a wholly owned subsidiary of c was formed on d3 pursuant to the laws of country3 e a corporation formed under the laws of country3 became a wholly owned subsidiary of d as of d4 on d4 c and d purchased f g h i j k l m n o p q r s t u v w x y and z immediately after the purchase the properties owned by the subsidiaries were transferred to e e owns f and g f owns h h owns i j k l m n o and p j owns q r s t u v w x and y p owns z b represents that pursuant to sec_301_7701-3 b is a foreign eligible_entity that is not required to be classified as a corporation for federal tax purposes b has a single owner that has limited_liability as defined in sec_301_7701-3 b intended to be disregarded for federal tax purposes effective on d1 however b inadvertently failed to timely file a form_8832 entity classification election c represents that pursuant to sec_301_7701-3 c is a foreign eligible_entity that is not required to be classified as a corporation for federal tax purposes c has a single owner that has limited_liability as defined in sec_301_7701-3 c intended to be disregarded for federal tax purposes effective on d2 however c inadvertently failed to timely file a form_8832 entity classification election d represents that pursuant to sec_301_7701-3 d is a foreign eligible_entity that is not required to be classified as a corporation for federal tax purposes d has a single owner that has limited_liability as defined in sec_301_7701-3 d intended to be disregarded for federal tax purposes effective on d3 however d inadvertently failed to timely file a form_8832 entity classification election e f g h i j k l m n o p q r s t u v w x y and z represent that pursuant to sec_301_7701-3 e f g h i j k l m n o p q r s t u v w x y and z are each a foreign eligible_entity that is not required to be classified as a corporation for federal tax purposes e f g h i j k l m n o p q r s t u v w x y and z each has a single owner that has limited_liability as defined in sec_301_7701-3 e f g h i j k l m n o p q r s t u v w x y and z each intended to be disregarded for federal tax purposes effective on d5 however e f g h i j k l m n o p q r s t u v w x y and z each inadvertently failed to timely file a form_8832 entity classification election plr-119786-02 law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-2 sec_301_7701-3 provides that unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owners if it has a single owner that does not have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides that when elections under sec_301 c i for a series of tiered entities are effective on the same date the eligible entities may specify the order of elections on form_8832 sec_301_7701-3 provides that to elect to be classified other than as provided in sec_301_7701-3 an eligible_entity must file form_8832 entity classification election with the designated service_center sec_301_7701-3 provides that an election will be effective on the date specified on the form_8832 or on the date filed if no such date is specified the effective date specified on the form_8832 cannot be more than days prior to the date the election is filed under c the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or an announcement published in the internal_revenue_bulletin sec_301_9100-1 and sec_301_9100-3 provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 plr-119786-02 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer failed to make the election because after exercising reasonable diligence taking into account the taxpayer's experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election conclusion based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result b is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect under sec_301_7701-3 to be classified as a disregarded_entity for federal tax purposes effective for d1 c is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect under sec_301_7701-3 to be classified as a disregarded_entity for federal tax purposes effective for d2 d is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect under sec_301_7701-3 to be classified as a disregarded_entity for federal tax purposes effective for d3 e f g h i j k l m n o p q r s t u v w x y and z each is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect under sec_301_7701-3 to be classified as a disregarded_entity for federal tax purposes effective for d5 additionally in accordance with sec_301_7701-3 the entities may specify that the order of the elections of e f g h i j k l m n o p q r s t u v w x y and z be deemed made in order from the bottom subsidiary to the top subsidiary on form_8832 a copy of this letter should be attached to each form_8832 a copy is included for that purpose except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent plr-119786-02 pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------------------------------ ------------------------------------------------------------ ---------------------------------- --------------------------------- ------------------------------- -------------------------------- ------------------------------------------------- ----------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-165248-04 date june legend legend ------------------------------------ ----------------------- ----------- ---------- -------- ------------ ------------ --------------------- ------------------ -------------------------- -------------------------- --------------------------- ------------------- --------------------------------------------------------------- decedent spouse x a b c d date date date date date date museum ------------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------- ----------------------------------------------------------------------------------- dear ------------------------------------------- ---------------------------------------------- ------------------------------------------------- -------------------- --------------------------------------------------------------- conservancy probate_court state state law cite plr-165248-04 this letter is in response to a letter dated date and subsequent correspondence from your authorized representative requesting a ruling concerning the federal estate_tax consequences of the proposed reformation of a statutory elective share trust resulting from an election against a will into a qualified_charitable_remainder_trust in accordance with sec_2055 of the internal_revenue_code the facts and representations submitted are summarized as follows decedent died testate on date survived by spouse and two children decedent’s will was probated in state probate_court on date paragraph first of decedent’s will bequeaths tangible_personal_property primarily to decedent’s children and a charity museum with the remaining tangible_personal_property in equal shares to spouse and children who survive decedent to be divided among them as they may agree or if they do not agree as decedent’s executors determine in their absolute discretion paragraph second devises real_property to a charity conservancy paragraph third bequeaths certain partnership interests to decedent’s children paragraph fourth exercises a power_of_appointment in favor of decedent’s children paragraph fifth bequeaths the residue of decedent’s estate in equal shares to fourteen named charitable organizations and all of these organizations are described in sec_501 and sec_2055 within six months after probate on date spouse elected against decedent’s will in accordance with state law state law provides that the surviving_spouse of a deceased person within six months after the probate of the will of such deceased person may waive any provisions that may have been made in it for him or for her and if the deceased left issue surviving_spouse shall take one-third of the personal and one-third of the real_property except that if surviving_spouse would take real and personal_property in an amount exceeding twenty-five thousand dollars in value surviving_spouse shall receive in addition to that amount only the income during surviving spouse’s life of the excess of his or her share of such estate above that amount the personal_property to be held in trust and the real_property vested in him or her for life from the death of the deceased person subsequently within the nine-month period after decedent’s death on date spouse disclaimed spouse’s interest in decedent’s partnership interests and in certain items of tangible_personal_property which is passing_to_spouse as a result of spouse’s exercise of the right of election spouse certified in the disclaimer document that there has been no assignment conveyance encumbrance pledge transfer or other_disposition of the disclaimed property and spouse has not accepted any interest or any benefit from the disclaimed property as a result of spouse’s election against decedent’s will coupled with the disclaimer spouse is entitled to receive dollar_figurex outright the income_for_life from the excess of one-third of decedent’s real and personal_property over dollar_figurex and under state law the personal_property is to be held in trust and the real_property vested in spouse for life from the date of decedent’s death specifically spouse’s interest in decedent’s estate consists of dollar_figurex payable outright and a right to all income from one-third of decedent’s tangible plr-165248-04 personal_property a painting that was bequeathed to museum one-third of decedent’s real_estate bequeathed to conservancy and one-third of the residue of decedent’s gross_estate as reduced by the dollar_figurex payable outright decedent's united_states estate and generation-skipping_transfer_tax return form_706 was timely filed on schedule m of the form_706 a qualified_terminable_interest_property qtip_election under sec_2056 was made with respect to the value of one-third of decedent’s tangible_personal_property one-third of decedent’s real_estate and one-third of the residue of decedent’s gross_estate as reduced by the dollar_figurex payable outright in accordance with spouse’s disclaimer under state law as a result of spouse’s election against the will coupled with the statutory trust does not qualify as a charitable_remainder_trust the parties spouse’s disclaimer the residue of decedent’s gross_estate as reduced by dollar_figurex is required to be held in trust statutory trust statutory trust does not include the tangible_personal_property bequeathed to museum museum and spouse agreed to share possession of the painting on a one-third two-third basis rather than convert it to an income producing asset statutory trust does not include the real_property bequeathed to conservancy conservancy and spouse have sold and entered into agreements to sell the real_property the statutory trust provides income to spouse for life with the remainder passing to the charitable organizations in accordance with paragraph fifth of decedent’s will charitable beneficiaries see cite propose to reform the statutory trust under sec_2055 to qualify as a charitable_remainder_unitrust under the proposed reformation the trustees are to pay spouse in each taxable_year of the trust spouse’s share of the unitrust percentage defined as an amount equal to five percent of the net fair_market_value of the assets held in trust determined annually on the first business_day of each taxable_year of the trust and is to be payable a to spouse and b in equal shares to the charitable beneficiaries provided however that the trustees may in their sole discretion adjust the allocation of the unitrust percentage between spouse and the charitable beneficiaries for purposes of the trust’s qualifying under sec_2055 the unitrust_amount is to be paid quarterly each taxable_year from income and to the extent income is not sufficient from principal in addition in determining the unitrust_amount the trustees are to prorate the same on a daily basis for a short taxable_year and for the taxable_year in which the payment period terminates further the proposed reformation provides that if in any year the net fair_market_value of the trust assets is incorrectly determined then within a reasonable period after the value is finally determined the trustees are to pay any remaining unitrust amounts in the case of an undervaluation or receive from the recipient in the case of an overvaluation an amount equal to the difference between the unitrust_amount properly payable and the unitrust_amount actually paid all assets passing to the trust as a result of spouse’s waiver of decedent’s will are considered the initial plr-165248-04 contribution no additional contributions may be made the obligation to pay the unitrust_amount is to commence with the date of death of decedent upon the death of spouse the trustees are to distribute the property then remaining in trust including any income which has been added to principal to the charitable beneficiaries on date decedent’s executors spouse and several charitable beneficiaries filed a complaint with state probate_court to reform statutory trust by substituting for its terms the proposed terms described above provided that such reformation be contingent upon the issuance of a private_letter_ruling from the internal_revenue_service that the reformed trust under sec_2055 will qualify as a charitable_remainder_unitrust on date state probate_court reformed the statutory trust in accordance with the complaint the executors of decedent’s estate request the following rulings the statutory trust is eligible for reformation under sec_2055 the proposed reformation will be a qualified_reformation within the meaning of sec_2055 the value of the charities unitrust_interest and remainder_interest in the reformed trust will be deductible under sec_2055 and the value of spouse’s unitrust_interest will be deductible under sec_2056 sec_2046 provides that disclaimers of property interests passing upon death sec_2518 provides that if a person makes a qualified_disclaimer with sec_2518 provides that a qualified_disclaimer means an irrevocable and are treated as provided in sec_2518 respect to any interest in property the disclaimed interest is treated as if it had never been transferred to the person making the qualified_disclaimer for purposes of the federal estate gift and generation-skipping_transfer_tax provisions unqualified refusal by a person to accept an interest in property but only if the disclaimer is in writing the writing is received by the transferor of the interest his legal_representative or the holder of the legal_title to the property to which the interest relates not later than months after the date on which the transfer creating the interest in the person making the disclaimer is made or the date on which the person making the disclaimer attains age the person making the disclaimer has not received the interest or any of its benefits and as a result of the disclaimer the interest passes without any direction on the part of the person making the disclaimer to the decedent's spouse or to a person other than the person making the disclaimer sec_2055 provides that the value of the taxable_estate shall be determined by deducting from the value of the gross_estate the amount of all bequests legacies devises and transfers to or for a corporation or certain other organizations organized and operated exclusively for religious charitable scientific literary or sec_2055 provides that where an interest in property passes or has plr-165248-04 educational_purposes passed_from_the_decedent to a person or for a use described in sec_2055 and an interest other than an interest that is extinguished upon the decedent's death in the same property passes or has passed for less than an adequate_and_full_consideration in money_or_money's_worth from the decedent to a person or for a use not described in sec_2055 no deduction is allowed under sec_2055 for the interest that passes or has passed to the person or for a use described in sec_2055 unless in the case of a remainder_interest the interest is in a charitable_remainder_annuity_trust or a charitable_remainder_unitrust described in sec_664 or a pooled_income_fund described in sec_642 sec_664 provides that a charitable_remainder_unitrust is a_trust - a from which a fixed percentage which is not less than percent nor more than percent of the net fair_market_value of its assets valued annually is to be paid not less often than annually to one or more persons at least one of which is not an organization described in sec_170 and in the case of individuals only to an individual who is living at the time of the creation of the trust for a term of years not in excess of years or for the life or lives of such individual or individuals b from which no amount other than the payments described in sec_664 and other than qualified gratuitous transfers described in sec_664 may be paid to or for_the_use_of any person other than an organization described in sec_170 c following the termination of the payments described in sec_664 the remainder_interest in the trust is to be transferred to or for_the_use_of an organization described in sec_170 or is to be retained by the trust for such a use or to the extent the remainder_interest is in qualified_employer_securities as defined in sec_664 all or part of such securities are to be transferred to an employee_stock_ownership_plan as defined in sec_4975 in a gratuitous transfer as defined by sec_664 and d with respect to each contribution of property to the trust the value determined under sec_7520 of such remainder_interest in such property is at least percent of the net fair_market_value of such property as of the date such property is contributed to the trust sec_2055 provides that a deduction is allowed under sec_2055 with respect to any qualified_reformation sec_2055 defines the term qualified_reformation to mean a change_of a governing instrument by reformation amendment construction or otherwise that changes a reformable_interest into a qualified_interest but only if - plr-165248-04 i any difference between i the actuarial value determined as of the date of the decedent's death of the qualified_interest and ii the actuarial value as so determined of the reformable_interest does not exceed percent of the actuarial value as so determined of the reformable_interest ii in the case of i a charitable_remainder interest the nonremainder interest before and after the qualified_reformation terminated at the same time or ii any other interest the reformable_interest and the qualified_interest are for the same period and iii the change is effective as of the date of the decedent's death sec_2055 defines the term reformable_interest to mean any interest for which a deduction would be allowable under sec_2055 at the time of the decedent's death but for sec_2055 sec_2055 provides that generally the term reformable_interest does not include any interest unless before the remainder vests in possession all payments to persons other than an organization described in sec_2055 are expressed either in specified dollar amounts or a fixed percentage of the fair_market_value of the property apply to any interest if not later than days after the last date including extensions for filing an estate_tax_return if an estate_tax_return is required to be filed a judicial proceeding is commenced to change the interest into a qualified_interest for which a deduction is allowable under sec_2055 sec_2055 defines the term qualified_interest to mean an interest sec_2055 provides in part that sec_2055 does not sec_2056 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate is to be determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property that passes or has passed_from_the_decedent to the surviving_spouse of an event or contingency or the failure of an event or contingency to occur an interest passing to the surviving_spouse will terminate or fail no deduction is allowed with respect to such interest - sec_2056 provides that where on the lapse of time on the occurrence a if an interest in such property passes or has passed for less than an adequate_and_full_consideration in money_or_money's_worth from the decedent to any person other than such surviving_spouse or the estate of such spouse and b if by reason of such passing such person or his heirs or assigns may possess or enjoy plr-165248-04 any part of such property after such termination or failure of the interest so passing to the surviving_spouse sec_2056 provides an exception to this terminable_interest_rule in the case of qualified_terminable_interest_property qtip for purposes of sec_2056 qualified_terminable_interest_property is treated as passing to the surviving_spouse and no part of the property is treated as passing to any person other than the surviving_spouse under sec_2056 qualified_terminable_interest_property is property which passes from the decedent in which the surviving_spouse has a qualifying_income_interest_for_life and to which an election under sec_2056 applies sec_2056 provides that the election to treat property as qtip under sec_2056 is made by the executor on the return of tax imposed by sec_2001 the election once made is irrevocable sec_2044 and b provides generally that the value of the gross_estate includes the value of any property in which the decedent had a qualifying_income_interest_for_life and with respect to which a deduction was allowed for the transfer of the property to the decedent under sec_2056 under sec_2056 the term charitable_beneficiary means any sec_2056 provides that if the surviving_spouse of the decedent is the only beneficiary of a qualified_charitable_remainder_trust who is not a charitable_beneficiary nor an esop_beneficiary sec_2056 will not apply to any interest in such trust which passes or has passed_from_the_decedent to the surviving_spouse beneficiary that is an organization described in sec_170 under sec_2056 the term qualified_charitable_remainder_trust means a charitable_remainder_annuity_trust or a charitable_remainder_unitrust described in sec_664 described in sec_664 the charitable_remainder interest however is a reformable_interest within the meaning of sec_2055 because a deduction would have been allowable for the interest under sec_2055 but for the requirements of sec_2055 and as provided in sec_2055 a judicial proceeding was commenced to reform statutory trust on or before the ninetieth day after the last date including extensions for filing decedent’s estate_tax_return in this case the statutory trust did not qualify as a charitable_remainder_unitrust spouse elected against decedent’s will and subsequently filed a qualified_disclaimer see revrul_90_45 the parties propose to reform the statutory trust under sec_2055 to qualify as a charitable_remainder_unitrust the reformed trust contains qualified interests as defined in sec_2055 the present_value of the remainder_interest before reformation is c the present_value of the qualified_interest after the proposed reformation is d the change from the present_value of plr-165248-04 the pre-reformed interests to the present_value of the qualified interests after the proposed reformation is less than percent in addition the nonremainder interest in the trust before the reformation terminates at the same time as the nonremainder interest after the reformation further the reformation of the statutory trust will be effective as of date the date of decedent’s death the reformed trust will be a charitable_remainder_unitrust as described in sec_664 and as a result decedent’s estate will be entitled to a federal estate_tax charitable deduction under sec_2055 for the present_value of the remainder_interest passing to charitable beneficiaries further spouse is the only beneficiary under the reformed trust who is not a charitable_beneficiary assuming the reformed trust will qualify as charitable_remainder_unitrust under sec_664 the present_value of spouse's unitrust_interest under the reformed trust will qualify for the estate_tax_marital_deduction pursuant to sec_2056 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition we express or imply no opinion regarding the value of the property transferred to the trust the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative each ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely lorraine e gardner senior counsel branch passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter


internal_revenue_service index number number release date state cc ebeo plr-100461-99 date city plan dear this responds to your request of date on behalf of city concerning whether line of duty disability benefits paid to disabled participants in the plan or to the survivor or survivors of deceased participants are excludable from the gross_income of the recipients under sec_104 of the internal_revenue_code the code the plan was established by city ordinance to provide retirement benefits disability benefits and survivor’s benefits to certain designated full-time employees of the city police department and fire department and their beneficiaries sec_31 of the plan sets forth the disability benefits under the plan and provides as follows a ordinary disability if a participant reaches a termination_date by reason of total and permanent disability the participant shall be entitled to receive a monthly disability benefit equal to the greater of the amounts determined in accordance with paragraph or paragraph as follows if the participant is credited with at least five years of credited service the monthly benefit payable pursuant to this paragraph shall be of the participant's average compensation if the participant is credited with at least five years of credited service the monthly benefit payable pursuant to this paragraph shall be the participant’s accrued_benefit based upon the participant’s actual years of credited service and average compensation at his or her termination_date without actuarial reduction and notwithstanding the provisions of c below hereof without reduction for any benefits payable under the workers’ compensation law of state b line of duty disability except as provided in paragraph of this subsection a participant regardless of his length of service who terminates employment by reason of total and permanent disability which as determined in accordance with rules established by the administrator is incurred as a result of an accident or injury which has been sustained as an active covered_employee and which has been ruled compensable under the workers’ compensation law of state shall be entitled to receive a monthly benefit equal to the greater of i ii iii the benefit determined pursuant to a above or if the line of duty disability is a catastrophic disability as defined in subparagraph ii below the greater of a a monthly benefit equal to the greater e of the participant’s_compensation or b the participant's employee contributions benefit or if the line of duty disability is a non-catastrophic disability as defined in subparagraph iii below the greater of a a monthly benefit equal to d of the participant’s_compensation or b the participant's employee contributions benefit sec_31 of the plan defines line of duty disability as a total and permanent disability which is incurred as a result of an accident or injury which has been sustained as a result of service as an active covered_employee and which has been ruled compensable under the workers’ compensation law of state sec_31 of the plan defines catastrophic disability as a line of duty disability a by reason of which the participant will be permanently prevented from engaging in any substantial gainful employment or b which severely limits one or more major life activities sec_31 of the plan defines non-catastrophic disability as a line of duty disability which is not a catastrophic disability sec_39 of the plan provides - line of duty death_benefit in the event of the death of a participant prior to the participant’s benefit_commencement_date while in the line of duty as defined below the participant’s beneficiary shall be entitled to receive the benefits described in subparagraphs or as applicable general benefit the beneficiary shall be entitled to receive i ii the participant’s employee contributions benefit payable in one or more installments over a period which meets the requirements of sec_40 and which is designated by the participant or if the participant has made no designation by his or her beneficiary plus an amount payable as a single lump sum equal to the participant’s annualized compensation determined as of the date of death provided however that the benefit provided by this subparagraph ii shall be payable only if the participant has died while a covered_employee surviving_spouse benefit i if all of the following conditions are met then the surviving_spouse of a deceased participant shall be entitled to receive a survivor benefit in lieu of any other plan benefit ii a for purposes of this subsection the line of duty survivor benefit is a monthly income commencing in the month next following the participant’s death and continuing for the remainder of the spouse’s life or earlier remarriage in an amount equal to 66e of the participant’s_compensation determined as of the day before the participant’s death b in the event of the death or remarriage of the spouse following the death of the participant a monthly benefit equal to of such compensation shall be paid in the aggregate to the participant’s surviving children who are named as contingent beneficiaries surviving children’s benefit i if all of the following conditions are met then the surviving children of a deceased participant shall receive a survivor benefit in lieu of any other plan benefit ii a for purposes of this subsection the line of duty survivors children’s benefit is a monthly income commencing in the month next following the participant’s death in an amount equal to of the participant’s_compensation determined as of the day before the participant’s death and paid in the aggregate to the participant’s surviving children who are named as primary beneficiaries sec_39 of the plan defines for purposes of this section the term line of duty as death from an injury or illness which has been sustained as an active covered_employee and which has been ruled compensable under the workers compensation law of state you request a ruling that sec_31 and sec_39 of the plan are statutes in the nature of workmen’s compensation acts and line of duty disability benefits paid pursuant to sec_31 and sec_39 of the plan are therefore excludable from the gross_income of the recipients under sec_104 of the code sec_61 of the code provides that except as otherwise provided by law gross_income means all income from whatever source derived including compensation_for services sec_104 of the code provides that gross_income does not include amounts received under workmen's_compensation acts as compensation_for personal injuries or sickness sec_1_104-1 of the income_tax regulations states that sec_104 of the code excludes from gross_income amounts received by an employee under a workmen's_compensation_act or under a statute in the nature of a workmen's_compensation_act that provides compensation to the employee for personal_injury_or_sickness incurred in the course of employment sec_104 also applies to compensation which is paid under a workmen’s compensation act to the survivor or survivors of a deceased employee sec_104 does not apply to a retirement pension or annuity to the extent it is determined by reference to the employee's age or length of service or the employee's prior contributions even though the employee's retirement is occasioned by an occupational injury or sickness sec_104 also does not apply to amounts which are received as compensation_for a non-occupational injury or sickness nor to amounts received as compensation_for an occupational injury or sickness to the extent that they are in excess of the amount provided in the applicable workmen's_compensation_act or acts if benefits are computed by a formula that does not refer to the employee’s age length of service or prior contributions and are provided to a class that is restricted to employees with service-incurred injuries sickness or death then the benefits are payments for the injuries sickness or death and the statute under which the benefits are paid qualifies as a statute in the nature of a workmen’s compensation act see revrul_80_84 1980_1_cb_35 revrul_83_77 1083_1_cb_37 and revrul_72_291 1972_1_cb_36 whether a payment is in the nature of workmen’s compensation depends upon whether it is made because of injury sustained in the line of duty not upon the amount_paid the fact that the amount received is based on a percentage of the employee’s salary on the date of the disability does not disqualify the payment from qualifying as one in the nature of workmen’s compensation see revrul_68_10 1968_1_cb_50 in revrul_80_44 1980_1_cb_34 a statute in the nature of a workmen’s compensation act provided for an allowance of the greater of a percent of the individual’s average final compensation or b the amount to which the individual would be entitled under the normal years_of_service retirement_plan the ruling concluded that the benefits under the statute were excludable under sec_104 of the code to the extent that they did not exceed percent of the final_average_compensation any excess over percent of final_average_compensation was attributable to length of service and therefore not excludable from gross_income based on the statute regulations and rulings cited above and on the representations made we rule as follows benefits payable under sec_31 of the plan are limited to total and permanent disabilities that have been ruled compensable under the workers’ compensation law of the state a participant who terminates employment by reason of total or permanent disability is entitled to receive a monthly benefit equal to the greater of sec_31 or sec_31 or sec_31 the benefits payable under sec_31 of the plan are determined pursuant to the ordinary disability provisions of sec_31 the monthly benefits payable under sec_31 are not determined by reference to the participant’s age length of service or prior contributions and equal of the participant’s average compensation the monthly benefits payable under sec_31 are determined by reference to the participant’s length of service or prior contributions ie accrued_benefit accordingly monthly benefits payable under sec_31 are excludable under sec_104 of the code to the extent they do not exceed of the participant's average compensation any amounts in excess of of average compensation are not excludable from gross_income the monthly benefits payable under sec_31 of the plan are not determined by reference to the participant’s age length of service or prior contributions and equal e of the participant's_compensation the monthly benefits payable under sec_31 of the plan equal the participant’s employee contributions benefit accordingly monthly benefits payable under sec_31 are excludable under sec_104 of the code to the extent they do not exceed 66e of the participant’s_compensation any amounts in excess of 66e of average compensation are not excludable from gross_income the monthly benefits payable under sec_31 of the plan are not determined by reference to the participant’s age length of service or prior contributions and equal 33d of the participant's_compensation the monthly benefits payable under sec_31 of the plan equal the participant's employee contributions benefit accordingly monthly benefits payable under sec_31 are excludable under sec_104 of the code to the extent they do not exceed 33d of the participant's_compensation any amounts in excess of 33d of average compensation are not excludable from gross_income sec_39 of the plan provides for line of duty death_benefits to participants' beneficiaries a participant's beneficiary is entitled to receive the benefits described in sec_39 or sec_39 or sec_39 as applicable benefits payable under sec_39 are determined by reference to the participant's age length of service or prior contributions employee contributions benefit the benefit payable under sec_39 a single lump sum equal to the participant's annualized compensation is not determined by reference to the participant's age length of service or prior contributions accordingly amounts payable under sec_39 are not excludable from the recipient's gross_income the amount payable under sec_39 is excludable from the recipient's gross_income under sec_104 of the code monthly benefits under sec_39 equal either 66e of the participant's_compensation or of the participant's_compensation in either case the amounts are not determined by reference to the participant's age length of service or prior contributions and are thus excludable from the recipient's gross_income under sec_104 of the code monthly benefits under sec_39 equal of the participant's_compensation this amount is not determined by reference to the participant's age length of service or prior contributions and is thus excludable from the recipient's gross_income under sec_104 of the code except as specifically ruled upon above no opinion is expressed or implied with respect to the application of any other provisions of the code or the regulations to the benefits described this ruling letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely harry beker chief branch office of the associate chief_counsel employee_benefits and exempt_organizations enclosures copy of this letter copy for sec_6110 purposes