t c no united_states tax_court james clay and audrey osceola petitioners v commissioner of internal revenue respondent docket nos filed date in these consolidated cases ps are members of a native american tribe during the years at issue the tribe operated a casino on tribal land owned communally by all members the tribe made regular distributions from casino revenue to each member ps received these distributions and did not report them as income r determined that the distributions are taxable to ps and therefore ps had unreported taxable_income in the amounts of the distributions r also determined that ps are liable for sec_6662 accuracy-related_penalties held the distributions to ps from casino revenue constituted unreported taxable_income to ps held further for purposes of sec_6751 the revenue_agent report rar and the 30-day_letter to which the rar was attached constitute the initial determination to assess penalties held further r must show that written supervisory approval for penalties was obtained before the first formal communication to the taxpayer of the initial determination to assess penalties held further the 30-day_letter was the first formal communication to the taxpayer of the initial determination to assess penalties held further r did not obtain written supervisory approval before the first formal communication of the initial determination to assess penalties and did not meet his burden of production for penalties under sec_7491 robert o saunooke for petitioners sarah r bolen marissa r lenius and laura a price for respondent pugh judge in notices of deficiency dated date and date respondent determined the following deficiencies and penalties unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as amended and in effect for the years in issue rule references are to the tax_court rules_of_practice and procedure all monetary amounts are rounded to the nearest dollar deficiency dollar_figure big_number big_number penalty sec_6662 dollar_figure big_number big_number year after concessions the issues for decision are whether quarterly distributions christmas bonuses and a miscellaneous payment to petitioners are income under sec_61 for tax years through and whether petitioners are liable for accuracy-related_penalties under sec_6662 for tax years and these consolidated cases are lead cases for a larger group all with the common legal issue of the tax treatment of the distributions and christmas bonuses collectively distributions findings_of_fact some of the facts have been stipulated and are so found the stipulated facts are incorporated in our findings by this reference petitioners james clay and audrey osceola were residents of florida when they timely filed their petitions sixteen related cases are bound by the outcome of these cases with respect to the taxability of the distributions those cases have been docketed under these numbers and i the miccosukee tribe of indians of florida the miccosukee tribe of indians of florida tribe is a federally recognized tribe of indians the tribe’s members ratified and adopted its constitution on date and it was approved by the department of the interior doi on date the constitution vests power and authority in the miccosukee general council general council which includes all enrolled tribal members who are at least years of age the general council has four regular general council meetings each year on the first saturday of february june august and november meetings of the general council other than regular general council meetings are called special general council meetings meetings of the general council are recorded transcribed and approved by the general council at the next meeting the business council controls the day-to-day operations of the tribe subject_to the general council’s approval the business council has five members each elected to a four-year term by the general council the chairman the assistant chairman the secretary the treasurer and the lawmaker the business council meets regularly and the chairman only votes in the case of a tie billy cypress served as chairman from through and was elected chairman again in as a function of his position as chairman of the tribe mr cypress also acted as the bureau of indian affairs bia superintendent of the tribe the tribe’s primary operating bank account is its general account all revenues not specifically allocated to another tribal account are deposited into this account and the tribe pays general operating_expenses and capital improvement costs among other expenses from it a tribal sales_tax the general council enacted a tribal sales_tax on date it was approved by the doi on date it applied to sales of goods and services or lease rentals by any business operating on the tribe’s reservation these include a gas station a gift shop a restaurant a tourist village and an air boat tour business the tax was passed on to customers and was reflected on the customers’ receipts the small businesses were only modestly profitable and the tribal sales_tax collected was used primarily to pay for trash pickup the tribe deposited the tribal sales_tax revenue into a separate tribal bank account not its general account the tribe distributed tribal sales_tax revenue to its members only once each member received about dollar_figure b the tribe’s casino on date the tribe entered into a contract with tamiami development corp tdc to construct manage and operate a class ii gaming facility for the tribe called miccosukee indian bingo and gaming casino the agreement which was later assigned to tamiami partners ltd tlp was approved by the doi tdc built the casino on land it purchased outside but adjacent to the tribe’s reservation land the purchased land was placed into trust for the tribe the tribe has never allotted any of its lands to tribal members the tribe has conducted gaming activities at the casino since date the general council created the miccosukee tribal gaming authority on date the tribe’s relationship with tlp ended amid dispute and litigation and the tribe has operated the casino under the supervision of the miccosukee tribal gaming authority since date it now owns and controls the casino after receiving land and cash as part of a settlement with the state of florida the tribe built a parking lot on a six-acre portion contiguous to the land on which the casino is located the parking lot is free for patrons of the casino the tribe also owns and operates several enterprises related to the casino including a hotel a concert hall a food court a restaurant and a gift shop the casino and its related enterprises operate on a fiscal_year ending on june of each year c taxation of the casino the tribe agreed to waive taxes on the casino’s gross revenue until tlp recouped its investment and the tribe imposed no taxes on the casino from its opening in until effective date the general council imposed a gross_receipts tax on any amount received by the casino including wagers admission fees and the sales revenue of the casino’s related enterprises the gross_receipts tax is treated as an above-the-line expense of the casino and its related enterprises the casino must estimate its gross_receipts for each month on the last day of each month and pay the tribe at least of the tax on these gross_receipts for that month using its estimate the casino then ha sec_15 days after the end of the month to calculate the actual gross_receipts and gross_receipts tax for that month and if the actual gross_receipts tax exceeds what the casino previously paid it must pay that excess the casino receives a credit against future gross_receipts tax if its estimate is greater than the actual gross_receipts tax on date after operations of the casino were under the tribe’s control mr cypress directed the tribe’s finance director mike hernandez to open a checking account called the nontaxable distribution revenue ntdr account into which the tribe would deposit the gross_receipts tax revenue mr hernandez opened the ntdr account shortly thereafter and the tribe has deposited the gross_receipts tax revenue into that account ever since most of the funds in the ntdr account came from the casino although revenue from the tribe’s small businesses and land leases and easements was deposited there as well what remained of the casino’s profits--after paying the gross_receipts tax and other expenses--was deposited into the tribe’s general account d distributions the tribe has made quarterly per capita distributions since at least until the tribe distributed funds to its members from its general account the largest sources of this revenue were the tribe’s small businesses land leases for cattle grazing hunting camps pipelines and cell towers distributions made before the opening of the casino were around dollar_figure per member per quarter the distributions grew considerably with the casino’s success the tribe has made quarterly distributions to its members from the ntdr account since it was opened in the date of the quarterly distributions and the number of enrolled members is set at general council meetings only enrolled members of the tribe can participate in general council meetings and receive distributions one must have at least one miccosukee parent to be an enrolled member in the tribe the amount of the distributions each quarter is determined by dividing the gross_receipts tax revenue for that quarter by the number of enrolled members distributions to minor children generally go to their tribal member mother because the tribe is matrilineal--membership in a clan within the tribe is determined by a tribal member’s mother--and the mother is generally the head of the household the father generally receives only his distribution the tribe may deduct certain amounts from a member’s quarterly distribution upon request or if the member participates in one of the tribe’s loan programs the quarterly distributions to a tribal member for the years at issue--2004 and 2006--were as follows quarter first second third fourth dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number members could cash their distribution checks at any bank or at the tribal administration building for a fee at the encouragement of mr cypress most members chose to cash their quarterly distribution checks at the tribal administration building the tribe also opened investment accounts for its members with smith barney these accounts allowed members to avoid certain requirements imposed on financial institutions while investing their otherwise idle cash and made it easier to make payments on large purchases such as cars not every member chose to open a smith barney account those who did could request to have a portion of their quarterly distributions deposited into their smith barney accounts the tribe also has paid its members christmas bonuses since at least christmas bonuses were paid from the tribe’s general account through the tribe began paying christmas bonuses from the ntdr account in because it was concerned that it would have to issue tax forms for distributions to members from the general account the gross_receipts tax_rate was increased to in to fund christmas bonuses the christmas bonuses for and were dollar_figure dollar_figure and dollar_figure respectively e the tribe’s tax position the tribe has maintained since that its distributions are not taxable to members and need not be reported on their income_tax returns in a memorandum dated date mr cypress advised mr hernandez that the tribal attorney has assured him that the distributions should not be reported on members’ tax returns mr cypress continued that i expect you and your staff to prepare tax returns for the members of the tribe in accordance with and relying on our attorney’s opinion from through mr cypress encouraged tribal members to cash their quarterly distribution checks at the tribal administration office and to omit quarterly distributions from credit applications to avoid inviting scrutiny from the internal_revenue_service irs he told the general council that the tribal administration office denies knowledge of the quarterly distributions when lenders call to verify them during a special general counsel meeting on date mr cypress was recorded in meeting minutes as stating the following business council has repeatedly asked that they do not claim the ntdr money as income on the credit applications but tribal members continue to do this by doing this tribal members run the risk of eventually having irs problems they irs will see the money reported on their credit applications and start to tax them on it the tribe has this money categorized as a license tax item in order to avoid irs problems for tribal members but with the actions of tribal members this is being compromised the minutes go on to state that chairman cypress explained how the distribution was set up to avoid the government irs taxing us on the funds our plans for the distribution were set up when we started the gaming operation these plans were sent to bia for their review and were approved by the department of interior if these monies were classified as per capita payment to tribal members then irs could tax us but we do not classify it as such but due to the actions of maybe two or three tribal members all tribal members could be affected the minutes for this meeting also record the following comments by another tribal officer assistant chairman jasper nelson when tribal members are asked to not divulge ntdr money it is for their own good he stated by doing this it will give irs the opportunity to find out about the money and tax us on it this would jeopardize the livelihood of tribal members who depend on this money minutes of a special general council meeting on date record mr cypress stating that there are members who share information with non-indians about the money they receive from the tribe the consequences these members are faced with as well as putting the rest of the tribe in this predicament they cannot blame anyone but themselves as these are the reason why we repeatedly stressed to tribal members to keep information to themselves in several general council meetings in and mr cypress and the tribe’s legal counsel dexter lehtinen also discussed the tax treatment of the neighboring seminole tribe’s distributions they warned that the tribe would be required to withhold tax on its distributions like the seminoles if tribal members did not follow their directions but in one general council meeting in mr cypress and mr lehtinen distinguished the tribe’s distribution scheme from the seminoles’ explaining that the seminoles’ distributions were taxed because they were from net profits while the tribe’s distributions were nontaxable because they were from the gross_receipts tax the tribe requested a legal opinion in from its outside counsel white case on the taxability of the tribe’s distributions to its members and on the tribe’s compliance with the indian gaming regulatory act of igra pub_l_no 102_stat_2467 codified pincite u s c secs this opinion stated that the distributions are taxable to tribal members the tribe opened a reserve_account at or near the commencement of an irs audit of the tribe and the casino around this reserve_account was meant to prepare for the possibility that the tribe would be required to make a payment to the irs as part of a settlement on behalf of the tribe relating to compliance with the igra or members relating to taxes on distributions ii petitioners’ distributions and income_tax returns ms osceola grew up on the reservation and went to elementary_school there but stopped attending school after fifth grade she was employed by several businesses around the reservation but had not been employed for over years as of the time of trial mr clay grew up in a village outside the reservation he never attended school and only became an enrolled member of the tribe in to secure medical_care for his mother petitioners speak miccosukee as their primary language and testified at trial with the help of an interpreter petitioners received quarterly distributions for each of the years at issue determined by the number of enrolled members in their family ms osceola received her distributions as well as those of her dependent_children her net distributions after deductions for housing and loan repayment--during the years in issue--were as follows distribution first quarter second quarter third quarter fourth quarter christmas bonus dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number ms osceola cashed her distribution checks at the tribal administration office during the years in issue she did not give each of her children their distributions after collecting them rather she kept them and spent them on family_expenses as she determined necessary in addition to the distributions ms osceola received a miscellaneous payment from the tribe of dollar_figure in the tribe made this payment out of the general account mr clay did not receive distributions until he became an enrolled member of the tribe in the second quarter of mr clay received net distributions during the years at issue in the following amounts distribution first quarter second quarter third quarter fourth quarter christmas bonus --- dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number big_number petitioners were married during the years at issue and they filed a joint form_1040 u s individual_income_tax_return for each of those years omar barrera an accountant in gainesville florida prepared petitioners’ form sec_1040 for the years in issue petitioners reported five of their children as dependents for each of the years in issue for a total of seven exemptions none of their dependent_children filed income_tax returns for the years at issue petitioners provided mr as a result of an error respondent determined the deficiency for tax_year after including a miscellaneous payment of dollar_figure in the notice_of_deficiency rather than one of dollar_figure respondent concedes the dollar_figure that was omitted in the notice_of_deficiency barrera with forms w-2g certain gambling winnings for the years in issue for purposes of preparing their form sec_1040 and reported gaming income and losses on their form_1040 for each year however petitioners did not report their quarterly distributions or christmas bonuses on their form sec_1040 for the years in issue petitioners never disclosed their quarterly distributions or christmas bonuses to mr barrera and he never advised them on the taxability of their distributions iii irs audit of petitioners’ returns in the irs audited dozens of returns filed by members of the tribe who received distributions in addition to petitioners on or before date supervisory revenue_agent anita d gentry prepared a memorandum regarding the miccosukee project giving preliminary approval for accuracy- related penalties for substantial understatements of income_tax in cases developed for members of the tribe to be placed behind penalty workpapers in each case file on date the agent examining petitioners’ returns sent them a revenue_agent report rar form 4549-a income_tax discrepancy adjustments containing proposed adjustments for and along with form_872 consent to extend the time to assess tax while the record does not include a as we explain infra section iv we are reopening the record to include certain exhibits relevant to respondent’s penalty determination final copy of what was sent to petitioners respondent states that the rar is included as part of the notice_of_deficiency the agent’s notes indicate that there was a 30-day_letter giving petitioners the option to file a protest and request a conference before the irs office of appeals appeals within days on date the agent sent the case to ms gentry for review ms gentry spent between and minutes reviewing the case before approving the penalties that day a civil penalty approval form dated date and bearing the typewritten initials ag dated date indicates that substantial_understatement and other accuracy related penalties were approved for and negligence penalties were not approved for those years ms gentry based her review on an date memorandum and calculations prepared by the agent recommending application of the six-year statute_of_limitations under sec_6501 because petitioners omitted more than of their income and photocopies of distribution checks to petitioners respondent issued a notice_of_deficiency to petitioners on date determining deficiencies and penalties for negligence and substantial the examining officer’s activity record entry for date after the expiration of the 30-day period states prepared case to send to review printed work papers unagreed report and day 886a and the entry for date states in part no protest snd needs to be prepared for and understatement_of_tax for tax years and respondent issued a second notice_of_deficiency on date determining deficiencies and penalties for negligence and substantial_understatement for tax_year i burden_of_proof opinion ordinarily the burden_of_proof in cases before the court is on the taxpayer rule a 290_us_111 under sec_7491 in certain circumstances the burden_of_proof may shift from the taxpayer to the commissioner petitioners have not claimed or shown that they meet the specifications of sec_7491 to shift the burden_of_proof to respondent as to any relevant factual issue ii posttrial briefing issues6 a respondent’s motion to strike rule provides that the court can strike from any brief any insufficient claim or defense or any redundant immaterial impertinent frivolous or scandalous matter respondent requests that we strike from petitioners’ we address each of petitioners’ and respondent’s motions to reopen the record with respect to our decision in graev v commissioner graev iii 149_tc_485 supplementing and overruling in part graev v commissioner graev ii 147_tc_460 infra section iv simultaneous reply brief arguments relating to the general welfare doctrine because petitioners conceded this issue before trial the per capita act of pub_l_no 97_stat_365 codified pincite u s c sec_117a- 117c and the indian land consolidation act pub_l_no sec_211 stat pincite codified pincite u s c sec_2210 because petitioners abandoned these arguments by omitting them from their opening brief and two documents petitioners rely on in support of their proposed findings and argument because they were not in evidence motions to strike are generally disfavored by federal courts 81_tc_999 allen v commissioner we will use the term the general welfare doctrine as shorthand for arguments relating to revrul_2005_46 2005_2_cb_120 revproc_2014_35 2014_26_irb_1110 applicable in tax years for which the period of limitations under sec_6511 had not expired and the tribal_general_welfare_exclusion_act of pub_l_no sec_2 stat pincite codified as amended at sec_139e and applicable in tax years for which the period of limitations under sec_6511 had not expired tribal_general_welfare_exclusion_act sec_2 stat pincite sec_139e provides that gross_income does not include the value of any indian_general_welfare_benefit indian general welfare benefits include payments to and services provided to or on behalf of a member of an indian_tribe pursuant to an indian tribal program sec_139e however the income is only excluded if the program is administered under specific guidelines and does not discriminate in favor of tribal leadership and the benefits are available to any member who meets the guidelines are for the promotion of general welfare are not lavish_or_extravagant and are not compensation_for services id t c a motion to strike should be granted only when the allegations have no possible relation to the controversy when the court is in doubt whether under any contingency the matter may raise an issue the motion should be denied estate of jephson v commissioner t c pincite quoting 35_fsupp_633 s d n y in addition if the subject of the motion involves disputed and substantial questions of law the motion should be denied and the allegations should be determined on the merits id and a motion to strike will usually not be granted unless there is a showing of prejudice to the moving party id see also pony creek cattle co v great atl pac tea co in re beef industry antitrust litigation 600_f2d_1148 5th cir u nnecessary evidentiary details are usually not stricken from the complaint unless prejudicial or of no consequence to the controversy issues included in the stipulation of settled issues our rules require parties to stipulate to the fullest extent to which complete or qualified_agreement can or fairly should be reached all matters not privileged which are relevant to the pending case regardless of whether such matters involve fact or opinion or the application of law to fact rule a before trial the parties filed a stipulation of settled issues stating that petitioners concede that the quarterly and christmas distributions at issue in this case are not tax-exempt general welfare_payments as described in revrul_2005_46 2005_2_cb_120 revproc_2014_35 2014_26_irb_1110 or sec_139e our rules are explicit about the binding nature of stipulations a stipulation shall be treated as a conclusive admission by the parties to the stipulation unless otherwise permitted by the court or agreed upon by those parties rule e see also enis v commissioner tcmemo_2017_222 at n the court will not permit a party to a stipulation to qualify change or contradict a stipulation in whole or in part except that it may do so where justice requires rule e 820_f2d_1543 9th cir a stipulation will generally be enforced unless manifest injustice would result aff’g tcmemo_1986_23 petitioners have not shown any reason why we should release them from their stipulation this is not a circumstance of a stipulated fact’s being contradicted by other facts in the record see eg 66_tc_312 rather this was a strategic decision before trial not to pursue an argument that then shaped the parties’ trial presentations in fact counsel for petitioners even used the stipulation as a basis for objecting to questions asked by respondent’s counsel stating at trial that this is not a general welfare case it would be prejudicial to allow petitioners to duck questions at trial about an issue on the basis that they have abandoned it only to revive the dispute on brief however as we discuss infra section iii a we are not the first court to consider this issue the u s court_of_appeals for the eleventh circuit to which these cases are appealable absent stipulation to the contrary see sec_7482 has ruled that sec_139e does not provide a tax exemption for the distributions see united_states v jim 891_f3d_1242 11th cir see also 54_tc_742 aff’d 445_f2d_985 10th cir whether we deem petitioners to have abandoned the argument strike the argument or decide it on its merits following the u s court_of_appeals for the eleventh circuit their argument is unavailing we therefore will deny respondent’s motion as to this issue and reject it on its merits issues not raised in petitioners’ opening brief we may consider an issue raised for the first time in a party’s answering brief to be abandoned and conceded see 122_tc_133 our practice is not to consider new issues raised for the first time in an answering brief 99_tc_132 aff’d sub nom 28_f3d_1024 10th cir petitioners did not raise the per capita act of in their pretrial memorandum at trial or in their opening brief and while they raised the indian land consolidation act in their pretrial memorandum they did not raise it again until their reply brief we therefore could deem petitioners to have abandoned arguments based on the per capita act of and the indian land consolidation act see dutton v commissioner t c pincite krause v commissioner t c pincite however as we explain infra section iii b and c they do not provide a tax exemption for the distributions we therefore will deny as moot respondent’s motion as to these arguments documents not in evidence petitioners rely on two documents not in evidence in their opening and reply briefs a contract between the tribe and tdc and a letter from the tribe to the bia’s acting director frank keel tacitly conceding that they cannot rely on facts not in evidence petitioners counter respondent’s motion to strike these two documents and petitioners’ arguments based on them by moving to reopen the record to admit them into evidence they argue that these documents should be admitted to clarify and confirm testimonial evidence received by the court at trial and respond to issues raised by respondent in his opening brief the decision to reopen the record to admit additional evidence is within our broad discretion 401_us_321 114_tc_276 abrogated on other grounds 132_tc_203 see also 790_f2d_1450 9th cir citing zenith radio corp u s pincite overruled on other grounds 486_us_622 the court_of_appeals for the eleventh circuit considers four factors in determining whether to reopen the record the timeliness of the motion to reopen the record the character of the testimony to be offered the effect of granting the motion to reopen to record and the reasonableness of the request to reopen the record 403_f3d_1278 11th cir dynamo holdings ltd p’ship v commissioner t c ___ ___-___ slip op pincite date the third factor--the effect of reopening the record--is most relevant here we will not reopen the record to admit these documents because we find that they are cumulative and would not change the outcome of the case they do not bear on the outcome of either of the issues in this case whether the distributions are taxable to petitioners and whether petitioners are liable for accuracy-related_penalties therefore we will deny petitioners’ motion to reopen the record to admit these two documents and will grant respondent’s motion to strike those portions of petitioners’ brief that rely on them b petitioners’ motion to amend the first stipulation of facts petitioners also move to amend four paragraphs of the first stipulation of facts to correct what they contend are factual errors we may amend a stipulation when to accept the unamended stipulation would have been manifestly unjust or if the evidence contrary to the stipulation was substantial 577_f2d_1206 5th cir see rule e petitioners’ proposed amendments are belated wording tweaks to bolster their posttrial arguments and do not change our conclusions on the legal issues before us in addition petitioners have not identified any manifest injustice or in violation of rule e petitioners’ opening brief does not cite in support of their proposed findings_of_fact any evidence that was admitted this is surprising especially because at the end of trial we discussed posttrial briefs with the parties nor did their reply brief comply with our rules thus these posttrial briefing issues appear to be part of a pattern of disregarding our rules lack of familiarity with this court and lack of resources are unappealing excuses for failure to read and comply with our rules and are no excuse for failure to heed discussions with the court on the record with a transcript to remind the parties of those discussions brewer quality homes inc v commissioner tcmemo_2003_200 wl at n petitioners’ counsel is put on notice that the rule is designed both to facilitate the work of the court and also to provide a ‘level playing field’ to the parties and the court will be inclined to impose formal sanctions in the event of future similar violations aff’d 122_fedappx_88 5th cir substantial evidence that contradicts the stipulations they seek to amend therefore we will deny their motion to amend the first stipulation of facts iii taxability of distributions to tribal members sec_61 provides that gross_income means all income from whatever source derived unless an exception is provided the supreme court stated that gross_income comprises all accessions to wealth clearly realized and over which the taxpayers have complete dominion 348_us_426 individual tribal members are subject_to federal income_taxation unless a treaty or an act of congress provides an exemption 351_us_1 an exemption from income_tax must be clearly expressed id 44_tc_686 aff’d 364_f2d_38 8th cir we cannot create a tax exemption by implication 78_tc_137 aff’d 709_f2d_564 9th cir 71_tc_980 aff’d 617_f2d_507 8th cir the parties first dispute whether the distributions are made from net gaming revenues taxable under the igra the igra provides that as a condition of making per capita payments to tribal members out of net gaming revenues from a class ii gaming facility the per capita payments are subject_to federal taxation and tribes notify members of such tax_liability when payments are made u s c sec b d petitioners argue that the distributions are from leases of land and also as noted above that they are exempt from tax under the general welfare doctrine irrespective of whether the distributions come from net gaming revenues or leasing revenues if petitioners can identify no exception from gross_income then they are taxable we do not find any real dispute between the parties on the facts although the parties strongly disagree over how to characterize the source of these distributions a igra we are not the first court to consider petitioners’ arguments that the distributions are not net gaming revenues and that the general welfare doctrine exempts them from taxation the u s court_of_appeals for the eleventh circuit recently ruled on a case regarding the taxability of distributions to another member of the miccosukee tribe sally jim jim 891_f3d_1242 in that case the government moved for summary_judgment that the distributions to ms jim which were derived from gaming proceeds were not exempt from taxation as general as noted above before trial petitioners conceded that the distributions were not general welfare_payments welfare_payments or income from the land united_states v jim no wl s d fla date the tribe intervened the district_court granted the government’s summary_judgment motion in part but held that material disputes of fact remained over how much of the distribution was from nongaming revenue and whether ms jim was taxable on the entire distribution including the amounts she received that were attributable to her family members after a bench trial the court concluded that no exemption applied to the income id on appeal the court_of_appeals affirmed that sec_139e does not exempt per capita payments from gaming revenue designated as taxable by the igra jim 891_f3d_1242 it also rejected the argument that the distributions were out of gross revenue not net revenue and therefore were not subject_to the igradollar_figure id pincite n and it quickly rejected the argument that the distributions were exempted from tax by the miccosukee settlement act of miccosukee even accepting petitioners’ claim that the gross_receipts tax is a continuation of the tribal sales_tax adopted in as the court_of_appeals concluded the gross_receipts tax still is a mechanism for collecting gaming revenue from the casino to fund per capita distributions to members eligible for no other exception to the definition of gross_income as we explain below see united_states v jim 891_f3d_1242 ndollar_figure 11th cir we similarly reject petitioners’ argument that distributions are not taxable because they were not out of net gaming revenue but rather were out of gross revenue settlement act publaw_105_83 sec_111 stat pincite codified pincite u s c secs 1750-1750e c jim f 3d pincite n we see no factual distinctions between the distributions to petitioners and to ms jim and therefore hold that the distributions to petitioners are taxable under the igra b petitioners’ other statutory arguments petitioners made other arguments that were not considered or were considered only briefly by the court_of_appeals petitioners point to three acts of congress that they maintain exempt the tribe’s distributions from federal income_taxation the miccosukee settlement act the act of date pub_l_no sec stat pincite codified pincite u s c sec 459e and the indian land consolidation actdollar_figure none of these provisions would exempt the distributions from the igra and even were we to conclude that the distributions were not out of net gaming revenue none of those provisions apply u s c sec 459e has been reclassified as sec of the same title petitioners take the position that no agency other than the bia has any authority to interpret or apply federal_law treaties or other matters arising out of indian affairs including the taxation of the tribes and their members petitioners cite no cases nor did we find any support for such a broad interpretation of the authority given to the bia by statute and certainly a statutory grant of authority to the bia to interpret the statutes could not supplant our role or the role of other courts to interpret and apply these provisions to the land on which the casino is located and therefore none exempt the distributions from federal_income_tax the miccosukee settlement act is the codification of the effects of the tribe’s settlement agreement with the state of florida as it relates to the federal government the miccosukee settlement act sec_707 addresses the tax effects of the settlement agreement providing in relevant part that no money or land paid or conveyed to the tribe under this act or the settlement agreement shall be taxable under federal or state law petitioners contend that miccosukee settlement act sec_707 makes all of the tribe’s land tax exempt however the plain wording of the provision limits its application to lands conveyed to the miccosukee tribe under this part or the settlement agreement the casino is not located on any of the land that the tribe received in the settlement agreement therefore the miccosukee settlement act does not provide an exemption from tax for petitioners’ distributionsdollar_figure petitioners also contend that u s c sec 459e exempts their distribution from taxation that section provides a tax exemption to any land conveyed pursuant to subchapter iv of title which relates to the conveyance of while the miccosukee settlement act may apply to the land on which the parking lot is built the tribe does not charge a fee for use of the parking lot so the parking lot does not provide another revenue source for the distributions submarginal land to indian tribes u s c secs 459-459e it provides that any land conveyed to indian tribes under that subchapter and any distribution of gross_receipts derived from those lands are exempt from federal state and local taxation id sec 459e and u s c sec 459a provides a list of the specific properties conveyed under that subchapter to specific tribes but the tribe is not included in that list thus u s c sec 459e does not apply to the land on which the casino is located and does not exempt petitioners’ distributions from tax finally petitioners contend that the indian land consolidation act provides a tax exemption for the distributionsdollar_figure the indian land consolidation act allows indian tribes to enter into a land consolidation plan providing for the sale_or_exchange of any tribal lands or interest in lands for the purpose of eliminating undivided fractional interests in indian trust or restricted lands or consolidating its tribal land holdings id sec_2203 title u s c sec_2210 provides that land or interests in land acquired by the federal government for an indian or an indian_tribe as part of a consolidation plan under the indian land consolidation act is exempt from federal state and local taxation the casino is located on as noted above petitioners raised this argument only in their reply brief and respondent argues petitioners should be deemed to have abandoned it land purchased by tdc and placed into trust for the tribe there is no evidence that the land or an interest in the land was acquired as part of a consolidation plan under the indian land consolidation act thus u s c sec_2210 does not apply to the tribe’s land and does not exempt the distributions from tax petitioners are correct that to the extent possible we resolve ambiguities in treaties and statutes in favor of indians and construe indian treaties in the sense in which the indians understood them see capoeman u s pincite 318_us_423 however this rule_of construction comes into play only if such statute or treaty contains language which can reasonably be construed to confer income exemptions holt v commissioner f 2d pincite this is not the case with the three provisions to which petitioners have pointed we are not free to create by implication a tax exemption for petitioner s hoptowit v commissioner t c pincite furthermore we do not agree with petitioners’ contention that we must accept mr cypress’ interpretation of these statutes as he was the bia superintendent regardless of whether or to what extent he is a delegate of the secretary of the interiordollar_figure petitioners have not presented any evidence that mr cypress was delegated any authority by the secretary of the interior by virtue of his position as continued c distributions not directly derived from the land petitioners next contend that the distributions are exempt from federal tax because they are derived directly from tribal lands they base this argument on capoeman and on the per capita act of and or the land consolidation act which we addressed above dollar_figure the supreme court held in capoeman u s pincite that the general allotment act provided the noncompetent indian17 taxpayer an exemption for proceeds directly derived from his allotted parcel of reservation land--in that case proceeds from the sale of standing timber on his allotment here the tribe has not made any allotments of land to its members see fry v continued superintendent even if we assume that the secretary of the interior has delegated mr cypress some authority we are not bound to his informal interpretations of the statutes and regulations concerning the tribe and indians more generally moreover his interpretations of these statutes are contradicted by the statutes’ plain meaning and we do not find them to be persuasive again this is an argument that petitioners raised only in their reply brief and respondent argues petitioners should be deemed to have abandoned it a noncompetent indian in this context is a member of a tribe who received an allotment of land that is held in trust for him or her by the federal government and who under the terms of general allotment act was prohibited from alienating or encumbering the land with the federal government’s consent 78_tc_137 n aff’d 617_f3d_507 8th cir united_states 557_f2d_646 9th cir perkins v commissioner t c __ slip op pincite date holt v commissioner t c pincite the per capita act of permits tribes to make to members per capita payments of funds held in trust by the secretary of the interior u s c sec_117a per capita distributions made under the per capita act of are exempt from federal and state tax id sec_117b a referencing the act of date pub_l_no sec stat pincite however not all per capita distributions qualify for the per capita act’s tax exemption the funds must come from approved sources and be distributed from qualifying accounts c f_r sec_115 petitioners argue that the ntdr account is a qualifying account and the gross_receipts tax revenue is an approved source specifically that it was derived directly from tribal lands the u s court_of_appeals for the eleventh circuit already has concluded that the tribe’s distributions to members come from ‘investment in improvements’ on the land and ‘business activities related to those assets ’ namely gambling and therefore do not derive directly from the land jim f 3d pincite ndollar_figure citations omitted alteration in original and we have held that income derived from a business on reservation land was not necessarily derived directly from the land hoptowit v commissioner t c pincite we have limited our definition of income derived directly from the land to income earned through exploitation of the land itself 83_tc_561 aff’d sub nom 792_f2d_849 9th cir see also 452_f2d_741 9th cir holding that income from farming and ranching on taxpayer’s allotted land is tax exempt aff’g in part and rev’g in part 52_tc_330 88_tc_188 holding that farming income on taxpayer’s allotted land is tax exempt our definition does not include income earned by use of the land along with capital assets and labor cross v commissioner t c pincite holding that income from operating a smokeshop on reservation land was not directly derived from the land see also 597_f2d_708 ct_cl holding that neither income from operation of a motel restaurant gift shop and apartment complex nor income from leases of buildings is directly derived from the land hoptowit v commissioner t c pincite holding that income from operating a smokeshop on reservation land was not directly derived from the land beck v commissioner tcmemo_1994_122 holding that rental income from an apartment complex on tribal land is not derived directly from the land aff’d 64_f3d_655 4th cir tonasket v commissioner tcmemo_1985_365 holding that income from operating a smokeshop on the taxpayer’s allotted land was not directly derived from the land we also have held that per capita payments of casino revenue are not directly derived from the land merely by virtue of the casino’s location on tribal land doxtator v commissioner tcmemo_2005_113 wl at campbell v commissioner tcmemo_1997_502 wl at holding that income from the operation of a casino on tribal land was not derived directly from the land aff’d and remanded 164_f3d_1140 8th cir petitioners argue that the distributions are directly derived from the land because they are in substance their share of rental payments that the tribe receives for leasing tribal land--owned communally by all members--to the casino they cite revrul_56_342 1956_2_cb_20 as support for their contention that their distributions are nontaxable the revenue_ruling lists rentals including crop rentals as income the irs understands to be exempt as directly derived from the land under capoeman id but whether payments ‘were in fact rent instead of something else paid under the guise of rent’ is a question of fact to be resolved on the basis of all the facts and circumstances k k veterinary supply inc v commissioner tcmemo_2013_84 at quoting 17_tc_199 aff’d 199_f2d_373 6th cir we are not bound by a revenue_ruling but even if we found its analysis persuasive the record does not support petitioners’ recharacterization of the gross_receipts tax as rent payments that fall outside the igra see 144_tc_324 we are not bound by revenue rulings under skidmore the weight we afford them depends upon their persuasiveness and the consistency of the commissioner’s position over time there is no written lease between the tribe and the casino and the gross_receipts tax ordinance makes no mention of a lease or the use of tribal land nor have we found any reference to a lease from the tribe to the casino in any of the general council meeting minutes in the record to the contrary the evidence in the record illustrates the tribe’s intention that the gross_receipts tax be a tax rather than rent payments the gross_receipts tax ordinance declared the intent of the miccosukee tribe of indians of florida that the miccosukee indian bingo gaming mibg shall be subject_to a gross_receipts tax and if we regard the gross_receipts tax as an application of the tribal sales_tax to the casino the ordinance states that the tribe is imposing the tax under its authority to levy and collect assessments in each the tribe’s financial statements for fiscal years through the gross_receipts tax revenue is listed under the section owners compensation fees rather than with the tribe’s leases finally each of the casino’s financial statements from fiscal years through states that while the casino is on the tribe’s land n o rental payment is currently required for_the_use_of such land petitioners have not shown that they are entitled to a tax exemption with respect to their distributions petitioners have not introduced any evidence or made any argument concerning the inclusion of the dollar_figure miscellaneous payment to ms osceola in in her gross_income and none of petitioners’ arguments address the christmas bonuses for and which were paid out of the tribe’s general account therefore we also sustain respondent’s determination that the christmas bonuses and ms osceola’s miscellaneous payment are taxable under sec_61 concluding that the tribe’s distributions are taxable to petitioners does not call into question the tribe’s sovereign authority to impose tax nor does the tribe’s sovereign authority affect our analysis of the taxability of the distributions that depends on the law and whether any exceptions to taxability apply iv underpayment penalties sec_6662 and b and imposes a penalty equal to of the portion of an underpayment_of_tax required to be shown on the return that is attributable to negligence or disregard of rules or regulations and or a substantial_understatement_of_income_tax negligence includes any failure to make a reasonable attempt to comply with the provisions of this title sec_6662 an understatement of income_tax is a substantial_understatement if it exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 in the notices of deficiency respondent determined both the negligence_penalty and the substantial_understatement_penalty the commissioner bears the burden of production with respect to an individual taxpayer’s liability for a penalty and is required to present sufficient evidence showing that the penalty is appropriate sec_7491 116_tc_438 to meet this burden for the substantial_understatement_penalty the rule_155_computations must confirm a substantial_understatement sec_7491 the commissioner must also show that he complied with the procedural requirements of sec_6751 see sec_7491 graev v commissioner graev iii 149_tc_485 supplementing and overruling in part graev v commissioner graev ii 147_tc_460 once the commissioner meets his burden of production the taxpayer bears the burden of proving that the commissioner’s determination is incorrect higbee v commissioner t c pincite a sec_6751 motions trial of this case was held and the record was closed before the issuance of our opinion in graev iii after the court’s decision in graev iii we ordered respondent to file a response addressing the effect of sec_6751 on these cases and directing the court to any evidence of sec_6751 supervisory approval in the record and petitioners to respond respondent was unable to direct the court to any evidence in the record that satisfies his burden of production with respect to sec_6751 and filed a motion to reopen the record to include two civil penalty approval forms accompanied by declarations from ms gentry one for both the and tax years and one for the tax_year petitioners did not oppose respondent’s motion but in their response they asked that they be also given the opportunity to reopen the record to call witnesses who prepared and or signed the declarations and penalty approval forms or introduce other evidence bearing on the validity of such declarations and forms they also raised issues with the documents respondent proffered in support of his compliance with sec_6751 we granted petitioners’ request to conduct additional discovery regarding respondent’s compliance with sec_6751 including interrogatories after that discovery petitioners moved to reopen the record to include certain additional documents relating to respondent’s review of the penalties namely ms gentry’s date memorandum the agent’s date memorandum regarding the six-year statute_of_limitations the agent’s activity log and respondent’s responses to petitioners’ interrogatories respondent did not oppose that motion we therefore will grant these two motions to reopen the record to admit evidence pertaining to and the parties also filed a stipulation of settled issues in which respondent conceded that he could not meet his burden of production as to the negligence_penalty for and and that petitioners are not liable for the accuracy-related_penalty for we therefore will deny respondent’s motion as to evidence relating to penalty approval for b petitioners’ sec_6751 arguments petitioners argue that the supervisory approval for the and substantial_understatement penalties was not timely and the supervisor’s review itself was not meaningful sec_6751 generally provides that no penalty shall be assessed unless the commissioner shows that the initial determination of the assessment was personally approved in writing by the immediate supervisor of the individual making such determination the u s court_of_appeals for the second circuit held in 851_f3d_190 2d cir aff’g in part rev’g in part tcmemo_2015_42 that written approval is required no later than the issuance of the notice_of_deficiency rather than the assessment of the tax in so holding the court noted the ambiguity in the statute as the irs cannot determine an assessment id pincite see also graev ii t c pincite gustafson j dissenting one can determine whether to make an assessment but one cannot ‘determine’ an ‘assessment’ because congress enacted sec_6751 to ensure that penalties should only be imposed where appropriate and not as a bargaining chip chai v commissioner f 3d pincite quoting s rept no pincite 1998_3_cb_537 and because the taxpayer decides whether to petition the tax_court after receiving the notice_of_deficiency the court held that the irs must obtain supervisory approval no later than the date the irs issues the notice_of_deficiency chai v commissioner f 3d pincite but left open was the question we face whether approval can come after the agent sends the taxpayer proposed adjustments that include penalties in other words must an agent secure penalty approval before sending to the taxpayer written notice that penalties will be proposed in this case in the form of a notice of proposed_adjustment that gives the taxpayer right to appeal the proposed penalties with appeals petitioners argue that the initial determination of a penalty is the first time an irs official introduced the penalty into the conversation see graev iii t c pincite lauber j concurring they contend that the rar contained the first suggestion of penalties making the rar--and not the notice of deficiency--the initial determination the rar is the report sent to the taxpayer indicating the adjustments to income as reported on the return and the nature of the adjustments the revenue_agent proposes to make 64_tc_191 when a 30-day_letter is sent the taxpayer may protest those adjustments at appeals and a notice_of_deficiency may follow if the taxpayer does not protest the adjustments or if the taxpayer and appeals do not settle see sec_601_105 sec_601_106 statement of procedural rules the notice_of_deficiency is the means by which the commissioner notifies the taxpayer that he has determined a deficiency sec_6212 once the irs determines a deficiency including any penalties the irs can assess that deficiency unless the taxpayer timely petitions this court for redetermination of that liability see sec_6213 the determinations made in a notice_of_deficiency typically are based on the adjustments proposed in an rar see branerton corp v commissioner t c pincite 32_tc_1139 r espondent sent to petitioner by registered mail a notice_of_deficiency determining deficiencies in income_tax for the taxable years and said determination by respondent was based on the adjustments contained in the revenue agent’s report 31_tc_1252 i t is obvious that petitioner is relying upon the revenue agent’s report of examination upon which respondent based his determination of deficiency and when those proposed adjustments are communicated to the taxpayer formally as part of a communication that advises the taxpayer that penalties will be proposed and giving the taxpayer the right to appeal them with appeals via a day letter the issue of penalties is officially on the table see palmolive bldg inv’rs llc v commissioner t c __ __ slip op pincite date therefore we conclude that the initial determination for purposes of sec_6751 was made no later than date when respondent issued the rar to petitioners proposing adjustments including penalties and gave them the right to protest those proposed adjustments next we consider when ms gentry approved these penalties respondent does not contend that nor do we consider whether ms gentry’s date memorandum satisfies his burden he directed us to the penalty approval form initialed by ms gentry on date we therefore hold that ms gentry approved the penalty determinations for and on date--after the initial determination of proposed penalties had been communicated to petitioners--and therefore supervisory approval was not timely under sec_6751 because we hold that respondent did not timely obtain written supervisory approval we need not reach petitioners’ second argument that ms gentry failed to conduct a meaningful review any contentions we have not addressed we deem irrelevant moot or meritless to reflect the foregoing appropriate orders will be issued and decisions will be entered under rule


internal_revenue_service number release date index number -------------------------------- -------------------------------------- ----------------------- ---------------------------- - - company shareholder state a dear -------------- department of the treasury washington dc person to contact -------------------- id no ------------- telephone number -------------------- refer reply to cc psi plr-156199-05 date date -------------------------------------- ---------------------- ----------------------- ------------------------- ------------- ----------------------- this letter responds to your letter dated date and perfected date requesting a ruling under ' b of the internal_revenue_code that company's late election under ' a to be an s_corporation will be treated as timely made facts company was incorporated under the laws of state on a shareholder intended company to be an s_corporation from inception however form_2553 election by a small_business_corporation was not timely filed with the internal_revenue_service company has filed timely federal tax returns form_1120s - u s income_tax return for an s_corporation for all relevant tax years and shareholders has timely filed his own federal tax returns form_1040 - u s individual_income_tax_return for the same years consistent with company’s intended status as an s_corporation plr-156199-05 law and analysis sec_1362 provides in general that an election by a small_business_corporation under ' a to be an s_corporation may be made for any_tax yearb a at any time during the preceding tax_year or b at any time during the tax_year and on or before the 15th day of the 3d month of the tax_year sec_1362 provides that if-- a a small_business_corporation makes an election under ' a for any_tax year and b that election is made after the 15th day of the 3d month of the tax_year and on or before the 15th day of the 3d month of the following tax_year then that election shall be treated as made for the following tax_year sec_1362 provides that if-- a an election under ' a is made for any_tax year determined without regard to ' b after the date prescribed by sec_1362 for making the election for that tax_year or no such election is made for any_tax year and b the secretary determines that there was reasonable_cause for the failure to timely make the election the secretary may treat such election as timely made for that tax_year and ' b shall not apply conclusion based on the facts and representations submitted we conclude that company has established reasonable_cause for failing to make a timely s_corporation_election and is eligible for relief under sec_1362 accordingly we rule that company's election under ' a is to be treated under ' b as filed timely for its tax_year beginning a this ruling is contingent on company filing form_2553 to be effective on a with the appropriate service_center no later than days from the date of this letter a copy of this letter should be attached to the form_2553 plr-156199-05 except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express or imply no opinion on whether company otherwise is eligible to be an s_corporation under a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative this ruling is directed only to the taxpayer on whose behalf it was requested according to ' k this ruling may not be used or cited as precedent sincerely s christine ellison chief branch office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for ' purposes cc


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 b04 plr-135752-17 date date -------------------------------------------------- legend settlor spouse child child child attorney attorney trust foundation date date year court -------------------------------------------------------------- court order ----------------------------------------------------- ----------------------------------------------- -------------------------------------------- -------------------------------------------------- ------------------------------------------------ ---------------------- -------------------- ---------------------------------------------------------------------------------- ---------------------------------- ----------------------- ------------------------ ------- ---------------------------------------------------------------------------------- ----------------------------------------------------------- -------------------------------------------------------------------- ------------------------------------- --------------------- -------------------------------------------------------------- -------------------------------------------------------------- state state statute state statute dear ---- ------- plr-135752-17 this letter responds to your authorized representative’s letter dated date requesting rulings on the gift and estate_tax consequences of the reformation of an irrevocable_trust and an extension of time under sec_301 of the procedure and administration regulations to allocate gst_exemption under sec_2642 of the internal_revenue_code the facts and representations submitted are summarized as follows settlor executed an irrevocable_trust trust on date for the benefit of settlor’s descendants trust was funded in year no additional gifts have been made to trust since year trust is governed by the laws of state the current beneficiaries of trust are child child and child article second provides that the trustee will divide the trust property into three equal shares each share is to be named for one of settlor’s children each child is a beneficiary of an independent share of trust article third paragraph b provides that the trustee may pay to or for the benefit of such child or his or her issue such part of the net_income and principal as the trustee deems advisable and in their respective best interests provided however that in all but an extraordinary emergency situation distributions shall be limited to their medical and educational needs any net_income not so paid may be added to principal article third paragraph c provides that upon the death of a child the trustee shall distribute the remaining principal and all accrued and accumulated income to or for such one or more appointees as the child appoints by will other than the child the child’s estate the child’s creditors or creditors of the child’s estate article third paragraph d provides that any property not appointed by a child shall be distributed to child’s then living issue by right of representation any distribution to an issue of child under the age of will be held in further trust if there are no issue of child the unappointed property shall be distributed to the settlor’s then living issue and if none to foundation article third paragraph a generally provides for withdrawal rights for the beneficiaries specifically that during the calendar_year the child may make withdrawals from any additions to the principal of the share during such year this right of withdrawal may be exercised from time to time by a written request signed by the child or during any period when the child is legally incompetent by his or her legal_representative other than the settlor and delivered to the trustee for the purpose of this paragraph any withdrawal right with respect to any addition extends to the property if any in which such addition is invested the trustee immediately shall notify the child in writing as to any addition the existence of such right and the property to which it pertains notwithstanding the foregoing if any addition is added to the share after december 1st of any given calendar plr-135752-17 year the child’s withdrawal right with respect to such addition shall lapse on the thirty-first day after his or her receipt of the notice from the trustee this withdrawal right is non- cumulative settlor created and funded trust in reliance on the advice of attorney who drafted trust based on affidavits of settlor spouse and attorney settlor created trust to provide for his descendants of all generations and to reduce the overall transfer_taxes payable on trust assets by ensuring that the assets held in trust would not be includible in the children’s gross estates upon the children’s deaths and to minimize the amount subject_to gst tax by utilizing settlor’s and spouse’s gst_exemption the withdrawal provision in article third paragraph a contains two drafting errors first trust grants each child the right to withdraw the entire amount of any contribution to that child’s separate share of the trust and fails to limit the withdrawal right to the gift_tax annual exclusion amount causing the children to possess general powers of appointment within the meaning of sec_2514 and sec_2041 over the entire amount of the contribution to that child’s separate share of trust second each child’s withdrawal right over the assets contributed to trust in any given year is non-cumulative and lapses in its entirety on an annual basis since the lapse is not limited to the greater of dollar_figure or percent of the value of the trust assets any lapse of a child’s withdrawal right would be treated as a taxable transfer by that child under sec_2514 to the extent that the property that could have been withdrawn exceeds in value the greater of dollar_figure or percent of the aggregate value of the assets subject_to withdrawal settlor and spouse each timely filed a form_709 united_states gift and generation- skipping transfer_tax return and elected to gift-split under sec_2513 for year it is represented that at the time of the year transfer to trust settlor and spouse each had their full gst_exemption available to allocate and intended that it be allocated to the year transfer to trust settlor relied on attorney to advise him on the need to allocated gst_exemption to trust however settlor and spouse did not affirmatively allocate gst_exemption to trust on form_709 no other transfers have been made to trust and no gst transfers have been made from trust the errors were discovered when settlor retained a new attorney attorney to represent him in estate_planning matters attorney informed settlor of the drafting errors that defeated the intent of the settlor in establishing trust trustee filed a petition in state court requesting judicial reformation of the erroneous provision of article third paragraph a effective as of the date trust was originally created on date court allowed the petition and in court order reformed trust to eliminate the scrivener’s error retroactive to the date of trust’s creation as reformed trust limits the beneficiaries’ withdrawal rights to the gift_tax annual exclusion amount and it limits the annual lapse of the withdrawal rights to the greater of dollar_figure or percent of the value of the trust assets plr-135752-17 you have requested the following rulings as a result of the judicial reformation of trust settlor’s children child child and child do not possess general powers of appointment within the meaning of sec_2514 and sec_2041 over their respective shares of trust except to the extent of each child’s withdrawal rights under the reformed trust instrument the judicial reformation of trust does not constitute for federal gift and estate_tax purposes the exercise or release by any child of settlor of a general_power_of_appointment the lapse of any child’s withdrawal right over trust did not result in a gift_for federal gift_tax purposes no part of trust property will be included in the gross estates of settlor’s children for federal estate_tax purposes except to the extent of each child’s withdrawal rights under the reformed trust instrument exercisable on the child’s death settlor and spouse request an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-3 of the procedures and administration regulations to allocate their respective gst_exemption to the year transfer to trust rulings sec_2001 provides that a tax is imposed on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2033 provides generally that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death sec_2041 provides that the value of the gross_estate includes the value of all property to the extent of any property with respect to which the decedent has at the time of his death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power_of_appointment by a disposition which is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent’s gross_estate under sec_2035 to inclusive for purposes of sec_2041 the power_of_appointment shall be considered to exist on the date of the decedent’s death even though the exercise of the power is subject_to a precedent giving of notice or even though the exercise of the power takes effect only on the expiration of a stated period after its exercise whether or not on or before the date of the decedent’s death notice has been given or the power has been exercised plr-135752-17 sec_2041 provides that for purposes of sec_2041 the term general_power_of_appointment means a power which is exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_2041 provides that the lapse of a power_of_appointment created after date during the life of the individual possessing the power shall be considered a release of such power the preceding sentence shall apply with respect to the lapse of powers during any calendar_year only to the extent that the property which could have been appointed by exercise of such lapsed powers exceeded in value at the time of such lapse the greater of the following amounts a dollar_figure or b percent of the aggregate value at the time of such lapse of the assets out of which or the proceeds of which the exercise of the lapsed powers could have been satisfied sec_2501 provides generally that a tax is imposed for each calendar_year on the transfer of property by gift by any individual resident or nonresident sec_2511 provides that the gift_tax shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power sec_2514 provides that for purposes of sec_2514 the term general_power_of_appointment means a power which is exercisable in favor of the individual possessing the power his estate his creditors or the creditors of his estate sec_2514 provides that the lapse of a power_of_appointment created after date during the life of the individual possessing the power shall be considered a release of such power the rule_of the preceding sentence shall apply with respect to the lapse of powers during any calendar_year only to the extent that the property which could have been appointed by exercise of such lapsed powers exceeds in value the greater of the following amounts dollar_figure or percent of the aggregate value of the assets out of which or the proceeds of which the exercise of the lapsed powers could be satisfied in 387_us_456 the court considered whether a state trial court’s characterization of property rights conclusively binds a federal court or agency in a federal estate_tax controversy the court concluded that the decision of a state trial_court as to an underlying issue of state law should not be controlling when applied to a federal statute rather the highest court of the state is the best authority on the underlying substantive rule_of state law to be applied in the federal matter if there is no decision by that court then the federal authority must apply what it finds to be state law after giving proper regard to the state trial court’s determination and to relevant rulings of plr-135752-17 other courts of the state in this respect the federal_agency may be said in effect to be sitting as a state court state statute provides in part that a proceeding to approve or disapprove a proposed modification or termination of a_trust may be commenced by a trustee or a beneficiary state statute provides in part that the court may reform the terms of a_trust even if unambiguous to conform the terms to the settlor’s intention if it is proved by clear_and_convincing evidence that the settlor’s intent or the terms of the trust were affected by a mistake of fact or law in this case an examination of the relevant trust instruments affidavits and representations of the parties indicate that the original terms of article third paragraph a are contrary to the intent of settlor the purpose of the reformation is to correct the scrivener's error not to alter or modify the trust instrument accordingly based on the facts submitted and the representations made we conclude that as a result of the reformation of trust settlor’s children do not possess general powers of appointment within the meaning of sec_2514 and sec_2041 over their respective shares of trust except to the extent of each child’s withdrawal rights under the reformed trust instrument further we conclude that the judicial reformation of trust does not constitute for federal gift and estate_tax purposes the exercise or release of a general_power_of_appointment by any child of settlor accordingly we conclude that the lapse of any child’s withdrawal right over trust did not result in a gift_for federal gift_tax purposes finally we conclude that no part of the trust property will be included in the gross_estate of child child or child for federal estate_tax purposes except to the extent of each child’s withdrawal rights under the reformed trust instrument exercisable on the child’s death ruling sec_2513 provides generally that a gift made by one spouse to any person other than the donor's spouse is considered for purposes of the gift_tax as made one-half by the donor and one-half by the donor's spouse but only if at the time of the gift each spouse is a citizen or resident_of_the_united_states sec_2601 imposes a tax on every generation-skipping_transfer gst which is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate sec_2641 defines the applicable_rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under sec_2642 the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is generally defined as the excess of over the applicable plr-135752-17 fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption amount which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual's estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2632 provides that the manner in which allocations are to be made shall be prescribed by forms or regulations issued by the secretary sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulation shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death are to be treated as if not expressly prescribed by statute and taxpayers may seek an extension of time to make an allocation described in sec_2642 or b under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i plr-135752-17 sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner 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 reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election under sec_2652 for purposes of chapter the term transferor means the decedent in the case of any property subject_to tax imposed by chapter and the donor in the case of any property subject_to tax imposed by chapter sec_26_2652-1 of the generation-skipping_transfer regulations provides that the individual with respect to whom property was most recently subject_to federal estate or gift_tax is the transferor of that property for purposes of chapter in this case settlor and spouse each elected to gift-split under sec_2513 on their respective timely filed form_709 for year thus settlor and spouse are each treated as the transferor of one-half of the assets gifted to trust in year based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore settlor and spouse are granted an extension of time of days from the date of this letter to allocate settlor’s and spouse’s available gst_exemption to their respective share of the year transfer to trust the allocations will be effective as of the respective date of the transfer to trust and the value of the transfer to trust as determined for federal estate_tax purposes will be used in determining the amount of settlor’s and spouse’s gst_exemption to be allocated to trust this allocation should be made on supplemental form sec_709 and filed with the cincinnati service_center at the following address internal_revenue_service cincinnati service_center - stop cincinnati oh a copy of this letter should be attached to the supplemental form sec_709 a copy of this letter should be attached to any gift estate or generation-skipping_transfer_tax returns that you may file relating to these matters 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 plr-135752-17 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 except as specifically ruled herein we do not express nor imply any opinion concerning the tax consequences of the transaction or any subsequent transaction regarding trust under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely yours associate chief_counsel passthroughs special industries lorraine e gardner lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter cc


internal_revenue_service department of the treasury number release date index number president direct dispatch inc green valley circle suite culver city ca washington dc person to contact telephone number refer reply to cc psi 2-plr-149655-02 date date legend x date dear this responds to a letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated on date the sole shareholder of x desired that x elect s_corporation treatment for x effective on date but the election to be treated as an s_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective date law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply plr-149655-02 x did not file an election to be treated as an s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective date within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely carolyn hinchman gray senior counsel branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index no cc psi - plr-110283-00 date trust a b date x state dear this responds to your letter dated date submitted on behalf of trust requesting a ruling under sec_1361 of the internal_revenue_code the information submitted states that trust was established on date by a grantor_trust currently holds stock in x a state corporation x intends to elect to be an s_corporation trust represents that trust has not made an election to be a qualified_subchapter_s_trust trust is not exempt from tax under subtitle a of the code and each trust_beneficiary is an individual article one of trust provides that the trustees shall hold manage invest and reinvest the trust property shall collect the income therefrom and shall pay the net_income in convenient installments in such proportions and with such exclusions as the trustees shall deem advisable among the following class of persons b the spouse of b the issue of b the respective spouses of the issue of b the brothers and sisters of b their respective spouses their issue and the respective spouses of such issue or the trustees shall have the right to and are authorized to accumulate any or all of such net_income as they shall deem advisable and add the same to the principal or the trust property any payments of net_income may be made by the trustees either directly to or indirectly in trust or otherwise for the benefit of the beneficiary concerned article one of trust further provides that in the event that any payment of income authorized under article one to any individual beneficiary shall be insufficient in the opinion of the trustees to defray the expenses of any illness accident or other emergency or to provide for the proper maintenance support and education of such beneficiary the trustee are authorized to use from time to time so much of the principal of the trust property as the trustee may deem advisable therefor article two of trust provides that trust shall continue in effect unless sooner terminated until twenty-one years after the death of the last to die of the four children of grantor living at the date of trust or until the earlier failure of all living takers in the class of persons described in article one of trust article two of trust further provides that upon the termination of trust the trustees shall transfer deliver and pay over the then trust property to b if b is then living and if not to the then living issue of b per stirpes failing such then living issue the then trust property shall be divided equally among and added to the other three trusts established by grantor on the same day trust was established and failing all such then living takers the then trust property shall be transferred delivered and paid over to such charitable_organization or organizations as the trustees shall select sec_1361 of the code provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect sec_1362 of the code provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 c have a nonresident_alien as a shareholder and d more than one class of stock under sec_1361 of the code an electing_small_business_trust is an eligible shareholder of an s_corporation sec_1361 defines electing_small_business_trust sec_1361 of the code provides that except as provided in sec_1361 the term electing_small_business_trust means any trust if - i such trust does not have as a beneficiary any person other than i an individual ii an estate or iii an organization described in paragraph or of sec_170 ii no interest in such trust was acquired by purchase and iii an election under sec_1361 applies to such trust sec_1361 of the code provides that the term electing_small_business_trust shall not include - i any qualified_subchapter_s_trust as defined in sec_1361 if an election under sec_1361 applies to any corporation the stock of which is held by such trust ii any trust exempt from tax under subtitle a of chapter and iii any charitable_remainder_annuity_trust or charitable_remainder_unitrust as defined in sec_664 sec_1361 of the code provides that for purposes of sec_1361 the term potential_current_beneficiary means with respect to any period any person who at any time during such period is entitled to or at the discretion of any person may receive a distribution from the principal or income of the trust notice_97_49 1997_2_cb_304 provides that for purposes of sec_1361 the term beneficiary does not include a distributee trust but does include those persons who have a beneficial_interest in the property held by the distributee trust furthermore the notice provides that for purposes of sec_1361 if a distributee trust becomes entitled to or at the discretion of any person may receive a distribution from principal or income of the esbt then the trust will become a potential_current_beneficiary and the s_corporation_election will terminate unless the distributee trust is a_trust described in sec_1361 accordingly based on the representations made and the information provided and the assumption that the interest of any contingent charitable_beneficiary of trust described in sec_170 is so remote as to be negligible and that such contingent charitable beneficiaries are therefore not beneficiaries of trust as described in sec_1361 we conclude that for purposes of sec_1361 the beneficiaries of trust are individuals and are qualified beneficiaries with respect to the power given to the trustees under article one to make certain distributions either directly to or indirectly in trust or otherwise for the benefit of the beneficiary concerned this is a power to make a distribution for purposes of sec_1361 however since there are currently no distributee trusts identified or currently in existence the power to distribute to these trusts will be disregarded for purposes of sec_1361 thus there is no distributee trust that is a potential_current_beneficiary if a distributee trust is identified or otherwise comes into existence in any period then the distributee trust will become a potential_current_beneficiary and the s_corporation_election will terminate unless the distributee trust is a_trust described in sec_1361 furthermore the beneficiary of any such new trust must satisfy the shareholder restrictions of sec_1361 accordingly upon trust making a valid and timely election under sec_1361 trust will satisfy the requirements of sec_1361 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 code provides that it may not be used or cited as precedent in accordance with the power_of_attorney of file with this office we are forwarding a copy of this letter to trust enclosures copy of this letter copy for sec_6110 purposes sincerely yours j thomas hines acting branch chief branch office of the associate chief_counsel passthroughs and special industries


cca_2017103109524120 id uilc number release date from sent tuesday date am to cc bcc subject re assessment levy question good morning a portion of a deficiency assessment was abated as excessive however the service issued a levy reflecting the excessive_amount cindy asked if the levy is good up to the correct amount of the assessment or should r withdraw levy and issue new one for correct amount last week i tossed around a couple of ideas this is a better solution than what i suggested last week form 668-d release_of_levy release of property from levy has a section for doing a partial_release and it can be used here by the way i don’t understand the supervisor’s reasoning if you would like to discuss this further please contact me


t c memo united_states tax_court paul f young petitioner v commissioner of internal revenue respondent docket no filed date larry d harvey for petitioner randall l preheim for respondent memorandum opinion vasquez judge this case is before the court on respondent’s motion for summary_judgment pursuant to rule unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code in effect for the year in issue after a concession the sole issue for decision is whether petitioner can exclude from income wages earned during from working in antarctica background at the time he filed the petition petitioner resided in colorado during petitioner performed services at mcmurdo station in ross island antarctica on hi sec_2002 federal_income_tax return petitioner excluded wage income earned and received during for services performed in antarctica i summary_judgment discussion rule a provides that either party may move for summary_judgment upon all or any part of the legal issues in controversy full or partial summary_judgment may be granted only if it is demonstrated that no genuine issue exists as to any material fact and that the legal issues presented by the motion may be decided as a matter of law see rule b 98_tc_518 affd 17_f3d_965 7th cir we conclude that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law respondent concedes that no penalty pursuant to sec_6662 is due from petitioner for ii in general sec_61 provides that gross_income means all income from whatever source derived accordingly citizens of the united_states generally are taxed on income earned outside the geographical boundaries of the united_states unless the income is specifically excluded from gross_income 117_tc_95 affd sub nom 68_fedappx_44 9th cir affd sub nom 357_f3d_1108 10th cir exclusions from income are construed narrowly and taxpayers must bring themselves within the clear scope of the exclusion id iii sec_911 in 126_tc_89 473_f3d_790 7th cir arnett ii we addressed the arguments made by the parties herein regarding sec_911 the u s court_of_appeals for the seventh circuit agreed with our analysis of sec_911 and affirmed our conclusion that antarctica is not a foreign_country pursuant to sec_911 and the regulations thereunder arnett v commissioner f 3d pincite we shall not repeat our analysis from arnett i herein we follow our analysis and holding in arnett i and the analysis and holding of the court_of_appeals in arnett ii in 126_tc_89 affd 473_f3d_790 7th cir we concluded our opinion with a continued iv conclusion accordingly for the reasons stated in arnett i arnett ii and herein we conclude that petitioner cannot exclude from gross_income wages earned during from working in antarctica to reflect the foregoing an appropriate order and decision will be entered continued citation of sec_863 suggesting that sec_863 provided an additional reason to rule against the taxpayer id pincite see also sec_863 providing that income earned in antarctica by a u_s_person is sourced in the united_states in arnett v commissioner f 3d pincite the u s court_of_appeals for the seventh circuit addressed sec_863 in greater detail stating at the outset we think that it is important to note that considering antarctica not to be a foreign_country is compatible with the general statutory scheme notably sec_911 is found under subtitle a chapter subchapter_n of the irc which is designated tax based on income from sources within or without the united_states part i of this subchapter entitled source_rules and other general rules relating to foreign_income deems any activity in antarctica to be space_or_ocean_activity in turn the united_states is designated the source country of income from such activity when earned by a citizen_of_the_united_states sec_863 although this provision does not provide a definitive answer as to whether antarctica is a foreign_country it supports the conclusion that sec_911 is not intended to apply to income earned for services provided in antarctica we take this opportunity to state our agreement with the court of appeals’ conclusion set forth above see also 450_us_1