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 --------------------------------------------------- telephone number ---------------------- refer reply to cc psi b04 plr-135733-17 date date --------------------------------------- legend settlor spouse son grandchild grandchild grandchild attorney attorney trust date date year year court ------------------------------------------------ ----------------------------------------------- ------------------------- -------------------------------------------- -------------------------------------------------- ------------------------------------------------ ---------------------- -------------------- ---------------------------------------------------------------- ---------------------------- ------------------------ -------- ------- --------------------------------------------------------------------- -------------------------------------- court order --------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------ state state statute state statute --------------------- -------------------------------------------------------------- -------------------------------------------------------------- plr-135733-17 dear ---- ------- this letter responds to your authorized representative’s letter dated date requesting rulings on the gift estate and generation-skipping gst tax consequences of the reformation of an irrevocable_trust the facts and representations submitted are summarized as follows settlor executed an irrevocable_trust trust on date for the benefit of settlor’s grandchildren and their descendants trust was funded in year and spouse made a second gift to trust in year no additional gifts have been made to trust trust is governed by the laws of state the current beneficiaries of trust are grandchild grandchild and grandchild 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 grandchildren each grandchild is a beneficiary of an independent share of trust article third paragraph b provides that the trustee may from time to time pay to or for the benefit of such grandchild 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 extraordinary emergency situations distributions to the grandchild and his or her issue 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 grandchild the trustee shall distribute the remaining principal and all accrued and accumulated income to or for such one or more appointees as the grandchild appoints by will other than the grandchild the grandchild’s estate the grandchild’s creditors or creditors of the grandchild’s estate article third paragraph d provides that any property not appointed by a grandchild shall be distributed to grandchild’s then living issue by right of representation any distribution to an issue of grandchild under the age of will be held in further trust if there are no issue of grandchild the unappointed property shall be distributed to the settlor’s then living issue if none too settlor’s son son if living otherwise to settlor’s issue by right of representation article third paragraph a provides generally for withdrawal rights for the beneficiaries specifically that during the calendar_year the grandchild 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 written request signed by the grandchild or during any period when the grandchild is legally incompetent by his or her legal_representative other than settlor or spouse 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 plr-135733-17 such addition is invested the trustee immediately shall notify the grandchild 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_year the grandchild’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 attorney drafted trust settlor created and funded trust in reliance on the advice of attorney based on affidavits of 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 grandchild’s gross_estate upon the grandchild’s death and to minimize the amount subject 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 grandchild the right to withdraw the entire amount of any contribution to that grandchild’s separate share of the trust and fails to limit the withdrawal right to the gift_tax annual exclusion amount causing the grandchild to possess general powers of appointment within the meaning of sec_2514 and sec_2041 over the entire amount of the contribution to that grandchild’s separate share of trust second each grandchild’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 grandchild’s withdrawal right would be treated as a taxable transfer by that grandchild 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 year form_709 united_states gift and generation-skipping_transfer_tax return and elected to gift-split settlor and spouse incorrectly reported the year gift to trust as an indirect_skip however settlor and spouse each allocated his or her gst_exemption to trust spouse timely filed a form_709 for year and allocated her remaining gst_exemption to trust no gst transfers have been made from trust the errors were discovered when son retained a new attorney attorney to represent him in estate_planning matters attorney informed son 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 plr-135733-17 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 of the value of the trust assets you have requested the following rulings as a result of the judicial reformation of trust settlor’s grandchildren grandchild grandchild and grandchild 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 grandchild’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 grandchild of settlor of a general_power_of_appointment the lapse of any grandchild’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 the settlor’s grandchildren for federal estate_tax purposes except to the extent of each grandchild’s withdrawal rights under the reformed trust instrument exercisable at the grandchild’s death settlor and spouse substantially complied with the requirements of sec_2632 to allocate their available gst_exemption to the year gift 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 extent 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 plr-135733-17 before the date of the decedent’s death notice has been given or the power has been exercised 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 plr-135733-17 no decision by that court then the federal authority must apply what it finds to be state law after giving proper regard to the state trial court’s determination and to relevant rulings of other courts of the state in this respect the federal_agency may be said in effect to be sitting as a state court state statute provides in part that a proceeding to approve or disapprove a proposed modification of 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 resulting from scrivener’s error 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 presented and the representations made we conclude that as a result of the reformation of trust settlor’s grandchildren do not possess general powers of appointment over the assets of trust except to the extent of each grandchild’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 purpose the exercise or release by any grandchild of settlor of a general_power_of_appointment we also conclude that the lapse of grandchild grandchild or grandchild 3’s withdrawal rights did not result in a gift_for federal gift_tax purposes finally we conclude that upon the death of grandchild grandchild or grandchild the assets of each grandchild’s portion of trust will not be includible in that grandchild’s gross_estate under sec_2041 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_25_2513-1 of the gift_tax regulations provides that the consent is effective only if both spouses signify their consent to treat all gifts made to third parties during that calendar_period by both spouses while married to each other as having been made one- half by each spouse such consent if signified with respect to any calendar_period is effective with respect to all gifts made to third parties during such calendar_period except in part if one spouse transferred property in part to his or her spouse and in part to third parties the consent is effective with respect to the interest transferred to third parties only insofar as such interest is ascertainable at the time of the gift and severable from the interest transferred to his spouse plr-135733-17 sec_25_2513-1 provides that the consent applies alike to gifts made by one spouse alone and to gifts made partly by each spouse provided such gifts were to third parties and do not fall within any of the exceptions set forth in sec_25_2513-1 through b the consent may not be applied only to a portion of the property interest constituting such gifts if the consent is effectively signified on either the husband’s return or the wife’s return all gifts made by the spouses to third parties except as described in subparagraphs through of this paragraph during the calendar_period will be treated as having been made one-half by each spouse sec_2601 imposes a tax on every generation-skipping_transfer 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 provides that the term applicable_rate means with respect to any gst the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer 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_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 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 plr-135733-17 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 elected to gift-split on their timely filed form_709 in year thus we conclude that settlor and spouse are each treated as the transferor of one-half of the assets gifted to trust in year spouse timely filed form_709 for year for gst purposes spouse is the transferor of the assets gifted to trust in year settlor and spouse incorrectly reported the year gift to trust as an indirect_skip however settlor and spouse allocated their gst_exemption to the year gift to trust settlor and spouse did not literally comply with the instructions to form_709 to properly allocated their remaining gst_exemption to the year gift to trust however literal compliance with the procedural instructions to make an election is not always required elections may be treated as effective where the taxpayer complied with the essential requirements of a regulation or the instructions to the applicable form even though the taxpayer failed to comply with certain procedural directions therein see 67_tc_736 acq in result 1979_1_cb_1 thus an allocation that does not strictly comply with the instructions on form_709 or the applicable regulations will be deemed valid if the information on the return is sufficient to indicate that the donor intended to make the allocation based upon the facts submitted and representations made we conclude that year form sec_709 contain sufficient information and therefore we further conclude that settlor and spouse substantially complied with the requirements of sec_2632 to allocate their respective gst_exemption to the year gift to trust spouse allocated her available gst_exemption to the year gift to trust on a timely filed form_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 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 rules herein we do not express or imply any opinion concerning the federal tax consequences of any aspect of the transaction or subsequent transaction to trust under the cited provisions or under any other provisions of the code plr-135733-17 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely 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


- legend parent internal_revenue_service number release date index number --------------------------------------------- ------------------------------------------------- -------------------------------------------- ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc corp b02 plr-150390-04 date date ty ------------------ ty ------------------ ----------------------------------------------------------------------- ------------------------------------------------------------------------ ------------------------------------------------ ------------------------------- ----------------------- foreign ------------------- -------------------- domestic subsidiary ---------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------- -------------------- ------------------------------- ----------------------- ---------------- acquiror ---------------------------------------------------------------------------- -------------------------------------------------------------------- acquisition subsidiary electing subsidiaries ---------------------------------- -------------------- --------------------------------------------- ----------------------- -------------------- --------------------------------- -------------------- plr-150390-04 ----------------------------------------------------------------------- ------------------------ --------------------- ------------------------------------------------------------------------ ---------------------------------- ------------------- ------------------------------------------------------------------------------------------------------------------ --------------------------- -------------------- ------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------- ------------------------ -------------------- ------------------------------------------------------------------------------------------------------------ ----------------------------------------------------------------------- ------------------ ----------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ ------ -------------------- -------------------------------------------------------------- -------------------------------------- ---------------------- ----------------------------------------------------------- ------------------------------------------------ -------------------- ---------------------------------------- -------------------- ----------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------- ------------------------------------------------------- ---------------------- plr-150390-04 ------------------------------------------------------- ---------------------- ---------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------- -------------------------------------------------- ------------------------- ---------------------------- ------------- ------------------ ------------------ ------------------- state x date date date date q w y z company official ------------------------------------------------------------- outside professional ------------------------------------------------------------------- dear -------------- -------------- -------- -------- ------ --------------------------------------------- -------------------------------------- this letter responds to a letter submitted on behalf of parent and electing subsidiaries dated date requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election the extension is being requested in order to allow parent and electing subsidiaries to file an election to restore value under sec_1_382-8 of the income_tax regulations hereinafter referred to as the election the material information submitted in the request and subsequent correspondence is summarized below parent a state x corporation was the common parent of a consolidated_group of corporations the parent group until date on date parent owned directly or plr-150390-04 indirectly percent or more of the stock of each of the electing subsidiaries electing subsidiaries are foreign entities treated as corporations for federal tax purposes and are not engaged in the conduct_of_a_trade_or_business within the united_states domestic subsidiary is a domestic subsidiary of one of the electing subsidiaries the only asset held by domestic subsidiary is stock of a member of the parent group acquiror a state x corporation is the parent of a consolidated_group of corporations the acquiror group before date parent was q-percent owned by foreign and w-percent owned by the public on date acquiror formed acquisition subsidiary solely for the purpose of acquiring parent on date acquisition subsidiary acquired y percent of parent’s outstanding_stock in a cash tender offer increasing its ownership of parent by more than percentage points the acquisition on date following the tender offer acquisition subsidiary merged with and into parent pursuant to the merger parent’s minority shareholders received cash in exchange for their shares in parent and parent became a wholly-owned subsidiary of acquiror at the time of the acquisition the parent group had consolidated_net_operating_loss carryovers of dollar_figurez thus the parent group constituted a loss group for purposes of sec_1_1502-91 as a result of the acquisition the parent group underwent an ownership_change as defined under sec_382 of the code and the use of the parent group’s net_operating_loss carryovers are subject_to limitation under sec_382 pursuant to sec_1_382-8 the value of the parent group treated as a single corporation for this purpose under sec_1_382-8 was reduced by the value of the stock it owned directly in electing subsidiaries the value of each of the electing subsidiaries that owned directly other electing subsidiaries or domestic subsidiary was reduced by the value of such subsidiary and domestic subsidiary’s value was reduced by the value of the stock it owned in a member of the parent group sec_382 provides that the amount of the taxable_income of any new_loss_corporation for any post-change_year which may be offset by pre-change losses shall not exceed the sec_382 limitation for such year under sec_382 the sec_382 limitation is determined by multiplying the value of the old_loss_corporation by the applicable long term tax-exempt rate a special rule designed to prevent double counting by controlled groups is set forth in sec_1_382-8 sec_1_382-8 requires the value of the stock of each component_member of the controlled_group be reduced by the value of the stock directly owned by that component_member in any other component_member component members of a controlled_group can elect to restore some or all of the value to another component_member under sec_1_382-8 the election to restore value is made following the procedures set forth in sec_1_382-8 for purposes of applying sec_1_382-8 a consolidated_group loss group or loss subgroup is treated as a single corporation pursuant to sec_1_382-8 the parent group and electing subsidiaries are component members of a controlled_group under sec_1_382-8 an election to restore the value of electing subsidiaries was due on date however for various reasons parent and electing subsidiaries failed to make the election in a timely manner plr-150390-04 under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_382-8 therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent and electing subsidiaries to file the election provided parent and electing subsidiaries show they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the government the information affidavits and representations submitted by parent company official and outside professional explain the circumstances that resulted in the failure to timely file the election the information establishes that parent and electing subsidiaries reasonably relied on a qualified_tax professional who failed to make or advise parent and electing subsidiaries to make the election and that the interests of the government will not be prejudiced if relief is granted see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that parent and electing subsidiaries have shown they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time for parent and electing subsidiaries to file the statement described in sec_1_382-8 is granted under sec_301_9100-3 until days from the date on this letter a copy of this letter must be attached to the statement the above extension of time is conditioned on the taxpayers' parent's and its controlled_group members’ tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers' tax_liability for the years involved a determination thereof will be made by the director's office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers' liability is lower sec_301_9100-3 plr-150390-04 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular we express no opinion with respect to whether an ownership_change occurred whether parent domestic subsidiary and electing subsidiaries are component members of a controlled_group the amount of value if any that may be restored or as to values or amounts of nols in addition we express no opinion as to the tax effects or consequences of filing the return or the election late under the provisions of any other section of the code or regulations or as to the tax treatment of any conditions existing at the time of or effects resulting from filing the return or the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-3 we relied on certain statements and representations made by parent parent's authorized representative company official and outside professional under penalties of perjury however the director should verify all essential facts moreover notwithstanding that the extension is granted under sec_301_9100-3 to file the election any penalties and interest that would otherwise be applicable still apply this letter is directed only to the taxpayer s who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file in this office copies of this letter are being sent to your authorized representatives sincerely _ken cohen_______________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate


internal_revenue_service department of the treasury index nos washington 0c cantact parenan talenhane numba n belegese pest - plr-118245-98 date oct t i o h_r e a t d n al date state x state z dear this is in reply to a letter of september previous correspondence submitted on behalf of pl sec_1 and al by their authorized representative p3 p4 fl sec_2 and ps requesting certain rulings regarding the transfer of certain assets to pl pil p3 bp4 and ps are each a series of al al is a_trust formed under the laws of state x pursuant to an agreement and declaration of trust declaration al is registered with the securities_and_exchange_commission the sec under the act as an open-end diversified management investment_company fi is a voluntary association formed as a business_trust under the laws of state z open-end diversified management investment_company under the act each qualify for treatment as ric under sec_851 et seq of the internal_revenue_code and intend to continue to so qualify for all subsequent tax years fl is registered with the sec as an a regulated_investment_company are each a series of fl and and sec_3 dollar_figure sec_2 dollar_figure prior to date sec_1 held an interest in p3 sec_2 held an and ps and sec_3 held an interest in p5 p3 the transferors contributed certain investment_interest in p4 p4 assets to pl in exchange for beneficial interests in pl immediately thereafter the transferors distributed their respective interest in pl to their respective partners in liquidation on date the trustees for pl have adopted capital_account establishment and maintenance procedures procedures holders of interests in pl will be limited to certain institutional investors holders and will not include individuals s_corporations partnerships or grantor trusts that are beneficially owned by any individual s_corporation or partnership pl will invest its aggregate assets in a manner that complies with the requirements specified in sec_851 as though pl were a ric subject_to sec_851 of the code the declaration for p1 which governs the rights obligations and liabilities of the holders provides that the holders' interests in pl are not transferable increases and decreases in the size of a holder's investment in pl will be accomplished by adjustments to that holder's capital_account x e i balance not by a transfer of interests in pl or capital accounts between the various holders pl represents that except as required by sec_704 of the code and sec_1_704-1 of the income_tax regulations each holder's allocable share of p1's income will be comprised of a proportionate share of each item_of_income includable in pi's gross_income pl further represents that the organization of p1 in a manner to enable it to be classified as a partnership under sec_301_7701-2 of the procedure and administration regulations was not done to enable a holder that is a regulated investment com- pany to make distributions that would be prohibited under revrul_89_81 c b invested directly in the assets of pl had the regulated_investment_company pl represents that each entity that has been identified as prospective holder is either a ric or an entity meeting the di- versification requirements of immediately before -- and taking into account the entity's pro- portionate share of pl's assets will meet those requirements immediately after -- its investment in pl additionally pl represents that pl will meet the diversification criteria of sec_851 immediately after the contributions of the holders f ii of the code sec_368 a furthermore pl represents that interests in pi will not be traded on an established_securities_market nor will any inter- ests be issued in transactions registered under the securities act of pi will not have more than holders at any one time and pl also represents that it is and will continue to be regis- tered with the sec under the act as and that it will make all of its book allocations in proportion to the holders' relative book capital accounts a management company furthermore pl represents that each transferor transferred f ii of the code assets to pi that satisfied the diversification test of sec_368 sec_368 apply except ceding sentence the principles of that government securities are not excluded for purposes of de- termining total assets under sec_368 iv unless the gov- ernment securities are acquired to meet sec_368 f ii solely for purposes of the pre- pl and each holder that is a ric represents that for pur- poses of determining the required_distribution under sec_4982 a of the code it will account for its share of partnership items of income gain by pl as required by revrul_94_40 c b and deduction as they are taken into account loss sec_7704 of the code provides that a publicly_traded_partnership shall be treated as a corporation sec_7704 of the code provides that for purposes of the term publicly_traded_partnership means any partner- interests in such partnership are traded on an estab- sec_7704 ship if lished securities market or interests in such partnership are readily_tradable on a secondary market or the substantial equivalent thereof sec_1_7704-1 of the regulations concerning pri- vate placements provides that except as otherwise provided in sec_1_7704-1 interests in a partnership are not readily_tradable on a secondary market or the substantial equivalent thereof if all interests in the partnership were issued in a transaction or transactions that was not required to be regis- tered under the securities act of and ii any time during the taxable_year of the partnership the partnership does not have more than partners at u s c 77a et seq i the transferors will each have an interest in pl pi repre- sents that bl may in the future have additional holders but it will have no more than partners holders and that no inter- ests in pl have been or will be traded on an established securi- ties market or issued in a transaction registered under the secu- rities act of representations made we conclude that pl will not be a publicly_traded_partnership for purposes of based on the information provided and the sec_7704 of the code sec_851 of the code provides that certain require- ments must be satisfied for a domestic_corporation to be taxed as a ric of the code provides that sec_851 percent of to qualify as a corporation's gross_income must be derived ric from dividends interest payments_with_respect_to_securities_loans as defined in sec_512 gains from the sale_or_other_disposition of stocks securities foreign_currencies or other income derived with respect to the business of investing in such stocks securities or currencies a prior to its repeal by sec_1271 of the taxpayer relief act of publaw_105_34 stat of the code required that sec_851 less than percent of the corporation's gross_income may be derived from the sale or disposition of certain assets held for less than months a ric beginning after august the repeal applies to taxable years of to qualify as tra '97 a ric sec_851 a of the code sec_851 a for the taxable_year of that taxable_year at least percent of the value of total assets must be represented by cash and cash items includ- a ric which begins after august at the close of each quarter of the to qualify as requires a corporation's a ric ing receivables government securities securities of other rics and other_securities generally limited in respect of one issuer to an amount not greater in value than percent of the value of the total assets of the corporation and to not more than percent of the outstanding securities of such issuer sec_851 b of the code sec_851 b for the to qualify as a ric taxable_year of a ric which begins after august that corporation's total assets may be invested in the securities other than government securities and securities of other rics of any one issuer or two or more issuers which the corporation controls and which are determined under regulations to be en- gaged in the same or similar trades_or_businesses or related trades_or_businesses not more than percent of the provides sec_702 sec_702 of the code provides that the character of that are included in a partner's dis- items stated in tributive share shall be determined as ized directly from the source from which realized by the partnership or incurred in the same manner as incurred by the partnership to determine the amount or character of the gross_income of partner such amount shall include that partner's_distributive_share of the gross_income of the partnership sec_702 provides that where it if such items were real- a is necessary section n of the technical and miscellaneous reve- of the code that states that income derived from a part- nue act of added a sentence to the flush language of sec_851 nership or trust shall be treated as satisfying the percent test of sec_851 b only to the extent that such income is at- tributable to items of income of the partnership or trust which would be described in sec_851 if earned directly by the ric the legislative_history of that sentence indicates that it was intended to clarify the general_rule used to characterize items of income gain ner's distributive_share as applied to rics that are partners it therefore explains the relationship of test under sec_851 sess loss deduction or credit includable in a part- see s rep no 100th cong 2d sec_702 to the percent under subchapter_k of the code a partnership is considered to be either an aggregate of its members or a separate_entity under the aggregate approach each partner is treated as an owner of an undivided_interest in partnership assets and operations under the entity approach the partnership is treated as a sepa- rate entity in which partners have no direct interest in partnership assets and operations cong sess and h_r rep no see s rep no 83d cong 2d 2d sess 83d in order for holders to qualify as rics under the diversifi- sec_851 of the code the aggregate approach will cation tests of have to be applied to each holder's partnership_interest in p1 as an aggregate each holder will be entitled to take into ac- count its share of the individual items of income and assets of pl the partnership held revrul_75_62 1975_1_cb_188 concerns a life_insurance_company that contributed cash to a partnership in exchange for a percent interest in the partnership real_estate as its principal asset question sec_805 of the code required life_insurance_companies to value their assets each taxable_year sec_805 required that shares of stock and real_estate be valued at their fair market values and that other assets be valued at their adjusted_basis ing is whether for purposes of company's interest in the partnership is considered to be an investment in the real_estate held by the partnership an aggre- gate approach or an investment in other_property an entity approach the issue presented in the rul- for the taxable_year in the life_insurance for this purpose sec_805 revrul_75_62 holds that the partnership_interest held by sec_805 of the code the life_insurance_company must be accounted for as other proper- ty for’ purposes of sec_705 and sec_741 both of which generally treat an interest ina an intent partnership as an interest in an entity as evidence of in subchapter_k to take the entity approach in questions concern- ing the nature of an interest in a partnership states that the legislative_history of cate that application of the entity approach to the facts of the ruling is inappropriate and that there is no compelling reason to take the aggregate approach sec_805 does not indi- the ruling cites the ruling the flush language of sec_851 of the code and its legisla- tive history indicate that here unlike the situation described in revrul_75_62 congress intended that an aggregate approach be taken in determining the nature of the partnership interests held by the holders aggregate approach in applying the percent gross_income_test of be anomalous to suggest that congress intended that a ric's in- terest in a partnership be viewed as a direct investment in the partnership's assets for purposes of the sec_851 be viewed as a direct investment in those assets for purposes of the test set out in sec_851 to rics that hold partnership interests the flush language of sec_851 mandates an and b sec_851 test but not it would the tax treatment accorded real_estate_investment_trusts reits lends further support to applying the aggregate approach to the present case vehicle similar to the ric for small investors to invest in real reits were created to provide an investment estate and real_estate mortgages cong 2d sess like rics reits are subject_to re- strictions on the type of assets they can hold if they want to retain the benefits accorded them under subchapter_m and are subject_to certain gross_income source tests reits and rics also have similar distribution and holding_period requirements see h_r rep 86th sec_1_856-3 of the regulations provides that the interest for example if for purposes of sec_856 a_trust owns a 30-percent capital the character of the various assets in the in the case of a real_estate_investment_trust which is a partner in a partnership as defined in sec_7701 a - and the regulations thereunder the trust will be deemed to own its proportionate share of each of the assets of the partnership and will be deemed to be en- titled to the income of the partnership attributable to such share of a partner in the partnership's assets shall be deter- mined in accordance with his capital interest in the partnership hands of the partnership and items of gross_income of the partnership shall retain the same character in the hands of the partners for all purposes of sec_856 thus interest in a partnership which owns a piece of rental property the trust will be treated as owning percent of such property and as being entitled to percent of the rent derived from the property by the partnership similarly if the partnership holds any property primar- ily for sale to customers in the ordinary course of its trade_or_business the trust will be treated as holding its proportionate share of such property primarily for such purpose sells real_property or a_trust sells its interest ina partnership which owns real_property any gross_income realized from such sale tributable to the real_property shall be deemed gross_income from the sale or disposition of real_property held for either the period that the partnership has held the real_property or the period that the trust was a member of the partnership whichever is the shorter for example where a partnership to the extent that it is at- also thus the regulation adopts the aggregate look-through approach in determining how a reit should account for its partnership interests for purposes of all of the income and asset qualification tests under sec_856 of the code the legislative purpose underlying the creation of both rics and reits was to provide small investors a means of pooling their resources to invest in a particular type of asset without the _g- imposition of corporate_income_tax similar for each specifically address the issue herein it an approach for rics that parallels that set forth for reits therefore although the ric regulations do not is appropriate to adopt the qualification tests are accordingly each holder that elects ric status as a part- and b and b sec_851 of the code and the regulations ner in pi will be deemed to own a proportionate share of the assets of pl and will be deemed to be entitled to the income of pl attributable to that share for purposes of determining whether that holder satisfies the requirements of b thereunder prior to their amendment by the tra of sec_851 beginning after date holder under sec_704 will not be considered gain derived by the other partners for purposes of these sections the interest of the holder in pl shall be deter- mined in accordance with the holder's capital interest in pl the holder will be deemed to hold its proportionate share of the assets of pl for the period that pl has held the individual as- sets or for the period that the holder has held the interest in p1 whichever is shorter rules of pl sec_1223 apply to determine a holder's holding_period in for these purposes the holding_period gain properly allocated to a for taxable years of the rics for purposes of sec_851 or '97 sec_704 of the code provides that a partner's dis- tributive share of income gain shall except as otherwise provided in chapter determined by the partnership_agreement loss deduction or credit of the code be sec_704 of the code provides that a partner's dis- loss deduction or credit or tributive share of income gain item thereof shall be determined in accordance with the partner's_interest_in_the_partnership determined by taking into account all facts and circumstances if agreement does not provide as of income gain gain substantial economic_effect to the partner's_distributive_share loss deduction or credit or item thereof or loss deduction or credit or item thereof does not have the allocation to a partner under the agreement of income the partnership sec_1_704-1 ii of the regulations provides that this means that in the event there is an economic in order for an allocation to have economic_effect it must be consistent with the underlying economic arrangement of the partners benefit or economic burden that corresponds to an allocation the partner to whom the allocation is made must receive the economic benefit or bear the economic burden has economic_effect if maintained in accordance with sec_1_704-1 iv liquidation of the partnership or any partner's interest in the the partnership capital accounts are generally an allocation upon partnership liquidating distributions will be made to the partners in accordance with their positive capital_account balances and partners are unconditionally required to restore the negative balance of their capital accounts to the partnership upon the liquidation of their interests in the partnership sec_1_704-1 the amount of money contributed by the fair_market_value of property and only if each partner's capital iv b of the regulations provides that the partners' capital accounts will be considered to be determined and maintained in accordance with the rules of paragraph b iv if account is increased by him to the partnership contributed by the partner to the partnership net of liabilities secured_by such contributed_property that the partnership is considered to assume or take subject_to under sec_752 of the code and allocations to the partner of partnership income and gain or items thereof including income and gain exempt from tax and income and gain described in paragraph b iv q but excluding income and gain described in paragraph b i and decreased by the amount of money distributed to the partner by the partnership distributed to the partner by the partnership net of liabilities secured_by such distributed property that such partner is considered to assume or take subject_to under sec_752 allocations to the partner of expenditures of the partnership described in sec_705 b loss and deduction or item thereof including loss and deduction described in paragraph b iv g but excluding items described in paragraphs b i above and loss or deduction described in the fair_market_value of property allocations of partnership or b iii and sec_1_704-1 ii h of the regulations provides that the partnership_agreement includes all agreements among the partners or between one or more partners and the partnership concerning affairs of the partnership and responsibilities of the partners sec_3_4 of article iii of the procedures provides that the provisions contained in the procedures relating to the maintenance of book capital accounts and tax capital accounts are intended to comply with sec_1_704-1 of the regulations and shall be interpreted and applied in a manner consistent with such regulations sec_3_4 of the procedures further provides that the trustees shall make any appropriate modifications in the event unanticipated events might otherwise cause the procedures not to comply with sec_1_704-1 including the requirements described in sec_1_704-1 ii b regulations and b iv of the sec_4 of article iv of the procedures provides that upon liquidation holders as provided in article vii of the procedures the proceeds will be distributed to the of pl sec_5 of article v of the procedures provides that if a redemption occurs prior to the end of a fiscal_year pi will treat the fiscal_year as ended for the purposes of computing the redeeming holder's distributive_share of pl items and allocations of all items to such holder will be made as though each holder were receiving its allocable share of pl items at such time section of article vii of the procedures provides that subject_to of the procedures upon the dissolution of p1 the trustees shall liquidate the assets of pl apply and distribute the proceeds as follows a first to the payment of all debts and obligation of p1 to third parties including without limitation the retirement of outstanding debt including any debt owed to holders or their affiliates and the expenses of liquidation and to the setting up of any reserves for contingencies which may be necessary and b then in accordance with the holders' positive book capital_account balances after adjusting book capital accounts for allocations provided in article v of the procedures and in accordance with the requirements described in sec_1 b ii b of the regulations section of article vii of the procedures provides that if a holder has a negative balance in its book capital_account following the liquidation of its interest as determined after taking into account all capital_account adjustments for the fiscal_year during which the liquidation occurs then such holder shall restore the amount of such negative balance to pl by the later of the end of the fiscal_year or days after the date of such liquidation so as to comply with the requirements of sec_1_704-1 such amount shall upon liquidation of pl be paid to creditors of pl or distributed to other holders in accordance with their positive book capital_account balances ii b of the regulations ii of the regulations based on the foregoing the allocations provided for in the procedures meet the requirements for economic_effect set forth in sec_1_704-1 allocations contained in the procedures have economic_effect within the meaning of expressed or implied regarding whether the allocations of profits and losses contained in the procedures satisfy the requirements for substantiality as set forth in sec_1_704-1 iii sec_704 of the code accordingly the no opinion is sec_1_704-1 iv of the regulations provides that a partnership_agreement may upon the occurrence of certain events increase or decrease the partners' capital accounts to reflect a revaluation of partnership property on the partnership's books considered to be determined and maintained in accordance with the rules of sec_1_704-1 capital accounts so adjusted will not be iv unless-- the adjustments are based on the fair_market_value of partnership property on the date of adjustment the adjustments reflect the manner in which the unrealized income gain property that has not been reflected in the capital accounts previously would be allocated among the partners if there were a taxable disposition of the property for its fair_market_value on that date loss or deduction inherent in the the partnership_agreement requires that the partners' iv gq for allocations to them of depreciation capital accounts be adjusted in accordance with sec_1 b depletion amortization and gain_or_loss as computed for book purposes with respect to the property the partnership_agreement requires that the partners distributive shares of depreciation depletion amortization and gain_or_loss property be determined so as between the adjusted tax basis and book_value of such property in the same manner as under sec_704 and as computed for tax purposes with respect to the to take account of the variation 5s the adjustments are made principally for a substantial non-tax business purpose-- i in connection with contribution of money or other_property to the partnership by a new or existing partner as consideration for an interest in the partnership or ii in connection with the liquidation of the partnership or a distribution of money or other_property by the partnership to a retiring or continuing partner as consideration for an interest in the partnership or iii under generally accepted industry accounting practices provided substantially_all of the partnership's property excluding money consists of stock securities commodities options warrants futures or similar instruments that are readily_tradable on an established_securities_market sec_704 a of the code provides that under regulations prescribed by the secretary income gain loss and - s deduction with respect to property contributed to the partnership by a partner shall be shared among the partners so as to take account of the variation between the basis of the property to the partnership and its fair_market_value at the time of contribution under sec_704 a partnership must allocate income sec_1_704-3 of the regulations provides that the purpose of sec_704 is to prevent the shifting of tax consequences among partners with respect to precontribution gain_or_loss gain loss and deduction with respect to property contributed by a partner to the partnership so as to take into account any variation between the adjusted tax basis of the property and its fair_market_value at the time of contribution notwithstanding any other provision of sec_1_704-3 the allocations must be made using a reasonable method that is consistent with the purpose of sec_704 sec_1_704-3 of the regulations provides that the principles of sec_1_704-3 apply to allocations with respect to property for which differences between book_value and adjusted tax basis are created when a partnership revalues partnership property pursuant to sec_1_704-1 iv reverse sec_704 c allocations sec_1_704-3 i of the regulations provides that for purposes of making reverse sec_704 allocations a securities_partnership may aggregate gains and losses from qualified_financial_assets using any reasonable approach that is consistent with the purpose of sec_704 sec_1_704-3 iii a of the regulations provides that a partnership is a securities_partnership if the partnership is either a management company or an investment_partnership and the partnership makes all of its book allocations in proportion to the partners' relative book capital accounts except for reasonable special allocations to a partner that provides management services or investment advisory services to the partnership sec_1_704-3 iii b of the regulations provides that a partnership is a management company if it is registered with the securities_and_exchange_commission as a management company under the investment_company act of under article ii of the procedures net unrealized_gain is defined to mean the excess if any of the aggregate fair_market_value of all investments over the aggregate adjusted bases for federal_income_tax purposes of all investments under article ii of the procedures net unrealized_loss is defined to mean the excess if any bases for federal_income_tax purposes of all investments over the aggregate fair_market_value of all investments of the aggregate adjusted under article ii of the procedures the book capital_account means for any holder at any time in any fiscal_year the book capital_account balance of the holder on the first day of the fiscal_year as adjusted each day pursuant to the provisions of sec_3_2 of the procedures sec_3_2 of article iii of the procedures provides that the book capital_account balance of each holder shall be adjusted each day by the following amounts a increased by any increase in net unrealized gains or decrease in net unrealized losses allocated to such holder pursuant to sec_5 a of the procedures b decreased by any decrease in net unrealized_gain or increase in net unrealized losses allocated to such holder pursuant to sec_5 b of the procedures c decreased by the amount of any recognized gain and increased by the amount of any recognized loss allocated to such holder's tax capital_account on the disposition of any investment ad increased by any capital_contribution made by such holder and e decreased by any distribution including any distribution to effect a withdrawal or redemption made to such holder by the trust pursuant to increases in each holder's book capital_account balance resulting from capital contributions or distributions or withdrawals from the trust or redemptions by the trust occurring during such fiscal_year as of the day that the capital_contribution distribution withdrawal or redemption is accepted made or effected by the trust c above shall be prorated for any adjustment sec_3_2 b or accordingly based on the information submitted and the representations made we conclude that p1 is a securities_partnership for purposes of sec_1_704-3 of the regulations and that pursuant to sec_1_704-3 pl will be allowed to make reverse sec_704 allocations on an aggregate basis furthermore we conclude that the approach used by pl to aggregate gains and losses from qualified_financial_assets is a reasonable approach that is consistent with the purpose of sec_704 sec_721 of the code provides that no gain_or_loss shall be recognized by either a partnership or its partners on the contribution of property to the partnership in exchange for an interest in the partnership provides that gain but not loss realized on such a transfer may be recognized if the partnership would be treated as an investment_company within the meaning of sec_351 of the code the partnership were incorporated sec_721 however if based solely on the representations set forth and the facts presented above the transfer of the diversified assets by each transferor to pl will not be a transfer to an investment_company within the meaning of sec_351 of the code sec_722 of the code provides that the basis of an interest in a partnership acquired by a contribution of property including money to the partnership shall be the amount of such money and the adjusted_basis of such property to the contributing_partner at the time of the contribution sec_723 of the code provides that the basis_of_property contributed to a partnership by a partner shall be the adjusted_basis of such property to the contributing_partner at the time of the contribution accordingly the basis of a transferor in its interest in pl will be the amount of money and the aggregate of the adjusted bases of the property contributed by the transferor further pl will have a basis in any property contributed to it equal to the adjusted_basis of such property to the transferor at the time of the contribution finally under sec_1223 the holding_period of pl in property received in the contribution from a transferor which was a capital_asset will include the transferor's holding_period for such property sec_731 of the code provides that in the case of a distribution by a partnership to a partner gain will not be recognized to such partner except to the extent that any money distributed exceeds the adjusted_basis of such partner's_interest_in_the_partnership immediately before the distribution and loss will not be recognized to such partner except that upon a distribution in liquidation_of_a_partner's_interest in a partnership where no property other than that described in sec_731 a is distributed to such partner loss will be recognized to the extent of the excess of the adjusted_basis of such partner's_interest_in_the_partnership over the sum of any money distributed and b determined under sec_732 in sec_751 and inventory as defined in sec_751 of any unrealized_receivables as defined the basis to the distributee as b a or sec_731 of the code provide that for purposes of sec_731 and securities and such securities will be taken into account at their fair_market_value as of the date of the distribution the term money includes marketable sec_731 a of the code provides in general that the term marketable_securities means financial instruments and foreign_currencies which are as of the date of the distribution actively_traded within the meaning of sec_1092 d sec_731 b v of the code provides that except as otherwise provided in regulations the term marketable_securities includes interests in an entity if substantially_all of the assets of such entity consist directly or indirectly of marketable_securities money or both sec_731 b vi provides that to the extent provided in regulations such term includes any interest in an entity not described in sec_731 interest which is attributable to marketable_securities money or both b v but only to the extent of the value of such sec_1_731-2 i of the regulations provides that b v of the code substantially_all for purposes of sec_731 of the assets of an entity consist directly or indirectly of marketable_securities money or both only if of the assets of the entity by value at the time of distribution of an interest in the entity consist directly or indirectly of marketable_securities money or both sec_1_731-2 sec_731 security to the extent that the value of the interest is attributable directly or indirectly to marketable_securities money or both if less than percent but percent or more of the assets of the entity by value at the time of distribution of an interest in the entity consist directly or indirectly of marketable_securities money or both b vi an interest in an entity is a marketable ii provides that percent or more for purposes of sec_731 a iii of the code provides that sec_731 will not apply to the distribution from a partnership of a marketable_security to a partner if such partnership is an investment_partnership and such partner is an eligible_partner thereof sec_731 c i of the code provides that for sec_731 a iii the term investment purposes of partnership means any partnership which has never been engaged in a trade_or_business and substantially_all of the assets by value of which have always consisted of a corporation of indebtedness principal contracts derivative financial instruments including options forward or futures contracts short positions and similar financial instruments in any asset described in sec_731 any commodity traded on or subject_to the rules of a board_of trade or commodity exchange vii other assets specified in regulations or viii ii stock in iii notes bonds debentures or other evidences iv interest rate currency or equity notional vi interest in or any combination of the foregoing v foreign_currencies c i or in i money sec_731 c iii i of the code provides that the term eligible_partner means any partner who before the date of ou the distribution did not contribute to the partnership any property other than property described in sec_731 c i accordingly based solely on the information provided and representations made we conclude that each transferor is an investment_partnership within the meaning of the code and that all of the partners of the transferor are eligible members of the transferor within the meaning of sec_731 c c i further under sec_731 no member of a transferor will recognize gain_or_loss on the distribution of an interest in pl to that partner sec_731 c i of in addition each partner of a transferor who receives an interest in pl in exchange for its interest in a transferor will have a basis in its interest in pl as determined under sec_732 of the code equal to the appropriate portion of its adjusted_basis immediately prior to the distribution in its interest in the transferor and provided any such interest in pl is asset a holding_period in each interest which includes the transferor's holding_period as determined under sec_1223 a capital except as specifically ruled upon above we express no opinion on the federal tax consequences of the transactions described above under any other provisions of the code this ruling is directed only to the taxpayers who requested sec_6110 of the code provides that it may not be it used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely yours j phwe attte j thomas hines senior technician reviewer branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


number release date id office uilc cca_2011040615084544 ---------------------------- from --------------------- sent wednesday april pm to ----------------- cc ------------------ subject re the question we talked about --------- sec_6501 provides that an assessment of tax must be made within years after the return was filed sec_6501 provides that if a taxpayer omits_from_gross_income an amount properly includible and that omission is in excess of percent of the amount of gross_income stated in the tax_return the tax may be assessed or a proceeding in court for the collection of such tax may begin without assessment at any time within years after the return was filed for purposes of a trade_or_business sec_6501 specifies that gross_income is the total_amounts received or accrued from the sale_of_goods or services if such amounts are required to be shown on the return prior to the diminution by the costs of such sales or services under sec_6501 an amount is not considered to be omitted from gross_income however if the amount is disclosed on the return in a manner adequate to apprise the irs of the nature and amount of the item in your case the taxpayer omitted over of gross_income on a timely filed original tax_return subsequently but within the three year period under sec_6501 the taxpayer filed an amended_return showing additional gross_income your question is whether the amended_return reporting the additional income is a disclosure of income that would prevent the amount omitted on the original from being considered to be omitted for purposes of applying the six-year period under sec_6501 the filing of an amended_return showing additional income will not operate to preclude the application of sec_6501 the original return governs for purposes of determining whether the taxpayer has omitted from gross_income an amount that is over of the amount stated on the return 38_tc_486 amended return’s inclusion of salary omitted on original return did not prevent sec_275 of the code predecessor to sec_6501 from applying chin v commissioner tcmemo_1994_54 we ignore the amended_return when applying sec_6501 further the supreme court in 464_us_386 held that the filing of an amended_return subsequent to a taxpayer’s filing of a fraudulent return does not affect the unlimited limitations_period under sec_6501 in reaching it’s decision that the taxpayer could not use an amended_return to prevent the application of sec_6501 the court recognized that a taxpayer who non-fraudulently omit sec_25 of gross_income cannot benefit by filing an amended_return instead he must live with the six-year period specified in sec_6501 the court concluded that congress did not intend for taxpayers who file fraudulent_returns to be better off than taxpayers who understand their income without fraud this analysis is consistent with our conclusion that the amended_return showing additional gross_income is not a disclosure of income that would prevent sec_6501 from applying when there has been a substantial omission with respect to the original return we note that the service should act within the three-year period of sec_6501 whenever possible to the extent that additional tax may be assessed and or notices of deficiencies issued in your case within the three-year period the service should take that action even if it is determined that sec_6501 applies -------------------------- ------------ --------- ---------------------


t c memo united_states tax_court howard mui and pei yi mui petitioners v commissioner of internal revenue respondent docket no filed date mark c heling alan f segal and ryan m borgmann for petitioner howard mui pengtian ma for petitioner pei yi mui grubert roger markley justin d scheid and andrew gordon for respondent memorandum findings_of_fact and opinion foley judge the issues for decision relating to and are whether petitioners are liable for tax relating to underreported income whether petitioners are liable for sec_6663 a fraud or sec_6662 accuracy- related penalties and whether pei yi mui pursuant to sec_6015 is entitled to relief from joint_and_several_liability findings_of_fact in date pei yi mui immigrated to the united_states on a three-month visa soon thereafter she married howard mui they purchased a home and she applied for permanent resident status to bolster the application mr mui added her as a joint account_holder to his pacific global bank account business account mr mui was a compulsive gambler to fund his habit he operated as a sole_proprietorship chinatown communication which sold international telephone calling cards mr mui considered this an ideal business because vendors allowed him to receive the cards in bulk and pay two months after receipt he used calling card sales proceeds ie received prior to the repayment date to gamble under constant pressure to meet vendors’ due dates he typically paid vendors with postdated checks drawn on the business account when the balance in this account approached zero he deposited checks drawn on petitioners’ charter one 1unless otherwise indicated all section references are to the internal_revenue_code in effect during the years in issue and all rule references are to the tax_court rules_of_practice and procedure bank account personal account undaunted by persistent cashflow problems he borrowed from friends and family when gambling resources dwindled mr mui accepted customer payments in cash and deposited these payments into the business account and the personal account petitioners closed their personal account in mr mui would often direct ms mui to sign checks relating to chinatown communication and on several occasions mr mui signed his wife’s name on certain checks ms mui was not involved in the operation of chinatown communication and supported herself with funds from her parents and personal savings mr mui had numerous encounters with law enforcement authorities in and he was arrested for domestic violence incidents relating to ms mui who obtained a restraining order and ultimately separated from him in mr mui also had problems relating to the sale of cigarettes upon which state and local excise_taxes had not been paid contraband cigarettes in the ohio state highway patrol highway patrol stopped him and seized big_number cartons of contraband cigarettes the highway patrol stopped him again in ie finding no contraband cigarettes in his possession and ie finding two packs of contraband cigarettes in his possession in date mr mui after pleading guilty to charges relating to the sale of contraband cigarettes in through was sentenced to months in prison petitioners timely filed joint and form sec_1040 u s individual_income_tax_return on which they respectively reported dollar_figure dollar_figure and dollar_figure of gross_receipts and dollar_figure dollar_figure and dollar_figure of cost_of_goods_sold the and returns were professionally yet sloppily prepared on all three returns petitioners reported that they were entitled to a refund and mr mui signed ms mui’s name after petitioners’ and years in issue returns were selected for audit mr mui who had limited proficiency in the english language told the examining revenue_agent first ra about chinatown communication’s use of the business account mr mui further informed the first ra that he had only limited business records and had estimated chinatown communication’s reported gross_receipts and costs of goods sold the first ra proceeded to perform a bank_deposits analysis and reconstruct chinatown communication’s income during this process he identified several gambling loans the proceeds of which were deposited into the business account prior to completion of the examination he retired but left workpapers of his analysis revenue_agent nevita williams ra williams was assigned to complete the examination upon a review of the deposits into the business account ra williams noticed that certain checks drawn on the personal account were deposited into the business account as a result she determined that an analysis of the personal account was necessary and proceeded to analyze deposits during the audit mr mui told ra williams but did not submit any supporting documentation that he routinely borrowed money to support his gambling habit without scrutiny ra williams incorporated the first ra’s analysis of the business account into her examination_report she also incorporated her analysis of the personal account petitioners divorced on date on date respondent received ms mui’s form_8857 request for innocent spouse relief in which she requested relief pursuant to sec_6015 c and f respondent denied ms mui’s request on date respondent issued petitioners a notice_of_deficiency which incorporated ra williams’ examination_report respondent determined that petitioners had an additional dollar_figure dollar_figure and dollar_figure of gross_receipts and dollar_figure dollar_figure and dollar_figure of costs of goods sold relating to and respectively as a result of these adjustments respondent determined that petitioners had dollar_figure dollar_figure and dollar_figure of unreported income relating to and respectively respondent further determined that petitioners were liable for sec_6663 fraud penalties or in the alternative sec_6662 accuracy-related_penalties relating to these years on date petitioners while residing in illinois filed their petition with the court i the statutory notice is valid opinion petitioners contend that the notice_of_deficiency lacks a rational foundation and is arbitrary and excessive we disagree see 100_f3d_1308 7th cir holding that a determination is presumed correct if it has a rational foundation and is not arbitrary and excessive aff’g tcmemo_1995_243 see also 54_tc_742 aff’d 445_f2d_985 10th cir first respondent’s use of the bank_deposits method ie to reconstruct petitioners’ income was appropriate because mr mui accepted customer payments in cash reported estimates on his federal_income_tax returns and failed to maintain records see sec_446 92_tc_661 sec_1_446-1 income_tax regs second mr mui readily acknowledges that he owned and operated chinatown communication and thus was linked to the income-producing activity see pittman v commissioner f 3d pincite4 third and most importantly respondent’s determination is solidly grounded on an extensive review of petitioners’ activities and bank accounts which bear a direct relationship to petitioners’ tax_liabilities see 883_f2d_1317 7th cir stating that the arbitrary and excessive doctrine is a challenge to the commissioner’s determination on the basis that it bears no factual relationship to the taxpayer’s liability aff’g tcmemo_1988_142 while we recognize that ra williams could have performed an independent review of the first ra’s analysis and more thoroughly analyzed petitioners’ personal account the notice was not arbitrary or excessive see id indeed petitioners failed to delineate any inaccuracies in the first ra’s analysis on their tax returns relating to the years in issue petitioners reported gross_receipts totaling dollar_figure and costs of goods sold totaling dollar_figure respondent determined however that petitioners’ cumulative understatements of gross_receipts and costs of goods sold were dollar_figure and dollar_figure respectively although the parties stipulated numerous checks totaling more than dollar_figure petitioners did not provide any testimony or credible_evidence establishing that these checks related to costs of goods sold or deductible expenses see rule a 31_tc_56 ii petitioners underreported their income petitioners have the burden but failed to prove that the deposits at issue are not income see 87_tc_74 we recognize that mr mui borrowed funds but there is no credible_evidence relating to the amount he borrowed moreover there is insufficient evidence establishing that the deposits were nontaxable or that petitioners are entitled to any cost_of_goods_sold or deductible expenses exceeding the amount respondent allowed see goldsmith v commissioner t c pincite during cross-examination petitioners presented ra williams with checks ie totaling more than dollar_figure which respondent’s determination did not take into account petitioners have not however established that these checks related to costs of goods sold see id indeed they failed to offer any testimony or additional documentary_evidence relating to these checks costs of goods sold or deductible expenses iii petitioners are liable for accuracy-related_penalties respondent determined but failed to establish by clear_and_convincing evidence that petitioners are liable for fraud penalties pursuant to sec_6663 2pursuant to sec_7491 the burden_of_proof may shift to respondent if petitioners introduce credible_evidence with respect to any factual issue this section is inapplicable because petitioners failed to maintain business records see sec_7491 see sec_6663 sec_7454 rule b pittman v commissioner f 3d pincite petzoldt v commissioner t c pincite respondent’s primary contention is that petitioners sold contraband cigarettes during the years in issue and concealed the proceeds to evade tax to support his flimsy fraud contention respondent cites a traffic stop and contraband cigarette sales in through 2008--all years not in issue the evidence relating to the years in issue ie two highway patrol stops of mr mui yielding only two packs of contraband cigarettes is woefully insufficient in addition petitioners cooperated during the audit respondent asserts that mr mui failed to disclose the personal account when asked through which bank account he conducted business mr mui did not reference the personal account because it had previously been closed any misunderstanding relating to this issue was more likely the result of mr mui’s limited proficiency in english rather than an intent to mislead respondent finally respondent contends that mr mui’s pattern of cash deposits and failure to maintain business records was intentionally calculated to make the unreported income harder to detect pressured to make vendor’s payment due dates and compelled to assuage his gambling fever mr mui frantically shuffled money between bank accounts calling card vendors and casinos respondent established that mr mui’s business practices were imprudent but failed to establish that any portion of the underpayment was attributable to fraud or that petitioners intended to evade tax see sec_6663 sec_7454 rule b pittman v commissioner f 3d pincite petzoldt v commissioner t c pincite stating that the existence of fraud may not be found under ‘circumstances which at the most create only suspicion’ quoting 184_f2d_86 10th cir remanding a memorandum opinion of this court petitioners are not liable for fraud penalties but are liable for accuracy- related penalties they substantially understated their income_tax and failed to exercise due care in the preparation of their tax returns see sec_6662 b and c and d c 116_tc_438 sec_1_6662-3 income_tax regs the and returns were prepared by professionals but petitioners failed to establish or even assert that their preparers had sufficient expertise to justify reliance that they provided them with necessary and accurate information or that they relied in good_faith on their judgment see sec_6664 115_tc_43 aff’d 299_f3d_221 3d cir sec_1_6664-4 income_tax regs thus they have not pursuant to sec_6664 established reasonable_cause for the underpayments or that the returns were prepared in good faith accordingly we sustain respondent’s determination relating to sec_6662 penalties iv ms mui is entitled to innocent spouse relief married taxpayers may elect to file a joint federal_income_tax return sec_6013 each spouse filing the return is jointly and severally liable for the accuracy of the return and the entire tax due sec_6013 pursuant to sec_6015 however a taxpayer may seek relief from joint liability ms mui qualifies for relief pursuant to sec_6015 as a result mr mui is liable for the entire tax_liability relating to each year in issue ms mui was divorced from mr mui when she filed her election for relief in addition she sought relief less than two years after the first collection activity relating to these liabilities see sec_6015 and b moreover mr mui signed ms mui’s name on the returns and at the time the returns were signed she did not have actual knowledge of the items giving rise to the deficiencies see sec_6015 115_tc_183 stating that the knowledge standard for purposes of sec_6015 is an actual and clear awareness of the existence of an item which gives rise to the deficiency aff’d 282_f3d_326 5th cir contentions we have not addressed are irrelevant moot or meritless to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number --------------------- ---------------------------------------- ------------------------------------ ------------------------------- in re ------------------------------------- department of the treasury washington dc person to contact ----------------------- id no --------------- telephone number --------------------- refer reply to cc intl - plr-157734-02 date june legend ------------------------------------- taxpayer ------------------------ individual a ----------------------- dear -------------- this replies to a letter dated date in which taxpayer requests an extension of time under sec_301_9100-3 to file certain statements described in sec_1_1503-2a and sec_1_1503-2 of the regulations in accordance with the information listed on schedule which is attached and made a part of this ruling letter additional information was electronically submitted on date date and date the information submitted for consideration is substantially as set forth below the ruling contained in this letter is predicated upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as a part of the audit process individual a is currently a vice president of taxpayer the affidavit of individual a and the facts submitted describe the circumstances that led to the discovery of the necessity to file certain statements under sec_1_1503-2a and sec_1_1503-2 with respect to the entities and tax years listed on schedule taxpayer asserts that it has acted reasonably and in good_faith within the meaning of sec_301_9100-3 because taxpayer has submitted its plr-157734-02 request for relief before the failure_to_file these statements has been discovered by the service sec_301 -1 b provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation the statements to be filed under sec_1_1503-2a and sec_1_1503-2 are regulatory elections within the meaning of sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the standards set forth in sec_301_9100-3 based on the facts and circumstances of this case we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time until days from the date of this ruling letter to file the statements described in sec_1_1503-2a and sec_1_1503-2 of the regulations in accordance with the information listed on schedule as provided in a the granting of an extension of time is not a determination that taxpayer is otherwise eligible to file the statements described in sec_1_1503-2a and sec_1_1503-2 which are the subject of this ruling letter this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this ruling letter should be associated with the statements to be filed in accordance with schedule no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented pursuant to a power_of_attorney submitted with taxpayer’s ruling_request a copy of this ruling letter is being furnished to the taxpayer and the other authorized representative plr-157734-02 sincerely associate chief_counsel international by s allen goldstein allen goldstein reviewer attachment schedule copy for purposes plr-157734-02 sec_1_1503-2 is effective for taxable years beginning on or after date sec_1_1503-2a is effective for taxable years beginning after date and before date see sec_1_1503-2 legend a ruling requested under sec_1_1503-2a c ii agreement b ruling requested under sec_1_1503-2a c iv waiver of period of limitation c ruling requested under sec_1_1503-2a c v annual certification d ruling requested under sec_1_1503-2 agreement e ruling requested under sec_1_1503-2 annual certification ---------- ---------- ------------ --- ------------ --- ------------ --- ------------ --- ------------ --- ------------ --- ------------ --- ------------ --- ------------ --- schedule -------------- ------ --- -------------- ------- --- ------------ ----- --- --------------- ------ --- ----- ------------ ------------ ------------ ------------ --------- --- --- --- --- --- --- ------------ ------ --- --- --- --- --- --- --- --- --- --- --- --- --- --- -------------- ----- --------- --------- --------- --------- --------- --------- -------------- ----- --- --- --- --- --- --- --- --------- ------ -------------- -- ----- ------ ------ --------- --------- ------------------------ --------------- --------------- --------------- --------------- --------------- --- --- --- --- ------ end of schedule --------------------------- --------------- ----- ------------ ------------ --------- --------- --------------------------- --- --- --- --- --- ------