tcmemo_2014_34 united_states tax_court ann s carrino petitioner v commissioner of internal revenue respondent cr traders partners lp ann s carrino a partner other than the tax_matters_partner petitioner v commissioner of internal revenue respondent docket nos filed date john m youngquist for petitioner jon d feldhammer and rebecca s duewer-grenville for respondent we consolidated ann s carrino docket no and cr traders partners lp ann s carrino a partner other than the tax_matters_partner docket no for a decision without trial under rule unless we say otherwise all references to rules are to the tax_court rules_of_practice and procedure all bare references to sections are to the internal_revenue_code in effect at the relevant time memorandum findings_of_fact and opinion holmes judge ann and vince carrino legally_separated in date shortly thereafter vince used community_property to fund a partnership that operated a wildly successful hedge fund that partnership’s original return didn’t name ann as a partner or report any distributions to her a few years later-- in date--a state court approved the couple’s agreement that of the then-current value of vince’s investment in the partnership was community_property in response vince filed an amended partnership return that identified ann as a partner the commissioner says that ann owes tax on the income attributable to her share of the partnership in which she didn’t know she was a partner ann disagrees with this perplexing assertion findings_of_fact in date ann married vince carrino in california he was and remains an exceptionally skilled financial manager who has operated a number of volatile hedge funds managing those funds between and was according to vince kind of like riding a roller coaster blindfolded and naked through a nuclear power plant it was not a pleasant experience the stress built up and the marriage deteriorated in date vince petitioned to dissolve the marriage while he and ann legally_separated four days later the divorce action dragged on for more than four years i cr traders vince started a new hedge fund the same year he separated from ann in date he had formed a limited_liability_company called cr traders llc cr llc and named himself the managing member that entity served as general_partner to a partnership that vince in his capacity as manager of cr llc created on date--cr traders partners l p cr lp although vince made capital contributions to cr llc about dollar_figure sometime in 2002--which cr llc then contributed to cr lp--neither of those contributions occurred before he and ann legally_separated in date cr lp began operating as a hedge fund in date and vince managed it through cr llc even though they were still married but legally_separated at the time vince apparently made this investment without notifying ann--much less obtaining her consent because cr llc had two members vince and william foley and because they didn’t elect to treat it as a corporation it is classified as a partnership see sec_301_7701-3 proced admin regs see infra opinion section ii a for a discussion on legal_separation in california cr lp was successful from the start cr llc’s own share in the fund earned about dollar_figure million on an initial investment of about dollar_figure during alone cr llc then contributed over dollar_figure million more in capital during and ended up with a year-end capital_account of over dollar_figure million according to its original partnership return cr lp issued schedules k-1 partner’s share of income deductions credits etc to other partners ann however was not listed as one of them nor was she listed as a member on cr llc’s own partnership return ann did not report any income from either cr llc or cr lp on her form_1040 at some point after cr lp was up and running--the record is unclear exactly when--ann learned of vince’s investment in cr llc and cr lp in the state-court dissolution proceedings ann asserted that all of the funds vince used after their legal_separation for that investment were community_property because ann filed as head_of_household even though she was still legally married under state law that year see infra opinion section ii a a person legally_separated from her spouse at the end of a tax_year is not considered married that year for purposes of the code in determining eligibility for head-of-household status see sec_2 we don’t think this particular disjunction between federal tax law and state marriage law is vulnerable to challenge congress can make determinations that bear on marital rights and privileges notwithstanding state law to the contrary--so long as the effect of the federal_law doesn’t restrict and disabl e the rights of a class of persons that the laws of various states have sought to protect united_states v windsor u s __ __ __ 133_sct_2675 they were traceable to money from another hedge fund that vince had founded and operated during their marriage--and that his investment in that earlier fund consisted entirely of community_property vince disagreed and protracted litigation ensued finally in date a state family court judge presided over a settlement conference between counsel for both vince and ann during that conference counsel signed a court- approved settlement agreement stating that of vince’s current interest in cr llc was traceable to community_property while the remaining -- traceable to vince’s performance fees--was vince’s separate_property the agreement also provided that ann’ sec_50 community-property share in that interest would be promptly liquidated and paid to her vince acted quickly and by the end of november cr lp distributed nearly dollar_figure million to ann about another month later on date vince and ann’s marriage ended when the superior court of california granted their divorce that amount was based on an estimate from vince’s counsel that cr lp’s value as of date was about dollar_figure million dollar_figure million less an income-tax obligation of about dollar_figure million the following year however the state court determined that cr lp’s date value was significantly higher and in date granted ann a judgment against vince for an additional dollar_figure million plus interest ii the amended returns the settlement agreement didn’t settle all the remaining issues between ann and vince when the superior court granted the divorce it also bifurcated the case to allow the family court to retain jurisdiction over the remainder of the marital- property disposition vince argued that ann needed to reimburse him for income- tax_payments he had made with respect to community-property income for tax years to ann contended that vince would be reimbursed as part of the overall true up for the property division vince took matters into his own hands on date he submitted amended partnership returns for cr lp and cr llc to the irs cr lp’s amended_return reported for the first time that ann was a partner and included a k-1 that allocated to her dollar_figure in other income and dollar_figure in interest_expense on investment debts for a net distributive_share of dollar_figure cr lp also amended the k-1 for cr llc--it showed a corresponding decrease of dollar_figure in cr llc’s distributive_share compared to its original k-1 vince was in other these cases concern only ann’s tax_year an date state court decision showed that the carrinos had settled their dispute about the benefits and liabilities attributable to community_income and losses for and the parties agree that if we decide ann is responsible for half of the community_income then her share is dollar_figure words taking the position that ann was a partner only in cr lp--the hedge fund--and not in cr llc the general_partner of the hedge fund--even though he had bought into cr lp in part with community_property routed through cr llc vince also had cr llc file its own amended_return for this new return did not show any additional members but did show a decrease of dollar_figure in vince’s distributive_share ann didn’t file a amended individual return reflecting the amounts shown on the k-1 that cr lp issued to her iii the fallout the commissioner took notice of that inconsistency examined ann’s individual return and in date sent her a notice_of_deficiency for that tax vince filed his own amended individual return to reduce his taxable_income by the same dollar_figure the superior court was not pleased it is clear that vince’s hasty and unilateral action in this regard has caused needless fees and costs while this court has no jurisdiction over the irs it does have jurisdiction over the parties and their dealings with each other the court agrees with ann and finds vince’s actions with respect to their tax returns to be unnecessary and contrary to the fiduciary duties to ann as a result he shall pay when due and indemnify and hold ann free and harmless of and from all penalties interest fees and costs incurred by her over and above the actual taxes federal and state due on her returns as ultimately determined by the irs and the franchise tax board emphasis added while ann contends that the commissioner--due to confidentiality rules-- has declined to reveal to her how the irs treated vince’s claim for a refund on his amended_return we take judicial_notice that the irs disallowed it vince filed a tax_court petition in date seeking redetermination of the irs’s decision to disallow his refund claim of dollar_figure for carrino v commissioner t c dkt no date the commissioner responded by filing a motion to dismiss for lack of jurisdiction on the ground that he had not sent vince a notice_of_deficiency for that year nor made any other determination that conferred jurisdiction on us id date in date after vince failed to file an objection we granted the commissioner’s motion id t c date year that notice said that since a state court decision finalizing a community_property split indicated that she received over dollar_figure of capital_gain in she should have reported that amount on her return ann a california resident timely filed a petition contesting that notice she asserts that she was not a partner in cr lp--during or at any time that case got put on hold when the commissioner began a tefra examination of cr lp both parties recognize that the commissioner issued this notice beyond the normal three-year assessment_period see sec_6501 ann however concedes that if the large sum of income from cr lp or cr llc is includible in her taxable_income for that year the statute_of_limitations is open under sec_6501 which gives the irs six years after the filing of a return if a taxpayer omits_from_gross_income an amount greater than of the amount of gross_income stated in that return the commissioner has conceded that if the income is not attributable to her then the statute_of_limitations has run the notice_of_deficiency made various other adjustments to income but the parties settled all of them tefra is the tax equity and fiscal responsibility act of tefra pub_l_no 96_stat_324 one part of which governs the tax treatment and audit procedures for most partnerships see tefra secs stat pincite tefra requires the uniform treatment of all partnership items --a term defined by sec_6231 and --and its general goal is to treat all partners alike when the irs adjusts partnership items the identity of the partners in a partnership is a partnership_item when as here it affects the distributive_share of the other partners see 118_tc_541 as with much of tefra there is much subtlety here a partner’s identity may not be a partnership_item where there is a dispute as to whether a person not listed as a partner on the partnership return is a partner see 95_tc_74 in context of s_corporation then continued the next year he sent ann a notice of final_partnership_administrative_adjustment using the amounts shown on cr lp’s amended_return in12 which he determined that she was a partner ann responded with a petition in which she asked us to determine that she was not a partner in cr lp we continued subject_to tefra partnership procedures holding that whether taxpayer was beneficial_owner of interest was shareholder-level item see also grigoraci v commissioner tcmemo_2002_202 whether bankrupt’s estate and bankrupt were both partners was an affected_item because it doesn’t affect distributions to other partners an fpaa as a notice of final_partnership_administrative_adjustment is abbreviated is the tefra equivalent of a notice_of_deficiency in that it triggers the start of the time for filing a petition with the tax_court she filed that petition approximately four months after the irs issued her the fpaa if the partnership’s tax_matters_partner which ann wasn’t doesn’t file a petition_for_readjustment of partnership items within days of the fpaa’s mailing then a notice_partner may do so within days after the close of the 90-day period see sec_6226 see also 85_tc_900 sec_6231 generally defines a notice_partner as a partner who is entitled to notice under sec_6223 which includes any partner in a partnership with or fewer partners as is the case with cr lp and for these purposes tefra provides an expanded definition of partner it includes any person whose income_tax_liability is determined in whole or in part by taking into account directly or indirectly partnership items of the partnership sec_6231 because ann’s income-tax liability is determined in part by taking into account cr lp’s partnership items she is considered a notice_partner see mann-howard v commissioner tcmemo_1992_537 wl at n noting that under tefra a wife filing a joint_return with her husband who is a partner in a tefra partnership can herself be considered a constructive partner consolidated the cases and the parties submitted them for decision under rule i parties’ arguments opinion the parties do not agree on the controlling question in these cases ann frames it narrowly--she asserts that we must ask whether the court-ordered marital division made her a partner in cr lp in she says that means we need to first analyze the nature of her interest under california community-property law and then address how the code determines whether someone is a partner in a partnership she argues that under california community-property law vince’s investment of community funds in cr lp did not give her a community-property interest in cr lp’s assets it gave her instead only a claim in and against vince’s partnership share in cr llc and through cr llc’s own partnership_interest in cr lp a claim in and against cr lp’s capital and income but only with respect to the part that was community_property from her perspective the court- approved settlement agreement in determined what part of cr llc’s and cr lp’s capital and income she was entitled to the subsequent distributions that she received from her ex may have come from cr lp’s assets but were only a payment to her from his share of those assets--they do not take her back in time and make her a partner to use the technical jargon of california community- property lawyers she argues that before the settlement she only had an inchoate one-half community-property interest in the value of what vince had invested in cr lp after their separation the distribution she received as a result of the settlement merely cashed her out of that community-property interest this means ann says that nothing in the code requires us to retroactively consider her a partner in cr lp for tax purposes ann also appeals to common sense--how could she be a partner when cr lp didn’t show her as a partner on its original return and when she didn’t even know that the partnership existed she says that vince filed the amended partnership return only so he could himself file an amended_return for to claim that he had overpaid his taxes by overreporting the income that he received from cr llc and cr lp the commissioner asks a simpler question must ann pay tax on dollar_figure of the income earned by cr lp that year and in arguing the answer should be in the affirmative he takes a different approach he argues that we don’t need to answer the question of whether ann was a partner in cr lp in that’s because according to the commissioner in ann held at least a present_interest in half of the income from vince’s community_property share of cr llc which itself received income from its partnership share in cr lp whatever that interest was it generated income on which she owes tax we agree with the commissioner’s approach in ann’s individual case in deciding that case we need not figure out whether ann was a partner in cr lp-- we need to answer only the question posed in any income-tax case--is the commissioner’s determination in the notice_of_deficiency correct or in ann’s case does she owe income_tax on half of the dollar_figure that is equal to stipulated community-property income attributable to vince’s share in cr llc ii federal tax law treatment of community_property sec_66 deals with the treatment of community_income married couples in a community-property state like california who don’t file joint tax returns generally must report half of the total community_income earned by the spouses during the taxable_year sec_1_66-1 income_tax regs see also 403_us_190 with community_income like other income federal income-tax liability follows ownership mitchell u s pincite and state law controls the ownership determination--it ‘creates legal interests but as we discuss in more detail later sec_66 and its accompanying regulations list some exceptions to the general_rule that each spouse must report half of the total community_income see generally sec_66 see also sec_1_66-1 income_tax regs the federal statute determines when and how they shall be taxed ’ id quoting 287_us_103 while the parties seem to agree on the community-property portion of income vince’s share of cr llc earned in they dispute whether ann had a present_interest in that portion during that year we look to california community-property law to settle that dispute a ann and vince were legally married in we must first resolve a threshold issue of whether ann and vince were even married in remember the general_rule requiring each spouse to report half of the community_income applies only to married couples who file separately ann and vince legally_separated on date after spouses legally separate the earnings or accumulations of each party are the separate_property of the party acquiring the earnings or accumulations cal fam code sec_772 west but does legal_separation end the marriage the commissioner contends the marriage didn’t end until date when the superior court granted their divorce ann argues--without a corresponding citation--that under california family law the marriage effectively ended on the date of legal_separation we side with the commissioner legal_separation does not end the marriage see monroe v superior court of los angeles county p 2d cal a separate_maintenance decree does not end the marriage estate of lahey v bianchi cal rptr 2d ct app noting legal_separation formerly known as decree of special maintenance jacquemart v jacquemart p 2d cal ct app a decree of separate_maintenance does not end the marriage we therefore hold that ann and vince were still legally married until late date and because ann and vince filed separately the general_rule that each spouse must report half of the community_income is in play here b community_income in cr lp now we turn to whether ann had a present_interest in the community- property portion of income vince earned as a member of cr llc in it’s well-established under california community-property law that the character of property as separate or community is determined at the time of its acquisition see v see p 2d cal in other words once property is community_property it is ‘stamped a community asset from then on’ unless the parties agree otherwise or its character is changed in some other way recognized by law in re marriage of rossin cal rptr 3d ct app quoting in re marriage of lehman p 2d cal thus it’s irrelevant when an individual actually receives the stream of income from that community asset rather the critical question is when the right to that stream of income accrued id pincite emphases added and even if one spouse invests community_property in a partnership with a nonspouse the property invested remains community_property see mccall v mccall p 2d cal ct app the interest in a partnership is not a new kind of property but takes its character as separate or community_property in accordance with how and when it was acquired id thus it doesn’t matter that vince through cr llc funded cr lp after he legally_separated from ann what’s important is that he funded that interest with community_property and the fact that he invested it in a partnership with a third party doesn’t change the characterization ann doesn’t seem to dispute that there was a community-property portion of income earned in from cr lp via vince’s interest in cr llc however she characterizes her right in this income in as an inchoate right citing black’s law dictionary she notes that such a right is one that has not fully developed matured or vested and she argues that this was precisely the california family law right she had until it was determined in date what amount of community_property was contributed to cr lp thus ann contends she had no right to cr lp income in that could be determined and subject her to tax that year we disagree her interest was not inchoate in california law tells us that far from being inchoate each spouse’s interest in community_property during continuance of the marriage relation is present existing and equal cal fam code sec_751 west in other words a community-property interest in a spouse’s partnership_interest is more than a mere money claim it’s a present_interest kenworthy v hadden cal rptr ct app the dispute in kenworthy was also over the nature of a wife’s community- property interest in her husband’s partnership as in this case mr kenworthy had used community_property to fund a partnership mrs kenworthy then died and in her will she left her community_property to various devisees id pincite mr kenworthy began to pay them their shares of the profits from the partnership id pincite those payments ended when mr kenworthy died and mrs kenworthy’s devisees never filed a claim against his estate for their shares of the partnership property id pincite the time for creditors to file claims against mr kenworthy’s estate then passed but mrs kenworthy’s devisees sued on a theory that her will had given them an actual property interest in mr kenworthy’s partnership and not just a claim to a share of its income the california court of appeal agreed the court first held that the wife’s interest in her husband’s partnership was not merely an expectant one but a present and existing one id pincite when the community_property was transferred to the partnership the wife did not divest herself of her community interest in that property in favor of a general money claim against the husband she merely traded her community interest in one asset for a community interest in another asset the husband’s partnership_interest id and because the devisees took a present existing interest to one-half of the husband’s partnership_interest under the terms of the wife’s will they were owners of that one-half interest id pincite although their interest was not community_property they had a claim to a present_interest in the partnership and not a general claim against the estate id thus because they owned a one-half interest in the husband’s partnership_interest the court held that they didn’t need to present a creditor’s claim and so were not time-barred id pincite we think the situation here is very similar when vince invested the community_property in cr lp ann did not divest herself of her community interest in that property in favor of a money claim against him any more than the wife did in kenworthy she merely traded her community interest in one asset for a community interest in another asset ie vince’s membership share of cr llc’s partnership_interest in cr lp kenworthy cal rptr pincite we are not saying that ann’s community-property interest made her part owner of cr lp’s assets but we do hold that her interest--an interest in vince’s membership share of cr llc’s partnership_interest in cr lp--was a present_interest and not a mere expectancy see id we acknowledge that those principles from kenworthy may be in tension with earlier california caselaw rosenthal v rosenthal cal rptr ct app for example was a dispute over a husband’s law partnership--a partnership he had begun during his marriage the wife claimed a community interest in that partnership because the husband had funded it with community assets id pincite the trial_court adopted that theory and the california court of appeal agreed id pincite its explanation is less than clear however at least to nonspecialists it said that a lthough specific property is divested of its community character upon its transfer to a partnership the husband’s interest in the partnership itself is community_property id pincite ann argues that kenworthy also stood for the proposition that specific property is divested of its community character upon its transfer to a partnership continued emphasis added citing cal corp code sec thus the court explained the wife acquires a general claim in her husband’s share of the partnership in place of her interest in specific community assets transferred to the partnership id pincite emphasis added in other words when parties are divorced and the community_property is divided the wife should be compensated for giving up her claim to the husband’s share of the partnership id emphasis added citing carmichael v carmichael cal app 2d ct app to hold otherwise the court said would allow a husband to transfer community assets to a partnership during the pendency of a divorce action in order to defeat his wife’s community_property rights id we note here that kenworthy agrees with rosenthal’s result--both cases protect a wife against her husband’s claim that she had no interest in partnership property that was traceable to community funds see kenworthy cal rptr at continued this statement however was from a dissent kenworthy v hadden cal rptr ct app evans j dissenting carmichael did not in fact characterize one spouse’s community-property interest in the other spouse’s partnership_interest as a general claim rather it held only that a wife should be able to receive as community_property a sum representing a portion of her husband’s partnership_interest without an accounting carmichael v carmichael cal app 2d ct app but it carefully distinguished many of the propositions rosenthal used to reach that result it first reread california corporation code section 15025--the only authority cited in rosenthal to support its statement that community_property is divested of its character upon transfer to a partnership that code section kenworthy explained only clarifies the character of partnership property as between the partners it does not attempt to characterize the nature of the partnership_interest of a partner as between a husband and his wife as to them the husband’s interest in the partnership is still community_property despite cal corp code sec id pincite citing mccall v mccall cal app 2d ct app kenworthy also limited rosenthal’s characterization of a wife’s community-property interest in her spouse’s partnership_interest as only a general claim kenworthy explained that a court of dissolution --like the trial_court in rosenthal-- has broad powers to divide assets accordingly in that context there is no objection to an inexact description of wife’s interest as a general claim id pincite emphasis added but since a probate court--like the trial_court in kenworthy--did not have broad discretion to divide assets its description of the wife’s community-property interest had to be very precise see id we recognize that kenworthy appears to distinguish rosenthal on the grounds that kenworthy was a probate case while rosenthal was a dissolution continued here as in kenworthy we must be extra precise in describing what property rights ann had in and following kenworthy we conclude that ann had a present and existing community-property interest in of vince’s interest in cr lp--which he held in the form of a membership interest in cr llc the court-approved settlement agreement in recognized that interest it didn’t create that interest therefore--regardless of whether ann was a partner in cr lp or a member in cr llc in 2003--we conclude that the general_rule of federal continued case see kenworthy cal rptr pincite but kenworthy emphasizes that distinction only to highlight the relative importance of the precision each of the two courts needed to do their jobs ann argues in her reply brief that both kenworthy and rosenthal are distinguishable because those cases involved viable partnerships that existed during a marriage since ann argues that her marriage with vince effectively ended upon legal_separation see supra opinion section ii a she contends that the partnership here was not funded--and thus was not in existence--until after the marriage ended we’ve already found however that vince funded the partnership while he and ann were still legally married at times ann appears to argue that since vince funded cr lp after their separation began she somehow lost a present_interest in the money until the property settlement in that would ignore the fact that vince used community_property to fund cr lp in and the use of those funds to invest in cr lp through cr llc didn’t divest ann of her interest in the community_property after 2002--she just traded her community interest in one asset for a community interest in vince’s interest in cr lp through cr llc each time vince made an investment in that partnership see kenworthy cal rptr pincite she never lost a present_interest in the community-property funds income-tax law--that a married_person filing separately must report half of the community income--applies in her case to the income that cr llc earned see sec_1_66-1 income_tax regs we conclude by noting credible arguments that might’ve been relevant to our analysis but that we don’t consider because the parties failed to make them see eg efron v commissioner tcmemo_2012_338 at n n first we note the commissioner does not mention sec_1_702-1 of the regulations sec_702 and its accompanying regulations provide rules to determine the income-tax liability of a partner for his distributive_share of a partnership’s income that regulation states that if a husband and wife in a community-property state file separate returns and only one spouse is a member we are left with the vexing question of what to do with ann’s tefra case there is no caselaw on whether this lack of effect at the partner level means the tefra case is somehow moot we do have jurisdiction to decide it see note supra and the fpaa does determine that a change in ownership occurred in that made ann a partner that year we think this means that that determination might have consequences for later years and for other partners of cr lp for if that year is somehow open for any of them other than ann we therefore find that this part of the commissioner’s determination is not moot but that it is wrong because ann’s interest in cr lp was not that of a partner but of a holder of a community-property interest in vince’s partnership we thus rule in ann’s favor in the partnership case we do note however that the parties did not brief this possible consequence of their respective positions they should feel especially free to move for reconsideration if they care to direct their attention to it and disagree with us of a partnership the part of his distributive_share of income which is derived from community_property should be reported by the husband and wife in equal proportions sec_1_702-1 income_tax regs we also note ann’s failure to argue for innocent-spouse relief as we mentioned earlier see supra note sec_66 and its accompanying regulations list a couple exceptions to the general_rule that each spouse must report half of the total community_income but these require proof of four conditions see sec_66 - or arguments about all the facts and circumstances see sec_66 sec_1_66-4 income_tax regs because ann didn’t argue that she fell within either of these exceptions we deem this issue waived see eg welle v commissioner t c ___ ___ slip op pincite n date dollar_figure decision will be entered under rule in docket no decision will be entered for petitioner in docket no another one of those exceptions lies within the discretion of the commissioner sec_66 authorizes him to disallow the benefits of any community-property law to a taxpayer with respect to any income if the taxpayer acted as if he were solely entitled to such income and the taxpayer failed to notify the taxpayer’s spouse of the nature and amount of such income before the due_date for filing the return for the tax_year in which the income was derived see 112_tc_183 the commissioner however didn’t invoke that subsection here to apply all of the income to vince


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date number release date conex-112440-12 uil ------------------------------------------- -------------------------------------- ------------------------------------ ---------------------------------- dear ----------------- this responds to your letter of date to commissioner shulman you asked that we provide guidance to former customers of -------------------- so they can comply with their federal tax filing obligations your letter indicated that many of the former customers had not yet received forms indicating the activity within their accounts for the year we understand that the trustees subsequently issued these forms and that the former customers should have received them by date the forms the former customers received generally should give them the information they need to file their returns by the april due_date for calendar-year taxpayers based on your correspondence many former customers of ---------------are apparently farmers or fisherman for tax purposes the tax law provides that farmers and fisherman can avoid a penalty for failure to pay the proper amount of estimated_tax during the year by filing their return by march along with one estimated_tax payment recognizing that many taxpayers received their 1099s after date we recently announced that farmers and fishermen whom the -------------- bankruptcy affected can ask to have estimated_tax penalties waived we also provided instructions on how to request this waiver i am enclosing a copy of this guidance we are closely following the developments in this matter including the liquidation proceedings the trustee is conducting as further information develops we will consider providing additional guidance to assist -------------- customers conex-112440-12 i hope this information is helpful if you have questions please contact me ----------------- --------------------------------- sincerely john p moriarty chief branch office of associate chief_counsel income_tax accounting


department of the treasury internal_revenue_service washington d c aug tax exempt government e division ane ntities uil tt ep e he legend taxpayer a ira x amount m bank l credit_union l fund v dear this is in response to your request dated date in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a maintained an individual retirement ira ira x with credit_union l taxpayer a asserts that on date he received a distribution of amount m from ira x taxpayer a asserts that his failure to accomplish a rollover of amount m within the 60-day period prescribed by sec_408 of the code was due to the failure of bank l to open an ira rollover account as requested by taxpayer a on date the certificate of deposit associated with ira x matured taxpayer a transferred the maturity amount amount m to bank l on the same day taxpayer a told a representative of bank l that amount m was from an ira and he wanted the amount m to be deposited into an ira cd taxpayer a page believed that bank l had opened a rollover ira to receive the transfer however bank l took information from an unrelated trust account that taxpayer a had opened three days before and mistakenly deposited amount m into the trust account taxpayer a did not realize the mistake until date when he attempted to rollover amount m into another ira with fund v and was informed by bank l that amount m was not in an ira on date taxpayer a deposited amount m into a money market account pending his discussions with bank l seeking help for this problem taxpayer a submitted a letter from bank l dated date in which bank l admitted that it misunderstood taxpayer a’s intentions and should have opened an ira account based on the facts and representations you request a ruling that the internal_revenue_service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distribution of amount m sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 page sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement revproc_2003_16 r b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the internal_revenue_service the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a is consistent with his assertion that his failure to accomplish a rollover of amount m within the day period prescribed by sec_408 of the code was due to the failure of bank l to open an ira rollover account as requested by taxpayer a therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution to taxpayer a of amount m taxpayer a is granted a period of days measured from the date of the issuance of this letter_ruling to make a rollover_contribution of amount m to an ira or iras described in code sec_408 provided all other requirements of code sec_408 except the 60-day requirement are met with respect to such ira contribution the contribution will be considered a rollover_contribution within the meaning of code sec_408 page no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent if you have any questions please contact sincerely yours ko sm furborry - laura b warshawsky manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose


internal_revenue_service number release date index number ----------------- --------------------------------- ------------------- ------------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no -------------- telephone number ---------------------- refer reply to cc corp plr-137275-13 date date legend foreign parent fsub1 fsub2 fsub3 ------------------------------- ------------------------------------------------------------------- ------------------------------------------------------------------- ------------- ------------------------- ---------------------------------------------------------------------------- ---- ---------------------------------------------- ------------- -------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ----------------------------- ------------- ------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- ----------------------------------------------- ------------- fsub4 -------------------------- ------------------------------------------------- ------------------------- ------------------------------------------------------------------------------------------------------- ------------- fsub5 ------------------------------------------------- plr-137275-13 --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ----------------------------- ------------- ---------------------- ----------------------------------------------------------------- - ---------------------------------------- ------------- --------------------- ----------------------------------------------------------------- - ---------------------------------------- ------------- ---------------- ----------------------------------------------------------------- - ---------------------------------------- ------------- ------------------- -------------------------------- ------------------------ ----------------------------------- -------------------------------- ------------------------ ------------------------- -------------------------------- ------------------------ ------ fsub6 fsub7 fsub8 distributing controlled sub1 a unrelated_person --------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------- ------ -------------------------------------------- fjv ------------------------------------------------ --------------------------------------------------------------------------------- ----------------------------------------- ------------- plr-137275-13 jv agreement business a --------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- -- -------- -------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- -------------------------- fsub3’s business -------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ --- -------------------------- business b dear -------------- -------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ - --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- 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--------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ---------------------------- plr-137275-13 this letter responds to your authorized representative’s letter dated date requesting rulings regarding certain federal_income_tax consequences of a proposed transaction the information submitted in that request and in later correspondence is summarized below the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process in particular this office has not reviewed any information pertaining to and has made no determination regarding whether the distribution defined below i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 of the internal_revenue_code and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 summary of facts foreign parent owns all of the issued and outstanding_stock of fsub1 and fsub2 fsub1 owns all of the issued and outstanding_stock of fsub3 fsub4 and distributing the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return the us parent group fsub2 directly or indirectly owns all of the issued and outstanding_stock of fsub6 fsub7 and fsub8 fsub4 indirectly owns all of the outstanding_stock of fsub5 distributing owns all of the single class of issued and outstanding_stock of controlled and all of the issued and outstanding_stock of sub1 distributing is indirectly engaged in business a through sub1 controlled is directly engaged in business b the financial information submitted by distributing and controlled indicates that business a and business b each has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years the distribution defined below is motivated in whole or substantial part by the following corporate business purposes i to facilitate the separation of business b from business a and the combination of business b with other segments of the same general business including fsub3’s business so that ii business b can participate in plr-137275-13 the jv agreement which will allow for continued innovation by business b and iii fsub3 can participate in the jv agreement which will allow for geographic expansion of fsub3’s business into an additional market collectively the corporate business purposes proposed transaction for what are represented to be valid business reasons distributing proposes to undertake the following transactions pursuant to a single_plan which have been partially consummated together the proposed transaction i distributing will distribute all of the stock of controlled pro_rata to fsub1 the distribution ii fsub1 will transfer all of the stock of controlled to fsub3 the contribution in addition foreign parent and or certain of its direct or indirect wholly owned subsidiaries have entered into the jv agreement with unrelated_person under the jv agreement fsub5 fsub6 fsub7 and fsub8 transferred cash to fjv in exchange for an a percent interest in fjv unrelated_person owns the remaining interest in fjv neither distributing nor controlled has transferred or will transfer directly or indirectly any of its respective assets to fjv or any of its directly or indirectly controlled entities however controlled will provide business b services to fsub3 which will in turn provide services to fjv in each case for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length representations a b no part of the stock that will be distributed by distributing in the distribution will be received by fsub1 as a creditor employee or in any capacity other than that of a shareholder of distributing the five years of financial information submitted on behalf of business a conducted by sub1 a member of the distributing separate_affiliated_group as defined in sec_355 the distributing sag is representative of the present operations of business a and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted c the five years of financial information submitted on behalf of business b conducted by controlled is representative of the present operations of plr-137275-13 d e f g h i j k l business b and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted neither business a conducted by the distributing sag nor control of an entity conducting that business will have been acquired during the five-year period ending on the date of the distribution in a transaction in which gain_or_loss was recognized or treated as recognized in whole or in part except in connection with the expansion of business a neither business b conducted by controlled nor control of an entity conducting that business will have been acquired during the five-year period ending on the date of the distribution in a transaction in which gain_or_loss was recognized or treated as recognized in whole or in part except in connection with the expansion of business b following the distribution the distributing sag will continue the active_conduct of business a independently and with its separate employees following the distribution controlled will continue the active_conduct of business b independently and with its separate employees the distribution will be carried out for the corporate business purposes the distribution is motivated in whole or substantial part by the corporate business purposes the distribution is not being used principally as a device for the distribution of the earnings_and_profits of distributing or its subsidiaries or controlled or its subsidiaries or both no intercorporate debt will exist between distributing and its subsidiaries and controlled and its subsidiaries at the time of or subsequent to the distribution there is no intercorporate indebtedness existing between distributing and controlled that was issued acquired or will be settled at a discount payments made in connection with all continuing transactions if any between distributing and its subsidiaries and controlled and its subsidiaries will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length m immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and -14 plr-137275-13 as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d at the time of the distribution distributing will not have an excess_loss_account in the stock of controlled or the stock of any controlled subsidiary for purposes of sec_355 immediately after the distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution for purposes of sec_355 immediately after the distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either a acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution or b attributable to distributions on distributing’s stock_or_securities that were acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution the distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons other than persons described in sec_355 will acquire directly or indirectly stock representing a percent or greater interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation immediately after the distribution taking into account sec_355 neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 the distribution of controlled stock to fsub1 in the distribution is with respect to fsub1’s ownership of distributing stock neither distributing nor controlled i was or will be a united_states_real_property_holding_corporation as defined in sec_897 at any time during the five-year period ending on the date of the distribution or ii will be a united_states_real_property_holding_corporation immediately after the distribution n o p q r s plr-137275-13 t under the jv agreement unrelated person’s interest in fjv does not create directly or indirectly an equity_interest in controlled for federal tax purposes u the contribution will qualify as an exchange under sec_351 rulings based solely on the information submitted and the representations set forth above and provided that i the distribution of controlled stock to fsub1 in the distribution is with respect to fsub1’s ownership of distributing stock and ii any other transfer of stock money or property between distributing controlled or any distributing shareholder and any person related to distributing controlled or any distributing shareholder is respected as a separate transaction we rule as follows on the distribution no gain_or_loss will be recognized by distributing on its distribution of the stock of controlled in the distribution sec_355 no gain_or_loss will be recognized by and no amount will be included in the income of fsub1 upon its receipt of the stock of controlled in the distribution sec_355 the basis of the stock of distributing and controlled in the hands of fsub1 immediately after the distribution will be the same as the basis of the distributing stock held by fsub1 immediately before the distribution allocated in proportion to the fair_market_value of distributing and controlled in accordance with sec_358 and sec_1_358-2 sec_358 and c fsub1’s holding_period in the controlled stock received in the distribution will include the holding_period of the distributing stock with respect to which the distribution is made provided that such distributing stock is held as a capital_asset on the date of the distribution sec_1223 earnings_and_profits if any will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 and sec_1_1502-33 caveats except as expressly provided herein no opinion is expressed or implied concerning the tax treatment of the proposed transactions under other provisions of the code or the regulations or the tax treatment of any conditions existing at the time of or effects plr-137275-13 resulting from the proposed transactions that is not specifically covered by the above rulings in particular except as so provided no opinion is expressed or implied regarding i ii whether the distribution satisfies the business_purpose requirement of sec_1_355-2 whether the distribution is being used principally as a device for the distribution of earnings_and_profits of distributing controlled or both see sec_355 and sec_1_355-2 or iii whether the distribution is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in distributing or controlled see sec_355 and sec_1_355-7 procedural statements this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the powers of attorney on file in this office a copy of this ruling letter will be sent to the representative named therein sincerely joanne m fay chief branch office of associate chief_counsel corporate


internal_revenue_service number release date index number ------------------- ------------------------- ----------------------------- re -------------------- -------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------- id no ----------------- telephone number --------------------- refer reply to cc psi plr-127000-15 date date legend date decedent spouse trust year year date attorney date dear ------------ ------------------------- ----------------------------------------------- ----------------------------------------------------- -------------------------------------------- ------- ------- ---------------------- --------------- ----------------------- this letter responds to your authorized representative’s letter dated date and subsequent correspondence requesting an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-3 of the procedure and administration regulations to allocate decedent’s and spouse’s gst_exemption to a transfer to a_trust facts the facts and representations submitted are summarized as follows on date in year decedent and spouse created trust for the benefit of their children and more remote descendants plr-127000-15 on date decedent and spouse transferred property to trust attorney prepared and filed form sec_709 united_states gift and generation-skipping_transfer_tax return in which decedent and spouse elected to split the gift under sec_2513 on each of the form sec_709 decedent and spouse allocated their respective available gst_exemption to the transfer on date in year decedent and spouse transferred property to trust year transfer however attorney failed to prepare the year form sec_709 and failed to advise decedent and spouse that they must file a form_709 to report the transfer for gift_tax purposes and to affirmatively allocate their remaining gst_exemption to the year transfer accordingly decedent and spouse failed to allocate their respective gst_exemption to the year transfer decedent died on date during the administration of decedent’s estate spouse learned of the failure to allocate decedent’s and spouse’s respective gst_exemption to the year transfer to trust decedent’s estate and spouse request an extension of time pursuant to sec_2642 and sec_301_9100-1 and sec_301_9100-3 to allocate their gst_exemption to the year transfer to trust law and analysis sec_2513 provides that a gift made by one spouse to any person other than his spouse shall be considered as made one-half by him and one-half by his spouse but only if at the time of the gift each spouse is a citizen or resident_of_the_united_states under sec_2513 paragraph a only applies if both spouses have signified their consent to the application of paragraph a in the case of all such gifts made during the calendar_year by either while married to the other sec_2601 imposes a tax on every generation-skipping_transfer gst a generation-skipping_transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the tax imposed by sec_2601 is the taxable_amount multiplied by the applicable_rate sec_2641 defines the term applicable_rate with respect to any gst transfer as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2642 provides that the inclusion_ratio with respect to any property transferred in a gst is the excess if any of over the applicable_fraction with respect to a gst that is not a direct_skip sec_2642 provides that the applicable plr-127000-15 fraction is a fraction the numerator of which is the amount of the gst_exemption allocated to the trust and the denominator of which is the value of the property transferred to the trust reduced by the sum of any federal estate_tax or state death_tax actually recovered from the trust attributable to such property and any charitable deduction allowed under sec_2055 or sec_2522 with respect to such property sec_2631 as in effect for year provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that an allocation of gst_exemption to property transferred during the transferor’s lifetime other than in a direct_skip is made on form_709 sec_2652 and sec_26_2652-1 provide that if under sec_2513 one-half of a gift is treated as made by an individual and one-half of such gift is treated as made by the spouse of the individual then for purposes of the gst tax each spouse is treated as the transferor of one-half of the entire value of the property transferred by the donor spouse regardless of the interest the electing spouse is actually deemed to have transferred under sec_2513 sec_2642 provides in part that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 and such allocation shall be effective on and after the date of such transfer sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances plr-127000-15 including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a gst_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except in subtitles e g h and i sec_301_9100-3 provides that in general requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under the rules of sec_301_9100-3 under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an election described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or to advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore decedent’s estate and spouse are granted an extension of time of days from the date of this letter to allocate their available gst_exemption to the year transfer to trust the allocations will be effective as of the date of the transfer and the value of the transfer to trust as plr-127000-15 determined for federal gift_tax purposes will be used in determining the amount of decedent’s and spouse’s gst_exemption to be allocated to trust the allocations should be made on original form sec_709 for year and filed with the internal_revenue_service center cincinnati ohio a copy of this letter should be attached to each original form_709 a copy of this letter is enclosed for this purpose 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 moreover no opinion is expressed or implied concerning the tax consequences of any modification of trust after year this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative 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 sincerely associate chief_counsel passthroughs special industries by ______________________________ lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter