internal_revenue_service number release date index number ------------------------- -------------------------------- ------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-105049-10 date date in re -------------------------------------------- ---------------------------------------------------------- --------------------- legend ---------------------------- testator -------------------------------------- child a ----------------------------- child b --------------------------------------- child c -------------------------------- stock ------------------------------------------------------------------------------ stock trust ------------------------------------------------------------------------------ residuary_trust children’s agreement ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------- state state a date date date date date date a b c d stock trust a residuary_trust a cite --------------------------------------------------------------------------------------------------- cite ------------------------------------------------------------------------------------------------------------------------ ------------------ ---------- -------------------- ------------------- -------------------------- ------------------------- ------------------------- ----------------------- ------ ------- ------ ------ ------------------------------------------------------------------------ --------------------------------------------------------------------------------- ------------------------------------------------------------------------ --------------------------------------------------------------------------------- plr-105049-10 ------------------------------------------------------------------------ ------------------------------------------------------ cite cite ------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------- cite ------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------ cite ------------------------------------------------------------------------ ------------------------------------------------------- cite cite ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------- highest court highest court of state a state court - state statute ------------------------------------------------------------------------------------------ --------------------------------------------- state governing statute a --------------------------------------------------- state governing statute b --------------------------------- state a statute q ---- ---- r ---- s t ---- -------- u -------- v --------- x y ------ ------------ z ------------------------------------------- ----------------------------------- ------------------------------------------------------------------------ --------------------------------------------------------------------------------- dear ------------ this responds to the date letter from your authorized representative requesting rulings on the income gift estate and generation-skipping_transfer gst tax consequences of a proposed settlement agreement the facts and representations are as follows testator died a resident of state on date he was survived by three children child a child b and child c the children five grandchildren the five grandchildren were then living there were no great-grandchildren at the time under articles third and eighth of testator’s will the will his shares of stock were to be held in trust the stock trust trust income was to be divided equally among the plr-105049-10 children on a child’s death the child’s income share was to be divided equally among the child’s then living children testator’s grandchildren the stock trust was to terminate twenty-one years after the death of testator’s last surviving grandchild when the principal would be divided equally per capita among testator’s then living great-grandchildren and deceased great-grandchildren whose then living descendants would take by representation under article twenty-second of the will the residue of testator’s estate was to be held in another trust the residuary_trust the residuary_trust provisions were identical to those of the stock trust except that the residuary_trust was to terminate when testator’s youngest great-grandchild reached age twenty-one the rule_against_perpetuities under the state rule_against_perpetuities in effect at testator’s death a bequest of a future_interest was void if considered prospectively at the testator’s death there was a possibility that the interest would not vest by the end of twenty-one years after the death of a life or lives in being at the testator’s death the permissible period a bequest to a class was void if there was a possibility that all the members of the class would not be ascertained and take vested interests within the permissible period a void specific_bequest passed to the testator’s residuary_estate if the testator’s disposition of the residuary_estate was void as well the residuary_estate passed as a reversion by intestacy cite in this case at testator’s death it was possible for the children to have additional children so that there could be grandchildren whose lives were not then in being this was the pivotal factor in determining whether his bequests of stock trust and residuary_trust income and remainders to his grandchildren and great-grandchildren violated the rule_against_perpetuities testator’s bequest of lifetime income interests to the grandchildren was to all of his grandchildren as a class a grandchild born after testator’s death would be part of the grandchildren’s class and would receive stock trust income_for_life based on this it was considered possible that not all of the grandchildren’s income interests would vest during lives in being at testator’s death testator’s bequests of remainders to his great-grandchildren were to vest only after all of testator’s grandchildren died the life of a grandchild born after testator’s death would also be a measuring life therefore at testator’s death it was possible that the certain annuities were also created that have since terminated each trust considered herein ie stock trust and residuary_trust in the will and stock trust a and residuary_trust a under the children’s agreement provided for distribution of the remainder at the end of twenty-one years following the death of the last survivor of the persons whose lives measured the duration of that trust because the perpetuities issue in this case centers on the lives measuring a plr-105049-10 time for vesting of the great-grandchildren’s remainders would be based on a life not in being at testator’s death accordingly the validity of these bequests was in doubt the bequests in the stock trust if void passed to the residuary_trust at testator’s death the bequests in the residuary_trust if void passed to testator’s intestate estate as a reversionary_interest the children’s agreement the children were testator’s heirs at law they acquired his property passing by intestacy consequently on date shortly after testator died the children entered into an agreement the children’s agreement revising the time when the great-grandchildren’s remainders were to vest under the children’s agreement the trusts were to terminate and the great-grandchildren’s remainders were to take effect on the death of the survivor of the children and five grandchildren that is lives in being at testator’s death the children’s agreement also changed the will’s pro_rata distribution of the stock trust and residuary_trust remainder to a per stirpes distribution on termination trust principal would be divided into three equal parts and distributed per stirpes under this revision the great-grandchildren descended from child a would share one third of the principal per stirpes those descended from child b would share a second third per stirpes and those descended from child c would share the last third per stirpes in all other respects the terms of the revised stock trust stock trust a and residuary_trust residuary_trust a were the same as those provided in testator’s will on a date before date testator’s shares of stock were transferred to stock trust a residuary_trust a was not funded it is represented that no additions have been made since then the litigation over more than x decades the trust beneficiaries and others have instituted actions for state court determinations regarding testator’s will and the children’s agreement specifically in cite the highest court of state highest court considered testator’s bequests of income interests to the grandchildren the court reasoned that under testator’s will a grandchild’s income_interest would vest when his or her parent child a child b or child c died thus the grandchildren’s class would necessarily close at the death of the last survivor of the children who were in being at testator’s death highest court held that therefore the bequest of lifetime income interests to the respective trust’s duration and not on the twenty-one year period following the death of the last survivor the twenty-one year period is hereafter assumed to be a part of each trust’s duration even though it is not specifically stated plr-105049-10 grandchildren as a class did not violate the rule_against_perpetuities the court held the stock trust created in the will to be valid through the lives of the grandchildren highest court then considered testator’s bequest of remainders to his great-grandchildren the court reasoned that the grandchildren’s life estates preceded the remainders and the grandchildren’s class was not limited to lives in being at testator’s death because the remainders would take effect only after all of those including afterborn grandchildren died it was possible that the remainders would not vest within lives in being at testator’s death therefore highest court held the stock trust remainders to be void and illegal as violating the rule_against_perpetuities cite state statute the wait and see rule nearly y decades after highest court rendered its decision in cite the state legislature enacted state statute state statute provides a wait and see rule in determining whether a future_interest satisfies the rule_against_perpetuities or is void under the wait and see rule a future_interest does not violate the rule_against_perpetuities if actual events demonstrate that the interest did in fact vest by the end of the permissible period state statute applies retroactively to all interests heretofore created following the enactment of state statute highest court considered the statute’s retroactivity cite in the case before the court the trust was created many decades before state statute was enacted at the time of creation certain interests were void as violating the rule_against_perpetuities however highest court applied state statute’s wait and see rule to conclude in retrospect that the interests were not void and did not violate the rule_against_perpetuities as a result the courts of state now apply the wait and see rule retroactively to conclude that a future_interest that was void when created many years before state statute was enacted is not void because in hindsight it vested before the permissible period ended accordingly such otherwise void interests are retroactively sustained a sec_3 testator’s bequest to the grandchildren though valid did not provide for distribution of a grandchild’s income share when the grandchild died before the trust ended on the death of the first grandchild to die on date the trustees petitioned the state court for instructions the state court held that based on testator’s intent a deceased grandchild’s children succeeded to the income share for the duration of the trust cite by inference highest court also considered testator’s bequest of the residuary_trust remainders highest court in effect confirmed that the stock trust remainder and residuary_trust remainder passed by intestacy to the children however the court did not rule on how the remainder would pass to the great-grandchildren plr-105049-10 not violating the rule_against_perpetuities cite however highest court has not yet addressed due process issues that may be presented the actualities in this case no additional grandchildren were born after testator’s death the lives of the children and the five grandchildren were all in being at testator’s death all of the children have died the last survivor of the five grandchildren died on date at the time there were z great-grandchildren of testator the trust will terminate twenty-one years after date which is date of testator’s z great-grandchildren a descended from child a b descended from child b and c descended from child c if the wait and see rule is applied to validate testator’s bequest of remainders to his great-grandchildren the principal would be divided into z equal shares and distributed under the will alternatively if testator’s disposition of the remainders is considered void the principal would be divided into three equal shares and distributed per stirpes under the children’s agreement the portion of a one-third share distributable to a great-grandchild would depend on the framework of the family line ie child a’s child b’s or child c’s to which that great-grandchild belongs great-grandchildren’s litigation there is a substantial difference between what a great-grandchild would receive in a per capita distribution and what he or she would receive in a per stirpes distribution on date the great-grandchildren benefitting from a per capita distribution the per capita parties instituted their action in state court for adjudication on the distribution of the stock trust remainder the great-grandchildren benefitting from a per stirpes distribution the per stirpes parties opposed the suit and also requested adjudication in addition an action was instituted concerning the distribution of income during the twenty-one year period state court combined the proceedings to consider the income and principal issues together cite over a d-year period guardians ad litem were appointed there was extensive discovery counsel filed three voluminous sets of briefs and the court heard two days of oral arguments the per capita parties argued that the wait and see test of state statute now applies under that test testator’s the will’s disposition of the stock in contrast the legislature of state a enacted state a statute which like state statute retroactively applies a wait and see rule to determine whether a future_interest that was void at the time it was created before the state a statute was enacted did in fact vest during the permissible period highest court of state a refused to apply the wait and see rule retroactively despite the relevant language in state a statute instead that court addressed issues of constitutionality and held that state a statute could not be applied retroactively to destroy vested or substantive rights created before state a statute was enacted cite plr-105049-10 trust remainder does not violate the rule_against_perpetuities therefore the stock trust principal is distributable per capita to testator’s living great-grandchildren and deceased great-grandchildren whose living descendants would take by representation the per stirpes parties argued that the highest court’s determinations were final and those rulings can not now be constitutionally impaired by a later-in-time state statute or judicial_ruling because highest court determined the remainders in the will to be void they passed as reversionary interests by intestacy to the children as such the remainders passed per stirpes under the children’s agreement some parties argued that trust income should be distributed per stirpes through the roots of the children for the duration of the stock trust others argued that the income is distributable per capita the court encouraged the parties to explore ways to resolve their differences through negotiation and compromise rather than through continued litigation among the potential outcomes regarding trust principal was a judicial_ruling that i ii iii principal is distributable per capita on date under the terms of the stock trust in the will or principal is distributable per stirpes on date under the terms of the children’s agreement or principal was distributable as of the last surviving grandchild’s death under the residuary_trust in the will which vested or will vest in the takers under the residuary_trust among the potential outcomes regarding trust income was a judicial_ruling that iv v vi income is distributable per stirpes from the death of the last surviving grandchild to date under either the will or the children’s agreement or income is distributable per capita from the death of the last surviving grandchild to date under the will or the children’s agreement or all rights to receive stock trust income terminated when the last surviving grandchild died at which time the stock trust principal was distributable under the residuary_trust of the will the great-grandchildren’s settlement agreement plr-105049-10 the parties negotiated extensively at the outset they agreed that the issues could be settled using a fractional difference settlement based on an assessment of the relative strengths of their adverse positions under the general framework of the compromise the great-grandchildren’s settlement agreement the ggc agreement provides for the stock trust principal to be divided into z separate shares based on the number of testator’s then living great-grandchildren and deceased great-grandchildren with then living children the share of a deceased great-grandchild will be divided per stirpes among that great-grandchild’s living descendants the stock trust assets will be divided in accordance with certain percentages the formula of the compromise provides for a q per stirpes r per capita fractional difference as to income and an s per stirpes t per capita fractional difference as to principal after the division into separate shares u of each great-grandchild’s share will be distributed outright to the great-grandchild if living or if the great-grandchild is deceased to his or her living descendants per stirpes the remaining v of each share will continue in trust for such great-grandchild or such descendants until the termination_date date each share will be a separate trust the respective great-grandchild or deceased great-grandchild’s descendants will be the sole beneficiary of the share for distributions of income and principal a sophisticated algorithm taken to thirteen decimal places will be used in the pro_rata division and outright distributions the division will take into account both the market_value and respective tax bases of the assets the ggc agreement was presented to state court for consideration the state court approved the settlement and ordered the division and distribution of the stock trust as set forth in the ggc agreement the ggc agreement is subject_to a favorable ruling from the internal_revenue_service you have asked for the following rulings the terms of the ggc agreement will not cause distributions from the stock trust or the continuing separate settlement trusts to become subject_to the generation-skipping_transfer_tax the terms of the ggc agreement will not cause any party to the agreement to make a gift to any other party to the ggc agreement for purposes of describing the ggc agreement the stock trust and stock trust a are considered to be the same trust plr-105049-10 the terms of the ggc agreement will not cause any party to the agreement to be required to include trust assets in his or her gross_estate unless such assets are distributable or have been distributed to such party prior to his or her death the terms of the ggc agreement will not cause any party to the agreement to realize income from the sale_or_exchange of any trust assets or interests ruling generation-skipping_transfer gst tax sec_2601 of the internal_revenue_code imposes a tax on every generation-skipping_transfer which is defined under sec_2611 as a taxable_distribution a taxable_termination or a direct_skip under of the tax_reform_act_of_1986 the act gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer under a_trust that was irrevocable on date except to the extent the transfer is made out of corpus added to the trust by an actual or constructive_addition after date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 will not cause the trust to lose its exempt status these rules are applicable only for purposes of determining whether an exempt trust retains exempt status for gst tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a court-approved settlement of a bona_fide issue regarding the administration of the trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject_to chapter if the settlement is the product of arm's length negotiations and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement a settlement that results in a compromise between the positions of the litigating parties and reflects the parties' assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes in this case the stock trust was irrevocable on date further it is represented that there have been no actual or constructive additions to the stock trust after date accordingly the stock trust is exempt from gst tax under sec_26_2601-1 plr-105049-10 the terms of the ggc agreement including the proposed division of the stock trust into separate shares and partial distributions of principal are the result of a settlement of substantial issues between the per capita parties and the per stirpes parties these issues have been tenaciously litigated over more than x decades highest court rendered opinions regarding these trusts many years ago however state statute has since been enacted with retroactive effect and highest court has affirmed state statute’s retroactive application to a similarly-created trust in light of this that court’s earlier determinations of the issues in this case are now in question we conclude that the ggc agreement constitutes a settlement of bona_fide issues concerning the provisions of the stock trust and its administration we also conclude that the terms of the ggc agreement are the product of arm's length negotiations they represent a compromise between the positions of the parties and reflect the parties' assessments of the relative strengths of their positions we further conclude that the ggc agreement is within the range of reasonable outcomes under the governing instruments and the applicable state law addressing the issues resolved in the ggc agreement accordingly based upon the facts submitted and the representations made we rule that the division of the stock trust into the z separate great-grandchildren’s trusts and the distributions to the living great-grandchildren and the descendants by representation of a deceased great-grandchild made in accordance with the ggc agreement will not cause the stock trust the continuing separate stock trusts or the distributions as described above to be subject_to the generation-skipping_transfer_tax ruling gift_tax issue sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year sec_2511 provides that the gift_tax applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-1 of the gift_tax regulations provides that as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in him or her no power to change its disposition whether for his or her own benefit or for the benefit of another the gift is complete sec_25_2511-1 provides that any transaction in which an interest in property is gratuitously passed or conferred upon another regardless of the means or device employed constitutes a gift subject_to tax whether an agreement settling a dispute is effective for gift_tax purposes depends on plr-105049-10 whether the settlement is based on a valid enforceable claim asserted by the parties and to the extent feasible produces an economically fair result see 674_f2d_761 9th cir citing 387_us_456 thus state law must be examined to ascertain the legitimacy of each party's claim if it is determined that each party has a valid claim the service must determine that the distribution under the settlement reflects the result that would apply under state law if there is a difference it is necessary to consider whether the difference may be justified because of the uncertainty of the result if the question were litigated the proposed settlement is a mediated settlement and is based on arm's length negotiations among all the parties all interested parties who hold or may hold an interest in the trusts including any minors and unborn heirs have been represented in the negotiations as discussed above the ggc agreement represents the resolution of a bona_fide controversy between the parties the terms of the ggc agreement are the product of arm's length negotiations and represent i a compromise between the positions of the per capita parties and the per stirpes parties and ii reflect the parties' assessments of the relative strengths of their positions we further conclude that the ggc agreement is within the range of reasonable outcomes under the governing instruments and applicable state law accordingly based on the facts submitted and representations made we conclude that the terms of the ggc agreement as described above will not cause any of the beneficiaries to have made a taxable gift_for purposes of the federal gift_tax under sec_2501 ruling estate_tax issue sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2033 provides that the value of the gross_estate includes the value of all property to the extent of the interest therein of the decedent at the time of death sec_2035 provides that if the decedent transferred an interest in property or relinquished a power with respect to any property during the 3-year period ending on the date of death and the value of the property or interest therein would have been included in the gross_estate under sec_2036 sec_2037 sec_2038 or sec_2042 if the interest or power had been retained by the decedent on the date of death then the value of the gross_estate includes the value of the property or interest that would have been so included sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time plr-105049-10 made a transfer except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period that does not in fact end before his death possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income from the property sec_2037 provides that the value of the gross_estate includes the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise if possession or enjoyment of the property can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property and the value of such reversionary_interest immediately before the death of the decedent exceed sec_5 percent of the value of such property sec_2038 provides that the value of the gross_estate includes the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona fine sale for adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power either by the decedent alone or in conjunction with any person to alter amend or revoke or where the decedent relinquished any such power during the 3-year period ending on the date of the death sec_2041 provides that the value of the gross_estate shall include the value of all property with respect to which the decedent possessed a general_power_of_appointment at the time of death sec_2041 defines the term general_power_of_appointment as a power that is exercisable in favor of the decedent the decedent's_estate the decedent's creditors or the creditors of the decedent's_estate in order for sec_2035 through to apply a decedent must have made a transfer of property or an interest therein except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth under which the decedent retained an interest in or power over the income or corpus of the transferred property as discussed above the ggc agreement represents the resolution of a bona_fide controversy between the parties it is a settlement of bona_fide issues and is the product of arm's length negotiations it reflects the parties' assessments of the relative strengths of their positions no great-grandchild or deceased great-grandchild’s descendants by representation has made a transfer to the stock trust or to any other great-grandchild by reason of the settlement agreement accordingly based upon the facts submitted and representations made we conclude that the terms of the ggc plr-105049-10 agreement will not cause any party to the agreement to have made a transfer within the meaning of sec_2035 through however once the ggc agreement becomes effective any trust property actually distributed or receivable by a beneficiary or his or her assignee would generally be included in the beneficiary’s federal transfer_tax base see eg sec_2033 sec_2041 sec_2501 ruling income_tax issue sec_61 provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1001 provides that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained 499_us_554 addresses the issue of whether a sale_or_exchange that has taken place results in the realization of gain_or_loss under sec_1001 in cottage savings a financial_institution exchanged its interests in one group of residential mortgage loans for another lender's interests in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution the supreme court in cottage savings u s pincite concluded that sec_1_1001-1 reasonably interprets sec_1001 and stated that an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent cottage savings u s pincite the court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans cottage savings u s pincite plr-105049-10 in the present case state governing statute a allows the court for cause shown to authorize the division of a_trust into two separate trusts on such terms and conditions and with such notice as the court directs in addition state governing statute b gives trustees the power to distribute in cash or in_kind or partly in each and allocate particular assets in proportionate or disproportionate shares in this case the court order approving the ggc agreement orders the division and distribution of the stock trust as set forth in the ggc agreement accordingly the court approved the non-pro rata distributions called for in the ggc agreement and further authorized the trustees to make the necessary transfers and assignments of the unconverted investment securities t herein awarded in_kind accordingly the submission concludes that the distribution scheme in this case is authorized by state law we agree the stock trust will be divided into z trusts on a non pro-rata basis under the state statutes cited above the court has the authority to authorize the trustees to make this type of non pro-rata apportionment thus the proposed division and distribution of the stock trust assets among the z trusts will not result in a material difference in_kind or extent of the legal entitlements enjoyed by the beneficiaries within the meaning of cottage savings accordingly based upon the facts submitted and representations made we conclude that the division of the stock trust into the z great-grandchildren’s trusts will not result in the recognition of gain_or_loss under sec_1001 by the stock trust any beneficiary of the stock trust or any separate great-grandchild’s trust the rulings in this letter pertaining to the federal estate and or generation-skipping_transfer_tax apply only to the extent that the relevant sections of the internal_revenue_code are in effect during the period at issue 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 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours leslie h finlow acting senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosure copy for purposes


t c memo united_states tax_court lyle e hotchkiss petitioner v commissioner of internal revenue respondent docket no 23421-04l filed date paul r tom for petitioner william f castor for respondent memorandum opinion kroupa judge this collection review matter is before the court in response to a notice_of_determination concerning collection action s under sec_6320 and or determination notice the sole issue for decision is whether 1all section references are to the internal_revenue_code and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated the appeals officer engaged in a prohibited ex_parte_communication we conclude that he did not background this case was submitted fully stipulated under rule the stipulation of facts and the accompanying exhibits are incorporated by this reference petitioner is a dentist who resided in florida at the time he filed the petition petitioner failed to file income_tax returns for and and respondent issued petitioner deficiency notices respondent assessed the deficiencies in tax after petitioner failed to file a petition contesting the tax_liabilities petitioner filed returns for and but he failed to pay all of the reported tax due respondent examined the returns and proposed additional tax petitioner consented to assessment of the additional tax respondent sent petitioner a letter final notice-- notice_of_intent_to_levy and notice of your right to a hearing and a letter notice_of_federal_tax_lien filing and your right to a hearing regarding the unpaid liabilities for taxable years through in early date petitioner timely submitted a written request for a collection_due_process cdp hearing in addition respondent sent petitioner a levy notice for the through taxable years and again petitioner timely requested a cdp hearing respondent granted petitioner’s requests for a cdp hearing to address petitioner’s dollar_figure million outstanding tax_liability for taxable years through years at issue petitioner submitted a form_656 offer_in_compromise during the course of the cdp hearing petitioner offered to pay dollar_figure as a collection alternative to lien and levy action for the years at issue and to settle any deficiency for and in support of his offer-in-compromise oic petitioner submitted a form 433-a collection information statement for wage earners and self-employed individuals for himself and a form 433-b collection information statement for businesses for his dentistry practice island dental petitioner did not challenge the existence or amount of the underlying tax_liability the internal_revenue_service irs assigned appeals officer frank andreacchi ao andreacchi to handle petitioner’s collection review matters for the years at issue ao andreacchi forwarded the oic and petitioner’s supporting information to an offer specialist for recommendation the offer specialist examined petitioner’s forms 433-a and 433-b and their attachments financial documents and calculated a reasonable collection potential rcp of dollar_figure with a future income component of dollar_figure ao andreacchi separately reviewed the administrative file in petitioner’s case and learned that petitioner had been convicted for failure_to_file under sec_7203 for and for three 2all amounts are rounded to the nearest dollar counts of income_tax evasion under sec_7201 for through the administrative file also included records concerning a nominee lien filed in petitioner’s case the nominee lien involved real_property owned by petitioner’s ex-wife in sanibel florida sanibel property the administrative file included detailed information concerning petitioner’s continued control_over the sanibel property which he transferred to his ex-wife for dollar_figure shortly before their divorce ao andreacchi separately calculated an increased rcp of dollar_figure after reviewing this information the increase of dollar_figure reflected the sanibel property’s value ao andreacchi faxed these computations to petitioner’s counsel on date and requested a response by date ao andreacchi received a phone call from petitioner’s counsel within a few hours after the fax was sent ao andreacchi explained that the oic was significantly below the rcp as determined by the offer specialist he further explained that even if petitioner increased the offer to nearly dollar_figure he would require an independent offer examination because the offer specialist examined only the data provided by petitioner which did not include the sanibel property’s value ao andreacchi again requested that petitioner’s counsel contact him by date if petitioner intended to increase the oic petitioner’s counsel failed to submit an increased oic or to provide any new or updated information ao andreacchi received a voice mail message from special_agent miguel rivera of the irs criminal_investigation_division on date he returned special_agent rivera’s call later that day the parties stipulated that special_agent rivera asked ao andreacchi to provide copies of petitioner’s financial documents filed with the oic the parties further stipulated that ao andreacchi asked if he could continue to contact petitioner or petitioner’s counsel and special_agent rivera informed him that petitioner was not the subject of a criminal investigation at that time ao andreacchi then faxed petitioner’s financial documents to special_agent rivera ao andreacchi did not accept petitioner’s dollar_figure oic because it was significantly less than petitioner’s rcp of dollar_figure accordingly he sustained the proposed collection action to satisfy petitioner’s unpaid tax_liabilities for the seven years at issue in the determination notice issued date petitioner timely filed a petition to contest the determination notice discussion we now decide whether we should uphold the determination notice petitioner contends that the phone conversation between ao andreacchi and special_agent rivera constituted a prohibited ex_parte_communication we first discuss the cdp hearings generally and then turn to rules concerning ex_parte communications the commissioner may collect a tax by levy upon the property of the taxpayer liable therefor if the taxpayer neglects or refuses to pay the tax_liability within days after notice_and_demand for payment sec_6331 the commissioner generally must provide the taxpayer written notice of the right to a hearing before the levy is made sec_6330 upon a timely request the taxpayer is entitled to an administrative hearing before an impartial officer_or_employee of the appeals_office sec_6330 following the hearing the appeals officer must determine whether the collection action is to proceed taking into account the verification the appeals officer has made the issues raised by the taxpayer at the hearing and whether the collection action balances the need for the efficient collection_of_taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary sec_6330 we have jurisdiction to review the determination if we have jurisdiction over the type of tax involved in the case sec_6330 122_tc_287 we review under an abuse_of_discretion standard when the underlying tax_liability is not in issue 114_tc_176 under the abuse_of_discretion standard petitioner is required to show that respondent’ sec_3petitioner did not contest the existence or amount of his underlying tax_liabilities at the cdp hearing so we need not consider that issue see 129_tc_107 actions were arbitrary capricious or without sound basis in fact see 112_tc_19 respondent’s determination to proceed with collection was based on petitioner’s failure to increase his oic which was significantly lower than petitioner’s rcp petitioner contested the reasonableness of the rcp in his petition but has since abandoned the argument instead petitioner argues only that the conversation between ao andreacchi and special_agent rivera was a prohibited ex_parte_communication requiring that petitioner’s case be remanded to appeals for a new hearing we have held the commissioner abused his discretion when appeals’ independence was compromised by prohibited ex_parte communications 125_tc_201 moore v commissioner tcmemo_2006_171 accordingly we focus on whether any prohibited ex_parte_communication occurred that compromised ao andreacchi’s independence congress mandated that the irs prohibit ex_parte communications between appeals officers and other irs employees to the extent that such communications appear to compromise the independence of the appeals officers internal_revenue_service restructuring and reform act of publaw_105_206 112_stat_689 the commissioner has issued guidance to fulfill that congressional mandate and ensure an independent 4petitioner’s opening and reply briefs failed to address the reasonableness of the rcp accordingly arguments concerning the rcp have been abandoned see eg 117_tc_117 n appeals_office see revproc_2000_43 2000_2_cb_404 this guidance defines ex_parte communications as communications between irs appeals and another irs function without the participation of the taxpayer or the taxpayer’s representative see revproc_2000_43 sec_3 q a-1 c b pincite not all ex_parte communications are prohibited however ex_parte communications are allowed when the communications involve matters that are ministerial administrative or procedural in nature and do not address the substance of the issues or positions taken in the case id q a-5 and -6 c b pincite petitioner argues that the conversation between ao andreacchi and special_agent rivera was a prohibited ex_parte_communication he further argues that all semblance of impartiality in the appeals process disappeared when ao andreacchi spoke to special_agent rivera and became in effect a criminal investigator allied with the irs criminal_investigation_division he cites several cases where we have remanded matters to appeals after improper ex_parte communications concerning the merits of the case or the character of the taxpayer see drake v commissioner supra indus investors v commissioner tcmemo_2007_93 moore v commissioner supra all these cases are distinguishable moreover even petitioner fails to suggest that the communications between ao andreacchi and special_agent rivera were similar in nature to the communications in those cases instead he suggests that any communications between a gun- carrying special_agent and an appeals officer would automatically negate impartiality the communications in the cases petitioner cites are materially different from the communications at issue ao andreacchi and special_agent rivera did not discuss the substance of the issues or positions taken in the cdp case or their perceptions of the demeanor or credibility of petitioner or petitioner’s representative rather ao andreacchi carefully restricted his communication with special_agent rivera to mere administrative ministerial or procedural matters special_agent rivera requested petitioner’s financial documents and ao andreacchi agreed to fax the documents the mere request for information received from the taxpayer is an administrative ministerial or procedural matter see revproc_2000_43 sec_3 q a-5 in addition ao andreacchi asked if he could continue communicating with petitioner or petitioner’s counsel the dialogue concerning the status of the criminal investigation was relevant to whether ao andreacchi could proceed with petitioner’s cdp case in accordance with respondent’s procedures for coordinating and handling parallel civil and criminal cases it has long been the policy of the irs to defer civil assessment and collection until the completion of criminal proceedings 113_tc_206 citing 693_f2d_298 3d cir revg tcmemo_1981_404 and 535_fsupp_402 d n j affd 464_us_386 affd 9_fedappx_700 9th cir see 113_tc_145 n ao andreacchi was only complying with this policy when he asked if he could continue speaking to petitioner or petitioner’s counsel congress did not mandate a major redesign of the fundamental processes appeals has traditionally followed when it directed the irs to address ex_parte communications revproc_2000_43 sec_2 c b pincite accordingly we find the ex_parte_communication in which ao andreacchi learned from special_agent rivera that petitioner was not then under criminal investigation to be an administrative ministerial or procedural matter petitioner argues however that any call from a special_agent of the irs criminal_investigation_division would alert an appeals officer that the taxpayer in question might be a criminal and would appear to compromise the independence of appeals see revproc_2000_43 sec_3 q a-1 petitioner provides no support for creating such a sweeping general_rule and we find no indication that irs criminal_investigation_division employees are to be treated differently from other irs employees in addition we find petitioner’s argument unpersuasive given the facts ao andreacchi’s independence was not compromised nor did it give the appearance of having been compromised by his communication with special_agent rivera ao andreacchi had already informed petitioner’s counsel that he was rejecting the oic because it was significantly below the rcp calculated by the offer specialist he had also alerted petitioner’s counsel that the value of the sanibel property should be included in the rcp and an independent offer investigation would be necessary if petitioner increased his oic petitioner did not increase the oic or further communicate with ao andreacchi before the deadline accordingly ao andreacchi issued the determination notice to petitioner on date rejecting petitioner’s oic and sustaining the proposed collection activity we fail to see how ao andreacchi’s independence was compromised or appeared to be compromised by his communication with special_agent rivera further ao andreacchi was aware of petitioner’s criminal convictions for several of the years at issue before speaking with special_agent rivera he was also aware of the questions in connection with the nominee lien on the sanibel property and he included the value of the sanibel property in the rcp in addition ao andreacchi and special_agent rivera did not discuss the purpose of special_agent rivera’s request we again fail to see how ao andreacchi’s independence was or appeared to be compromised we have reviewed the entire record and find that the communication between ao andreacchi and special_agent rivera did not constitute an impermissible ex_parte_communication because it was ministerial administrative or procedural in nature and did not compromise nor give the appearance of compromising ao andreacchi’s independence accordingly we sustain the determinations in the determination notice that collection may proceed to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc psi b01 cor-117130-01 date date index number number info release date this responds to your date letter concerning subchapter_s_election from the information provided i understand that as a subchapter_s_corporation effective date the subchapter_s_election form however was not timely filed for the taxable_year and the internal_revenue_service service treated the election as made for the following taxable_year you inquire as to whether relief is available at this time to treat the election as timely made for the year intended to be treated generally sec_1362 of the internal_revenue_code the code allows the service to treat an untimely subchapter_s_election as timely if the service determines that there was reasonable_cause for the failure to timely make the election revproc_97_48 1997_43_irb_19 and revproc_98_55 1998_46_irb_27 grant automatic relief under sec_1362 for certain late s_corporation elections for taxpayers not eligible for automatic relief under these revenue procedures a private_letter_ruling request is necessary to obtain relief under sec_1362 however the service will not ordinarily issue a private_letter_ruling if the period of limitations on assessment under sec_6501 has lapsed for any taxable_year for which an election should have been made or any taxable_year that would have been affected by the election had it been timely made as indicated in your letter relief under either revproc_97_48 or revproc_98_55 in addition the period of limitations on assessment under sec_6501 has expired for the taxable_year as such it is unlikely that relief would be granted if a private_letter_ruling request was submitted i am unaware of any other provision or authority that would allow for relief under your circumstances does not appear to be eligible for automatic cc psi b01 cor-117130-00 if you have any further questions please contact me or shannon cohen at sincerely s dianna k miosi dianna k miosi chief branch associate chief_counsel passthroughs and special industries


internal_revenue_service number release date index number ----------------------------------------------------------- ------------ -------------------------------------------------------- ------------------------------------------------ ------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------- id no ----------------- telephone number --------------------- refer reply to cc psi plr-124449-15 re ---------------------------------- -------- 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-124449-15 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-124449-15 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-124449-15 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-124449-15 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


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-102229-08 date july legend grantor_trust husband date company company exchange a b c d dear ---------------- ------------------------------------------------ ------------------------------------------------------------------------------------ ----------------------- ---------------------- -------------------------- ------------ -------- ------------------------------------ ---- ----- -------------- ---- this is in response to your date letter and other correspondence requesting income gift and estate_tax rulings concerning the proposed exercise of a power of substitution the facts submitted are as follows on date grantor executed trust grantor’s husband husband serves as the initial trustee of trust and will also serve as the initial trustee of family_trust discussed later sec_1 1a of trust provides that the trustee is to hold administer and dispose_of trust as provided in article i it is intended that grantor’s retained annuity interest qualify as a qualified_interest as defined in sec_2702 of the internal_revenue_code plr-102229-08 sec_1 1b defines annuity as an amount equal to a less than of the initial net fair_market_value of the principal of trust as finally determined for federal gift_tax purposes sec_1 1c provides that the grat term begins on the day property is contributed to trust and expires on the second anniversary of that date sec_1 1d provides in relevant part that no additional contributions are to be made to trust under this agreement after the initial contribution and prior to the expiration of the grat term although no additional contributions may be made to trust if any transfer is deemed made to the trustee such deemed additional transfer is to be held by the trustee in a separate trust upon the same terms and conditions as the original contribution to trust and such transfer shall not form a part of trust sec_1 2a provides that the trustee is to pay on the day before each anniversary of the initial funding or within b days thereafter i the annuity to grantor if grantor is then living or ii the greater of the income of the trust and the annuity to grantor’s estate if grantor is deceased the trustee is prohibited from issuing a note other debt_instrument option or similar financial arrangement in satisfaction of the obligation to pay the annuity the instrument provides for a daily proration of the annuity between grantor and grantor’s estate for the period in which grantor’s death occurs sec_1 2b provides that the payments to be made under the provisions of subsection a are to be paid from the income of trust and to the extent that such income is not sufficient from the principal of trust if income for any year is in excess of the aggregate payments for such year such excess income is to be added to principal sec_1 provides in relevant part that trust terminates upon the expiration of the grat term upon termination if grantor and husband are then living the trustee is directed to retain the trust property in a separate trust the family_trust upon the following terms and conditions during husband’s lifetime the trustees may distribute to grantor’s issue as much of the trust property as trustees determine for any reason not prohibited by trust any income not distributed within d days of the end of a calendar_year are to be added to principal upon husband’s death the trustees are to distribute the trust property to any one or more persons or entities excluding husband’s creditors his estate or the creditors of his estate in such amounts or proportions and upon such terms conditions or trusts as husband appoints by will containing an express reference to this power_of_appointment the trustees are to distribute any unappointed trust property to grantor’s issue per stripes plr-102229-08 sec_1 further provides that if grantor is then living but husband is then deceased the trustee is directed to distribute the trust property to grantor’s issue per stirpes if grantor is then deceased and if husband survives grantor regardless of whether he is living when trust terminates the trustee is directed to distribute the trust property to husband or his estate as the case may be if grantor is then deceased and if husband fails to survive grantor the trustee is directed to distribute the trust property to grantor’s issue per stirpes sec_2 provides in relevant part that grantor’s primary purpose is to have the retained annuity interest meet the requirements of a qualified_interest as defined in sec_2702 and sec_25_2702-3 of the gift_tax regulations the trustees are not to exercise any power authority or discretion if the effect of such exercise would be to defeat such purposes in furtherance of such purpose sec_2 4a prohibits the trustees from making a distribution of trust property to anyone other than grantor or her estate and sec_2 4b prohibits commutation of the interest of grantor or grantor’s estate in trust pursuant to article ii of trust the trustee has broad powers to invest dispose_of and otherwise deal with property in trust whether originally contributed to trust or previously substituted into trust by grantor without the approval or consent of any other person sec_4 provides in relevant part that grantor may acquire any or all property constituting trust principal by substitution of other_property of equivalent value to the property acquired measured on the date of substitution grantor may exercise this power without the consent of trustees the power to acquire trust property may be exercised only in a fiduciary capacity action in a fiduciary capacity means action that is undertaken in good_faith and in the best interests of trust and its beneficiaries and subject_to fiduciary standards imposed under applicable state law the trust further provides that property is of equivalent value if the fair_market_value for federal gift_tax purposes of property removed from the trust equals the fair_market_value for federal gift_tax purposes of property placed in the trust grantor intends to fund trust with shares of company shares of company and cash valued at approximately dollar_figurec it is represented that company and company are publicly traded on exchange grantor proposes to exercise her power of substitution from time to time by transferring into trust additional shares of company in exchange for shares of company or additional shares of company in exchange for shares of company and or cash equivalents or other publicly_traded_securities in all cases grantor either will transfer to or receive from trust cash or cash equivalents in an amount necessary such that the total value of the assets transferred into trust equal the total value removed from trust incident to the exercise of the power of substitution plr-102229-08 it is represented that the present_value of the right to receive trust corpus on the termination of the grat term determined in accordance with sec_7520 exceeds of the initial fair_market_value of the property transferred to trust it is also represented that the administrative and miscellaneous provisions of trust including sec_4 also apply to family_trust you have requested the following rulings neither the existence nor the exercise of the power of substitution disqualifies grantor’s retained_interest as a qualified_interest under sec_2702 the gift_tax value of the company shares and the company shares will be determined in accordance with sec_25_2512-2 by valuing each stock at the mean between its highest and lowest quoted selling_price on exchange on the date of substitution grantor’s exercise of the power of substitution will not constitute a gift to trust for gift_tax purposes if the value of assets transferred to trust equals the total value of assets transferred from trust trust is a grantor_trust in its entirety with respect to grantor both during the grat term and after its expiration neither grantor nor trust will recognize any income or loss by reason of the exercise of the power of substitution ruling sec_2702 provides that solely for purposes of determining whether a transfer of an interest in trust to or for the benefit of a member_of_the_transferor's_family is a gift and the value of the transfer the value of any interest in the trust retained by the transferor or any applicable_family_member as defined in sec_2701 shall be determined as provided in sec_2702 sec_2702 provides that the value of any retained_interest which is not a qualified_interest shall be treated as being zero sec_2702 defines a qualified_interest as any interest which consists of the right to receive fixed amounts payable not less frequently than annually any interest which consists of the right to receive amounts which are payable not less frequently than annually and are a fixed percentage of the fair_market_value of the property in the trust determined annually and any noncontingent remainder_interest if all of the other interests in the trust consist of interests described in or above plr-102229-08 sec_25_2702-3 provides that an interest is a qualified_annuity_interest only if it meets the requirements of sec_25 b and d sec_25_2702-3 provides generally that a qualified_annuity_interest is an irrevocable right to receive a fixed amount the annuity amount must be payable to or for the benefit of the holder of the annuity interest at least annually a right of withdrawal whether or not cumulative is not a qualified_annuity_interest in this case under sec_4 of trust grantor has retained the power to acquire trust property by substituting other_property of equivalent value to the property acquired measured at the time of substitution under the terms of trust grantor's power to acquire trust property under this section may only be exercised in a fiduciary capacity based on the facts presented and the representations made we conclude that neither the existence nor the exercise of the power of substitution as described above disqualifies grantor’s retained_interest under sec_2702 ruling and sec_2501 imposes a tax on the transfer of property by gift by an individual sec_2511 provides that the tax imposed by sec_2501 applies 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_2512 provides that if a gift is made in property the value thereof at the date of the gift shall be considered the amount_of_the_gift sec_2512 provides that where property is transferred for less than an adequate_and_full_consideration in money_or_money's_worth then the amount by which the value of the property exceeded the value of the consideration is deemed to be a gift and is included in computing the amount of gifts made during the calendar_year however under sec_25_2512-8 a transaction which is bona_fide at arm's length and free from any donative_intent will be considered as made for an adequate_and_full_consideration in money_or_money's_worth under sec_25_2512-1 the value of property for gift_tax purposes is the price at which such property would change hands between a willing buyer and willing seller neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts sec_25_2512-2 provides that in general if there is a market for stocks or bonds on a stock exchange in an over-the-counter market or otherwise the mean between the highest and lowest quoted selling prices on the date of the gift is the fair_market_value per share or bond in this case under the terms of trust grantor may substitute property of equivalent value for trust property grantor proposes to transfer additional shares of company for shares of company that trust currently holds or additional shares of plr-102229-08 company for shares of company that trust currently holds in addition if necessary grantor will transfer to or withdraw from trust cash or cash equivalents or other publicly_traded_securities in an amount necessary to make the total value of the assets transferred to trust equal to the total value of the assets withdrawn from trust as a result of the substitution it is represented that the value of the company stock and the company stock subject_to the proposed exchange will be determined in accordance with sec_25_2512-2 as of the date of the exchange based on the facts presented and the representations made we conclude that the exercise by grantor of the power of substitution will not constitute a gift to trust for gift_tax purposes if the total fair_market_value of assets transferred to trust equals the total fair_market_value of assets transferred from trust ruling sec_4 and sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter in computing taxable_income or credits against the tax of an individual sec_672 provides in general that a grantor shall be treated as holding any power or interest held by any individual who was the spouse of the grantor at the time of the creation of such power or interest sec_673 provides in general that the grantor shall be treated as the owner of any portion of a_trust in which he has a reversionary_interest in either the corpus or income therefrom if as of the inception of that portion of the trust the value of such interest exceed sec_5 percent of the value of such portion sec_674 provides in general that the grantor shall be treated as the owner of any portion of a_trust in respect of which the beneficial_enjoyment of the corpus or the income therefrom is subject_to a power of disposition exercisable by the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_1_671-3 of the income_tax regulations provides in part that a grantor includes both ordinary_income and other income allocable to corpus in the portion he is treated as owning if he is treated under sec_674 or sec_676 as an owner because of a power over corpus which can affect income received such that he would be treated as an owner under sec_673 if the power were a reversionary_interest revrul_85_13 1985_1_cb_184 concludes that if a grantor is treated as the owner of a_trust the grantor is considered to be the owner of the trust assets for federal plr-102229-08 income_tax purposes a grantor’s receipt of the corpus of a_trust in exchange for an unsecured promissory note was treated as an unsecured borrowing of the trust corpus which caused the grantor to be treated as the owner of the trust under sec_675 the transfer of the trust assets in exchange for the note was not recognized as a sale for federal income purposes assuming the present_value of the interest determined under sec_7520 which will pass to the family_trust if both grantor and husband survive the grat term is more than of the total value of the property contributed to trust and based solely on the facts and representations submitted we conclude that trust and family_trust will each be grantor trusts all of which is treated as owned by grantor under sec_671 and sec_674 during grantor’s life because of husband’s power as trustee of family_trust to distribute income and principal among grantor’s issue none of the exceptions to sec_674 described in sec_674 c or d are applicable grantor’s exercise of the power to substitute trust or family_trust assets therefore will not result in the recognition of any gain_or_loss by grantor_trust or family_trust for federal_income_tax purposes in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives 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 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 plr-102229-08 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely george l masnik chief branch office of the associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter


department of the treasury internal_revenue_service number release date index number person to contact telephone number refer reply to cc psi - plr-135420-01 date date washington dc x a b d1 year dear this letter responds to a letter dated date and additional correspondence submitted on behalf of x by x’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 of year a and b are the shareholders of x a the president of x represents that it was always intended for x to be an s_corporation however according to the service_center no timely completed form_2553 election by a small_business_corporation was filed on behalf of x for year sec_1362 of the code provides that if -- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year plr-135420-01 based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x’s first taxable_year accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x’s year taxable_year a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely yours matthew lay senior technician reviewer office of the associate chief_counsel passthroughs and special industries branch enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c date number release date cc dom fs proc tl-n-2360-00 uilc internal_revenue_service national_office field_service_advice memorandum for district_counsel district_counsel north florida cc ser nfl jax from subject assistant chief_counsel field service cc dom fs proc request for chief_counsel_advice issuance of statutory_notice_of_deficiency to successor_corporation this chief_counsel_advice responds to your memorandum dated date chief_counsel_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend a b c d date date statute issue to which party should the internal_revenue_service service issue the statutory_notice_of_deficiency conclusion the service should issue the statutory_notice_of_deficiency to b as successor_in_interest to a facts a was incorporated in state c b is a taxable corporation organized under tribal law b was incorporated on date when the certificate of incorporation was filed with the secretary of d the articles of merger dated date between a and b were prepared and filed with the secretary of state of state c the articles of merger provide that a will merge into b with b the surviving entity the articles further provide that b shall succeed to all the rights privileges immunities and franchises and all the property real personal and mixed of a without the necessity for any separate transfer and that b shall be responsible and liable for all obligations of a and neither the rights of the creditors nor any liens on the property of a shall be impaired by the merger statute renders the surviving corporation responsible and liable for all the liabilities and obligations of each corporate party to the merger a filed its final return for the short_year ending date it is this period for which the service wishes to issue a statutory_notice_of_deficiency for a’s tax_liability law and analysis the statutory_notice_of_deficiency for a’s tax_liability for the short_year ending date should be issued to b as successor_in_interest to a case development hazards and other considerations none if you have any further questions please call the branch telephone number


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 ita b05 plr-117881-08 date date taxpayer ---------------------------------------- --------------------------------------- year -------- dear -------------------- this ruling is in reference to the taxpayer’s request that its form_1128 application to adopt change or retain a tax_year be considered timely filed under the authority in sec_301_9100-3 of the income_tax regulations on procedures and administration taxpayer filed a late form_1128 to change its accounting_period for federal_income_tax purposes from a taxable_year ending december to a taxable_year ending august effective august year revproc_2006_45 2006_2_cb_851 provides procedures for certain corporations to obtain automatic approval to change their annual_accounting_period under sec_442 of the internal_revenue_code a corporation complying with all the applicable provisions of this revenue_procedure will be deemed to have obtained the approval of the commissioner of the internal_revenue_service to change its annual_accounting_period section of revproc_2006_45 provides that a form_1128 filed pursuant to the revenue_procedure will be considered timely filed for purposes of sec_1_442-1 of the income_tax regulations only if it is filed on or before the time including extensions for filing the return for the short_period required to effect such change the information furnished indicates that the taxpayer did not file its form_1128 by the due_date of the return for the short_period required to effect such change however the taxpayer filed its form_1128 under sec_301_9100-3 soon thereafter sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions such as the instant case must be made under the rules of sec_301_9100-3 request for plr-117881-08 relief subject_to 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 the granting of relief will not prejudice the interest of the government based on the facts and information submitted and the representations made we conclude that taxpayer has acted reasonably and in good_faith and that the granting of relief will not prejudice the interest of the government accordingly taxpayer has satisfied the requirements of the regulations for the granting of relief and taxpayer’s late filed form_1128 requesting to change to august effective august year is considered timely filed because a change in period under revproc_2006_45 is under the jurisdiction of the director internal_revenue_service center where the taxpayer’s returns are filed we have forwarded the application to the director ------------------service center any further communication regarding this matter should be directed to the service_center this ruling is based upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling however as part of an examination process the service may verify the factual information representations and other data submitted this ruling addresses the granting of sec_301_9100-3 relief only we express no opinion regarding the tax treatment of the instant transaction under the provisions of any other section of the code or the regulations that may be applicable or regarding the tax treatment of any conditions existing at the time of or effects resulting from the instant transaction specifically we express no opinion as to whether the taxpayer is permitted under the code and applicable regulations to change to the tax_year requested in the form_1128 or whether the change may be effected under revproc_2006_45 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 plr-117881-08 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 enclosed is a copy of the letter_ruling showing the deletions proposed to be made when it is disclosed under sec_6110 sincerely yours george f wright senior technician reviewer branch income_tax accounting office_of_chief_counsel