internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp 2-plr-116161-99 date date legend acquiring target fund state x state y this letter responds to your representative’s date request for rulings under sec_368 of the internal_revenue_code on behalf of the above- captioned taxpayers additional information with respect to the proposed transaction was submitted in letters dated date and date the information submitted for consideration is summarized below acquiring is organized under the laws of state x and registered under the investment_company act of the act as a non-diversified closed-end management investment_company acquiring has elected to be taxed as a regulated_investment_company ric under of the internal_revenue_code the code acquiring’s investment objective is to provide shareholders with high income exempt from federal_income_tax and state y personal income taxes acquiring seeks to achieve its investment objective by investing primarily in a portfolio of long-term investment grade municipal obligations issued by or on behalf of state y its political subdivisions agencies and instrumentalities and by other qualifying issuers that pay interest which in the opinion of bond counsel to the issuer is exempt from federal_income_tax and state y personal income taxes acquiring currently has outstanding voting common_stock and one series of voting preferred_stock target fund is organized under the laws of state x and registered under the investment_company act of the act as a non-diversified closed-end plr-116161-99 management investment_company target fund has elected to be taxed as a ric under code like acquiring target fund's investment objective is to provide shareholders with current income exempt from federal_income_tax and state y personal income taxes target fund seeks to achieve its investment objective by investing primarily in a portfolio of long-term investment grade municipal obligations issued by or on behalf of state y its political subdivisions agencies and instrumentalities and by other qualifying issuers that pay interest which in the opinion of bond counsel to the issuer is exempt from federal_income_tax and state y personal income taxes target fund currently has outstanding voting common_stock and one series of voting preferred_stock acquiring and target fund have entered into an agreement and plan_of_reorganization for what are represented to be valid business reasons pursuant to the agreement the transaction consists of the following steps target fund will transfer all of its assets and liabilities to acquiring in exchange for an equal value of newly issued acquired common voting_stock and non- qualified preferred_stock target fund will distribute to their shareholders all of the acquiring stock received in the transaction each target fund shareholder will receive shares of acquiring on a pro_rata basis target fund will liquidate and dissolve in accordance with the laws of state x and terminate its registration under the act the following representations have been made in connection with the proposed transaction a the fair_market_value of the acquiring stock received by target fund shareholders will be approximately equal to the fair_market_value of the target fund stock surrendered in the exchange c acquiring will acquire at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets held by target fund immediately prior to the reorganization for purposes of this representation amounts paid_by target fund to dissenters amounts used by target fund to pay its reorganization expenses amounts paid_by target fund to shareholders who receive cash or other_property and all redemptions and distributions except for redemptions in the ordinary course of target fund’s business as an closed-end investment_company as required by sec_22 of the act pursuant to a demand of a shareholder and regular normal dividends made by target fund immediately preceding the transfer will be included as assets of target fund held immediately prior to the transaction plr-116161-99 d acquiring has no plan or intention to reacquire any of its stock issued in the transaction e acquiring has no plan or intention to sell or otherwise dispose_of any of the assets of target fund acquired in the transaction except for dispositions made in the ordinary course of business or transfers described in sec_368 of the code f target fund will distribute to its shareholders the stock of acquiring received pursuant to the plan_of_reorganization g the liabilities of target fund assumed by acquiring and any liabilities to which the transferred assets of target fund are subject were incurred by target fund in the ordinary course of its business h following the reorganization acquiring will continue the historic_business of target fund or use a significant portion of target fund’s historic_business_assets in the continuing business i target fund acquiring and the shareholders of target fund will pay their respective expenses if any incurred in connection with the reorganization j there is no intercorporate indebtedness existing between target fund and acquiring that was issued acquired or will be settled at a discount k target fund and acquiring qualify as a regulated_investment_companies as defined in sec_368 and ii of the code l the fair_market_value of the assets of target fund transferred to acquiring will equal or exceed the sum of the liabilities assumed by acquiring m acquiring does not own directly or indirectly nor has it owned during the past five years directly or indirectly any stock of target fund n cash is being distributed to shareholders of target fund in lieu of fractional shares of acquiring solely to save acquiring the expense and inconvenience of issuing and transferring fractional shares and such cash does not represent separately bargained for consideration in the reorganization the total cash consideration that will be paid in each transaction between acquiring and target fund to the target fund shareholders instead of issuing fractional shares of acquiring stock will not exceed one percent of the total consideration that will be issued in the transaction to target fund shareholders in exchange for their shares of target fund stock the fractional share interests of each shareholder of target fund will be aggregated and no target shareholder will receive cash in an amount equal to or greater than the value of one full share of acquiring stock plr-116161-99 o target fund is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 p target fund and acquiring have elected to be taxed as rics under sec_851 and for all of their taxable periods including the last short taxable_period ending on the date of reorganization for target fund have qualified for the special tax treatment afforded rics under the code after the reorganization acquiring intends to continue to so qualify q there is no plan or intention by acquiring or any person related as defined in sec_1_368-1 to acquiring to acquire any of the stock of acquiring issued in the transaction either directly or through any transaction agreement or arrangement with any other person r during the five-year period ending on the date of the proposed transaction target fund nor any person related to target fund as defined in sec_1_368-1 of the income_tax regulations without regard to sec_1_368-1 will have directly or through any transaction agreement or arrangement with any other person i acquired stock of target fund with consideration other than shares of acquiring or target fund or ii made distributions with respect to target fund stock except for a distributions described in sec_852 and sec_4982 of the code and b additional distributions to the extent such distributions do not exceed percent of the value without giving effect to such distributions of the proprietary interest in target fund on the effective date of the proposed transaction s prior to or in the transaction neither acquiring nor any person related to acquiring as defined in e will have acquired directly or through any transaction agreement or arrangement with any other person stock of target fund with consideration other than shares of acquiring t acquiring and target fund is incorporated under the laws of state x and is registered under the investment_company act of act as non-diversified leveraged closed-end investment companies non-diversified within the meaning of the act means that investment companies are not limited in the proportion of assets that they may invest in the securities of a single issuer acquiring and the target fund are however managed so as to meet the diversification requirements of sec_851 of the code and qualify for tax treatment as rics u there is no plan or intention for acquiring the issuing_corporation as defined in sec_1_368-1 or any person related as defined in sec_1_368-1 to acquiring to acquire during the five year period beginning on the date of the proposed transaction with consideration other than acquiring stock acquiring stock furnished in exchange for a proprietary interest in target fund in the proposed transaction either directly or through any transaction agreement or arrangement with any other person except for plr-116161-99 cash distributed to the target fund’s common shareholders in lieu of fractional shares of acquiring common_stock v during the five year period ending on the date of the proposed transaction i neither acquiring nor any person related as defined in sec_1_368-1 to acquiring will have acquired target fund’s stock cid with consideration other than acquiring stock ii target fund nor any person related as defined in sec_1_368-1 determined without regard to sec_1_368-1 to target fund will have acquired such target fund’s stock with consideration other than acquiring stock or target fund’s stock and iii no distributions will have been made with respect to target fund’s stock other than ordinary normal regular dividend distributions made pursuant to target’s historic dividend paying practice either directly or through any transaction agreement or arrangement with any other person except for a cash paid to dissenters and b distributions described in sec_852 and sec_4982 of the code as required for target fund’s tax treatment as a ric w the aggregate value of the acquisitions redemptions and distributions discussed in paragraphs u and v above will not exceed percent of the value without giving effect to the acquisitions redemptions and distributions of the proprietary interest in target fund on the effective date of the proposed transaction x the acquiring preferred_stock received by target fund preferred stockholders will be substantially identical as defined in prop sec_1_356-7 sec_65 fed reg to the target fund preferred_stock surrendered in exchange therefor based solely upon the information and representations set forth above we hold as follows the acquisition by acquiring of substantially_all of the assets of target fund solely for acquring voting_stock and the assumption by acquiring of the liabilities of target fund as described above will qualify as a reorganization within the meaning of sec_368 of the code substantially_all means at least of the fair_market_value of the net assets and at least of the fair_market_value of the gross assets of target fund acquiring and target fund will each be a_party_to_a_reorganization within the meaning of sec_368 no gain_or_loss will be recognized by target fund upon the transfer of substantially_all of its assets to acquiring solely in exchange for acquiring voting common_stock sec_361 no gain_or_loss will be recognized by target fund upon the distribution of such acquiring stock to target fund shareholders sec_361 acquiring will not recognize any gain_or_loss on the receipt of the assets of plr-116161-99 target fund in exchange for voting shares of acquiring sec_1032 the basis of target fund assets in the hands of acquiring will be the same as the basis of those assets in the hands of target fund immediately prior to the exchange sec_362 the holding_period of target fund assets in the hands of acquiring will include the period during which such assets were held by target fund sec_1223 the common and preferred shareholders of target fund will not recognize any gain_or_loss on their receipt of common and preferred_stock of acquiring including fractional share interests to which they may be entitled solely in exchange for their target fund shares as described above sec_354 the basis of the acquiring shares including fractional share interests to which they may be entitled received by target fund shareholders will be the same as the basis of the target fund shares surrendered in exchange therefor sec_358 the holding_period of the acquiring shares including fractional share interests to which they may be entitled received by target fund shareholders in exchange for their target fund shares will include the period during which the exchanged target fund shares were held provided that the target fund shares are held as a capital_asset in the hands of the target fund shareholders on the date of the exchange sec_1223 the payment of cash to target fund shareholders in lieu of fractional shares of acquiring will be treated as though the fractional shares were distributed as part of the reorganization and then redeemed by acquiring the cash payment will be treated as a distribution in full payment for the fractional shares deemed redeemed under sec_302 with the result that target fund shareholders will have short-term or long-term_capital_gain or loss to the extent that the cash distribution differs from the basis allocable to their fractional shares pursuant to sec_381 of the code and sec_1_381_a_-1 of the income_tax regulations the tax_year of target fund will end on the effective date of the transfer acquiring will succeed to and take into account the items of target fund described in sec_381 of the code subject_to the provisions and limitations specified in sec_381 sec_382 sec_383 and sec_384 of the code and the regulations thereunder no opinion is expressed about the federal_income_tax treatment of the proposed plr-116161-99 transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings 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 specifically no opinion was requested and none is expressed about whether acquiring or target fund qualify as rics that are taxable under subchapter_m part i of the code this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant sincerely assistant chief_counsel corporate by lewis k brickates assistant to chief branch


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 b03 plr-112114-08 date september x a b c legend ---------------------------------------- ---------------------------------------------- ----------------------- -------------------------- ------------------------------- --------------------- country --------- d1 d2 --------------------- --------------------- dear ------------ this letter responds to a letter dated date and subsequent correspondence written on behalf of x requesting a ruling under sec_301_9100-3 of the procedure and administration regulations facts x was formed under the laws of country x represents that it is a foreign_entity eligible to elect to be classified as a disregarded_entity for federal tax purposes x was a wholly-owned subsidiary of a a country corporation b a country corporation acquired a through a subsidiary entity c on d1 upon b’s acquisition of a it was plr-112114-08 intended that x would be treated as a disregarded_entity effective d2 however due to inadvertence a form_8832 entity classification election to treat x as a disregarded_entity effective d2 was not timely filed law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an entity separate from its owner sec_301_7701-3 provides in part that except as provided in sec_301_7701-3 unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 entity classification election with the service_center designated on form_8832 sec_301_7701-3 provides that an election under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed if an election specifies an effective date more than days prior to the date on which the election is filed it will be effective days prior to the date it was filed sec_301_9100-1 provides that the commissioner may 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 not more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-2 provides the standards the commissioner will use to determine whether to grant an automatic_extension of time for making certain elections plr-112114-08 sec_301_9100-3 provides the guidelines for granting extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301 a provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that x has satisfied the requirements of sec_301 and sec_301_9100-3 as a result x is granted an extension of sixty days from the date of this letter to file a properly executed form_8832 with the appropriate service_center to elect to be classified as a disregarded_entity effective d2 a copy of this letter should be attached to the form_8832 except as specifically set forth above we express no opinion concerning the federal tax consequences of the above described facts under any other provision of the internal_revenue_code in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely s william p o’shea associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b09 plr-153611-01 date date re legend original trust date decedent spouse daughter son state date year year grandchildren successor trust successor trust trustee probate_court date plr-153611-01 dear in a letter dated date you requested rulings concerning the income and generation-skipping_transfer gst tax consequences of a judicial division and modification of an irrevocable_trust into two separate and equal successor trusts this letter responds to your request the information submitted and the representations made are summarized as follows on date decedent created an irrevocable living_trust under the laws of state the original trust for the benefit of spouse daughter and son decedent died on date article ninth paragraph three of the original trust provides that during spouse’s lifetime the trustee shall pay to spouse as often as quarterly one-half of the net_income of the trust article ninth paragraph five provides that upon each child reaching age twenty- one the trustee may advance to either daughter or son out of the share of principal from which each child is receiving income such part of the trust principal as the trustee deems necessary or advisable for the benefit of such child provided the trustee reduces such child’s income payments accordingly article ninth paragraph seven provides that upon spouse’s death the trustee shall segregate the original trust’s income into two equal shares one for daughter and one for son article ninth paragraph eight provides that in the event of the death of either daughter or son during the life of the trust estate such deceased child’s share of income shall be paid to his or her descendants per stirpes article ninth paragraph nine provides that the original trust shall continue until the death of the survivor of spouse daughter and son at the death of such survivor the original trust will terminate and the remaining trust property will be distributed to the then-surviving descendants per stirpes of daughter and son if one of decedent’s children is not survived by descendants the entire trust estate will be distributed to the then-surviving descendants of the other child article ninth paragraph ten provides that if at the termination of the original trust neither daughter son nor any of their descendants are surviving the remaining trust property will be distributed to decedent’s brother if decedent’s brother is not surviving the property will be distributed to daughter and son’s heirs at law in accordance with the laws of descent of state plr-153611-01 spouse died in year son died in year survived by six children the grandchildren and their descendants daughter is now years old and has no descendants trustee asserts that the respective interests of daughter and the descendants of son have become divergent and are now in conflict with respect to the investment of trust assets and the distribution of income to resolve any differences the income beneficiaries the adult contingent income and remainder beneficiaries and the minor unborn or otherwise unascertained beneficiaries through their guardian ad litem agreed to a judicial division of the original trust into two separate and equal successor trusts successor trust and successor trust this division reflects the current income beneficiaries’ respective beneficial interests in the original trust pursuant to the agreement each of the successor trusts will assume an equal share of all outstanding liabilities of the original trust successor trust will be administered under the terms of the original trust successor trust however will be modified to provide for payment to son’s descendants of an annual amount equal to the greater of i the entire net_income of the trust or ii the total annual return amount the total annual return amount will be determined by multiplying the average fair_market_value of the trust corpus of successor trust as of the last day of the preceding three calendar years less any liabilities of the trust for such preceding years and any undistributed amounts of income attributable to the preceding year by four percent provided however that the fair_market_value of the trust corpus for the years and shall be deemed to be one-half the fair_market_value of the original trust for the years and following the approval of the agreement by the various beneficiaries trustee submitted a petition to the probate_court seeking approval of the agreement on date the probate_court issued a preliminary order approving the agreement pursuant to the preliminary order the judicial division and modification of the original trust will become effective upon receipt of a favorable ruling from the internal_revenue_service the probate court’s preliminary order also requires trustee to file a petition and proposed final order within thirty days following the receipt of a favorable private_letter_ruling regarding the tax consequences of the changes described in the agreement in addition to the aforementioned facts trustee represents that no other changes are to be made to the original trust and there have been no actual or constructive additions to the original trust after date based on the foregoing you have requested the following rulings the original trust is exempt from gst tax because it became irrevocable on or before date and no additions actual or constructive have been made to the original trust since that date plr-153611-01 the implementation of the court-approved division of the original trust into successor trust and successor trust and the modification of successor trust will not cause the original trust the two successor trusts or any distributions therefrom to be subject_to the gst tax the proposed division and modification of the original trust will not constitute taxable dispositions of trust assets by the original trust or the two successor trusts or of interests in the original trust by any of the beneficiaries of the original trust or the two successor trusts for purposes of sec_1001 of the internal_revenue_code ruling sec_1 and sec_2601 imposes a tax on every generation-skipping_transfer sec_2611 defines the term generation-skipping_transfer as a taxable_distribution a taxable_termination and a direct_skip sec_26_2601-1 of the generation-skipping_transfer_tax regulations provides that except as otherwise provided in sec_26_2601-1 the provisions of chapter of the internal_revenue_code_of_1986 apply to any generation-skipping_transfer as defined in sec_2611 made after date sec_26_2601-1 provides that the gst tax provisions do not apply to any generation-skipping_transfer under a_trust as defined in sec_2652 that was irrevocable on date this rule does not apply to a pro_rata portion of any generation-skipping_transfer under an irrevocable_trust if additions are made to the trust after date sec_26_2601-1 provides that unless otherwise provided in either sec_26_2601-1 or c any trust in existence on date is considered an irrevocable_trust sec_26_2601-1 provides the rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax under sec_26_2601-1 or will not cause the trust to lose its exempt status 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 the provisions of 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 plr-153611-01 and reflects the parties’ assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes sec_26_2601-1 provides that a judicial construction of a governing instrument to resolve an ambiguity in the terms of the instrument or to correct a scrivener’s error will not cause an exempt trust to be subject_to the provisions of chapter if - the judicial action involves a bona_fide issue and the construction is consistent with applicable state law that would be applied by the highest court of the state sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy sec_26_2601-1 b or c by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust sec_26_2601-1 provides that for purposes of sec_26 b i d a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust sec_26_2601-1 provides that any trust in existence on date will be considered an irrevocable_trust except as provided in sec_26 b ii b or c which relate to property includible in the decedent’s gross_estate under sec_2038 and sec_2042 in the present case the original trust is considered to have been irrevocable on date because neither sec_2038 nor sec_2042 apply consequently with regard to ruling we conclude that the original trust is not subject_to the gst tax because it satisfies all of the requirements set forth in sec_26_2601-1 with regard to ruling the terms of the original trust provide that the income beneficiaries shall receive all of the net_income of their respective share of the original plr-153611-01 trust the order issued by the probate_court calls for a division of the original trust into successor trust and successor trust the terms of the original trust will govern successor trust however successor trust will be modified so that son’s descendants will be paid annually the greater of the net_income of the trust or the total annual return amount the proposed modification of successor trust ensures that son’s descendants will receive at least as much income as they currently receive under the terms of the original trust furthermore the modification and division of the original trust will not extend the time for the vesting of any beneficial_interest in the trust beyond the period provided for under the terms of the original trust thus the court-approved division and modification of the original trust satisfies the requirements of sec_26_2601-1 based on the foregoing we conclude that the court-approved division of the original trust into successor trust and successor trust and the modification of successor trust will not subject the original trust successor trust successor trust or any distributions therefrom to the gst tax we also conclude that the successor trusts and the distributions therefrom shall continue to be exempt from the gst tax provided no actual or constructive additions are made to the trusts ruling sec_61 provides that gross_income means all income from whatever source derived including gains derived from dealings in property sec_1_61-1 of the income_tax regulations provides that gross_income means all income from whatever source derived unless excluded by law gross_income includes income realized in any form whether in money property or services sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss is the excess of the adjusted_basis provided in sec_1011 over the amount_realized under sec_1001 except as otherwise provided in subtitle a of the code the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property is recognized under sec_1_1001-1 except as otherwise provided in subtitle a 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 as loss sustained case law supports the proposition that gain is realized only if properties exchanged are materially or essentially different 499_us_554 the issue in cottage savings was whether a financial_institution realized tax deductible losses when it exchanged percent participation interests in one group of residential mortgages for another lender’ sec_90 percent participation interests in a different group of residential mortgages plr-153611-01 the supreme court of the united_states reasoned that because the participation agreements exchanged derived from loans made by different obligors and were secured_by different homes the interests exchanged embodied legally distinct entitlements and hence were materially different therefore the court held that the taxpayer sustained tax deductible losses unlike the facts presented in cottage savings the facts presented here involve a judicial division and modification of a_trust under the state code based on the information submitted and the representations made in the ruling_request the assets and liabilities of the original trust will be divided and modified pursuant to the authority granted in the uniform prudent investor act of the state code trust expenses will be allocated between income and principal pursuant to authority granted in the state code the pro_rata division of the original trust into successor trust and successor trust and the modification of successor trust will not cause the trust beneficiaries to have materially different or additional rights the trust beneficiaries will hold essentially the same bundle of rights and succession of interests before and after the pro_rata division and modification no sale_or_other_disposition of property will occur within the meaning of sec_1001 as a result of the division and modification hence no gain_or_loss will be realized by the original trust or its beneficiaries under sec_61 or sec_1001 as a result of the division and modification except as expressly provided herein no opinion is expressed or implied concerning the federal 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 pursuant to the power_of_attorney and declaration of representative on file with this office a copy of this letter is being sent to taxpayer’s representative this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent sincerely james f hogan senior technician reviewer office of associate chief_counsel passthroughs and special industries enclosure copy for purposes


internal_revenue_service number release date index number ---------------------- --------------------------------------- -------------------------- ------------------------- in 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 b03 plr-102422-04 date date ---------------- ------------------- -------------------- --------------------------------------------------- x ----------------------------------------- state date date a ----------------------------------------- dear ------------ correspondence submitted on behalf of x requesting relief under sec_301_9100-1 through of the procedure and administration regulations for an extension of time in which to make an election under sec_754 of the internal_revenue_code this responds to your request we received your letter dated date and subsequent -------------------------------------------------- facts x is a limited_liability_company formed under the laws of state on date on date a purchased percent of x a’s purchase of percent of x resulted in a termination of x under sec_708 as evidenced by provisions in x’s operating_agreement the parties involved intended that a sec_754 election be made upon the sales transaction however x’s tax advisor failed to inform x of the consequences of a termination of x under sec_708 including the need for a short_year return consequently the sec_754 election was not filed timely plr-102422-04 not prejudice the interests of the government and that x is not using hindsight in requesting relief to make the election it is represented that x acted reasonably and in good_faith that granting relief will law and analysis sec_754 provides that if a partnership files an election in accordance with the regulations prescribed by the secretary the basis of partnership property is adjusted in the case of a transfer of a partnership_interest in the manner provided in sec_743 such an election shall apply with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years a transfer of an interest in a partnership on the death of a partner is eligible for the sec_754 election the value of the partnership_interest reported on the estate_tax_return including discounts is the value used to determine the basis of the partnership_interest and the adjustment to basis of partnership property under sec_743 and sec_754 see generally sec_1_1014-3 sec_1_754-1 of the income_tax regulations provides that an election under sec_754 is made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed no later than the time for filing for the taxable_year including extensions under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose deadline is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-2 and sec_301_9100-3 provide the standards the commissioner conclusion based on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of sixty days following the date of this letter except as specifically set forth above we express or imply no opinion concerning plr-102422-04 to make a sec_754 election effective date the election should be made in a written_statement filed with the applicable service_center for association with x’s tax_return a copy of this letter should be attached to the statement filed a copy of this letter is enclosed for that purpose the federal_income_tax consequences of the transactions described above under any other provision of the code specifically we express or imply no opinion as to whether x is a partnership for federal tax purposes letter to the taxpayer the code provides that it may not be used or cited as precedent under a power_of_attorney on file with this office we are sending a copy of this this ruling is directed only to the taxpayer requesting it sec_6110 of s sincerely heather c maloy associate chief_counsel passthroughs special industries enclosures cc copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court andrew roque bosque and alma bosque petitioners v commissioner of internal revenue respondent docket nos filed date andrew roque bosque and alma bosque pro sese christina ciu and thomas r mackinson for respondent memorandum findings_of_fact and opinion vasquez judge in these consolidated cases respondent determined deficiencies in petitioners’ federal_income_tax and accuracy-related_penalties as follows year deficiency penalty sec_6662 dollar_figure dollar_figure big_number big_number the issues for decision are whether rental real_estate losses petitioners claimed on their schedules e supplemental income and loss for and are subject_to the passive_activity_loss limitations under sec_469 whether petitioners are entitled to a deduction of dollar_figure for business use of their home claimed on their schedule c profit or loss from business for abe consulting inc aci schedule c whether petitioners are entitled to a deduction of dollar_figure for rental or lease of business property claimed on their aci schedule c whether petitioners are entitled to a deduction of dollar_figure for legal and professional services claimed on their schedule c for the law offices of andrew b bosque associates law practice schedule c whether petitioners are entitled to a deduction of dollar_figure for rental or lease of business property claimed on their law practice schedule c and whether petitioners are liable for accuracy-related_penalties under sec_6662 for and unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined that petitioners failed to report continued findings_of_fact some of the facts have been stipulated and are so found the stipulations of facts and the attached exhibits are incorporated herein by this reference petitioners resided in san jose california when they filed their petitions in and andrew roque bosque mr bosque worked as a self-employed attorney and also performed services for abe consulting inc aci a business he organized in alma bosque mrs bosque worked full time as a nurse petitioners also owned three rental real_estate properties rental real_estate petitioners owned the following rental real_estate properties a single-family home in lathrop california lathrop property approximately hour from petitioners’ home a single-family home in sloughhouse california sloughhouse property approximately hours from petitioners’ home and continued wages of dollar_figure for petitioners did not challenge this determination in their petition or at trial and the issue is deemed conceded see rule b respondent’s determinations with respect to petitioners’ itemized_deductions and self-employment_tax are computational adjustments that will be resolved by our decisions on the primary issues mrs bosque earned wages of dollar_figure in and dollar_figure in a single-family home in reno nevada reno property over hours from petitioners’ home petitioners tried many different methods to solicit tenants they hired a real_estate agent to help them find tenants and mr bosque discussed the properties with charles hinds mr hinds the real_estate agent’s husband for hour three times a week mr bosque advertised the lathrop and sloughhouse properties on craigslist he spent hour three times a week updating the advertisements and replying to inquiries he had received lastly mr bosque visited the lathrop and sloughhouse properties once a month and posted flyers in area restaurants and businesses it took him approximately hours to drive to and from the properties and post the flyers mr bosque kept daily logs detailing the time he spent updating the craigslist advertisements replying to inquiries and visiting the lathrop and sloughhouse properties petitioners had little success renting out their properties in and as a result they suffered losses in each year and claimed the losses on their and schedules e petitioners completed the schedules e as though mr bosque petitioners introduced no evidence of any activity related to the reno property petitioners received rental income of dollar_figure for and dollar_figure for petitioners claimed rental real_estate losses of dollar_figure and dollar_figure for and respectively qualified as a real_estate_professional petitioners did not file an election with their or return to treat all interests in rental real_estate as a single rental real_estate activity pursuant to sec_469 abe consulting inc mr bosque organized aci for the purpose of recruiting individuals to become real_estate agents during he designed powerpoint presentations highlighting the benefits of becoming a real_estate agent and delivered them to his recruits at either his home or his office in milpitas california business use of home in petitioners added to their home a room which mr bosque used as an office for both aci and his law practice during the years in issue petitioners claimed on both their aci schedule c and their law practice schedule c a deduction for the business use of their home instead of apportioning the business use of their home between aci and the law practice petitioners claimed as a deduction the full amount of the business use of their home twice ie dollar_figure for aci and dollar_figure for the law practice respondent allowed the deduction claimed mr bosque’s daily log showed that he performed services for aci on occasions in and on occasion in his date entry showed that he performed services for aci from p m but no other entry showed a beginning and ending time on petitioners’ law practice schedule c but disallowed the deduction claimed on their aci schedule c rental or lease of business property petitioners claimed on their aci schedule c a deduction of dollar_figure for the rental or lease of business property respondent disallowed the deduction after petitioners failed to provide substantiation at trial petitioners admitted to having no documentation to substantiate the claimed deduction law office of andrew b bosque associates mr bosque continued to practice law in although his practice was placed in sic the back burner while he concentrated on his real_estate activities he worked out of his home and his office in milpitas meeting with clients at both locations legal and professional services in mr bosque used the services of three paralegals he did not pay his paralegals a set salary or hourly rate rather he paid them what he thought was a fair price for the work that they did and the urgency with which he needed the work completed mr bosque explained that terry johns mr johns one of his paralegals was his real_estate expert mr bosque treated his paralegals as independent contractors but did not issue forms 1099-misc miscellaneous income to them petitioners claimed on their law practice schedule c a deduction of dollar_figure for legal and professional services for the paralegal fees mr bosque paid respondent disallowed the deduction after petitioners failed to provide substantiation at trial petitioners introduced copies of checks written from the andrew b bosque associates checkbook in mr bosque wrote a total of checks to his paralegals some of the checks specified which case the paralegal had worked on while others stated paralegal fees rental or lease of business property petitioners claimed on their law practice schedule c a deduction of dollar_figure for rental or lease of business property respondent disallowed the deduction after petitioners failed to provide substantiation at trial mr bosque admitted that he did not exactly know what the deduction for rental or lease of business property pertains to and that currently petitioners did not have any documentation to substantiate it opinion the commissioner’s determinations in the notice_of_deficiency are presumed correct and taxpayers bear the burden of proving that the commissioner’s determinations are incorrectdollar_figure see rule a 290_us_111 petitioners do not contend that sec_7491 applies in the instant cases to shift the burden_of_proof to respondent taxpayers also bear the burden of proving that they have met all requirements to be entitled to any claimed deductions rule a 503_us_79 i deductibility of rental real_estate losses taxpayers are allowed deductions for certain business and investment_expenses pursuant to sec_162 and sec_212 however sec_469 generally disallows any passive_activity_loss for the tax_year a passive_activity is any trade_or_business in which the taxpayer does not materially participate sec_469 a passive_activity_loss is defined as the excess of the aggregate losses from all passive activities for the year over the aggregate income from all passive activities for such year sec_469 a rental_activity is generally treated as a per se passive_activity regardless of whether the taxpayer materially participatesdollar_figure sec_469 a real_estate_professional pursuant to sec_469 the rental activities of a taxpayer who is in the real_property business real_estate_professional are not per se passive activities but are treated as a trade_or_business subject_to the material_participation requirements of sec_469 sec_1_469-9 income_tax regs a rental_activity is any activity where payments are principally for_the_use_of tangible_property sec_469 a taxpayer qualifies as a real_estate_professional and is not engaged in a passive_activity under sec_469 if i more than one-half of the personal services performed in trades_or_businesses by the taxpayer during such taxable_year are performed in real_property trades_or_businesses in which the taxpayer materially participates and ii such taxpayer performs more than hours of services during the taxable_year in real_property trades_or_businesses in which the taxpayer materially participates 750-hour service performance requirement sec_469 in the case of a joint_return the foregoing requirements for qualification as a real_estate_professional are satisfied if and only if either spouse separately satisfies the requirements id thus if either spouse qualifies as a real_estate_professional the rental activities of the real_estate_professional are not per se passive under sec_469 sec_1_469-5t temporary income_tax regs fed reg date sets forth the requirements to establish the taxpayer’s hours of participation as follows the extent of an individual’s participation in an activity may be established by any reasonable means contemporaneous daily time reports logs or similar documents are not required if the extent of such participation may be established by other reasonable means reasonable means for purposes of this paragraph may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period based on appointment books calendars or narrative summaries we have held that the regulations do not allow a postevent ballpark guesstimate bailey v commissioner tcmemo_2001_ goshorn v commissioner tcmemo_1993_578 petitioners contend that they satisfy the sec_469 requirements of being a real_estate professionaldollar_figure mr bosque spent hours a week updating the craigslist advertisements responding to inquiries and discussing the rental properties with mr hinds he also spent hours a month driving to and from the lathrop and sloughhouse properties posting flyers in nearby businesses and checking on the properties mr bosque’s activities related to the rental real_estate properties total hours per year less than the 750-hour service performance requirement of sec_469 petitioners argue that we should consider the hours mr bosque worked for aci in our determination of whether he qualifies as a real_estate_professional assuming without deciding that aci is a real_property_trade_or_business petitioners presented minimal evidence as to how many hours mr bosque performed services for aci during and mr on brief it appears that petitioners attempt to combine their hours_of_service as mentioned supra either spouse separately must satisfy the requirements of sec_469 we dismiss the possibility of mrs bosque’s qualifying as a real_estate_professional in or she worked full time as a nurse during the years at issue and petitioners presented no evidence that would allow us to conclude that she performed more than hours of services with respect to real_property trades_or_businesses mr bosque spent hours per year updating the craigslist advertisements responding to inquiries and discussing the properties with mr hinds and hours per year visiting the lathrop and sloughhouse properties for a total of hours bosque’s daily log shows days in and day in on which he performed services for aci and only entry shows beginning and ending timesdollar_figure petitioners provided no evidence that would allow us to approximate the number of hours mr bosque performed services for aci on the remaining days on the basis of the record we conclude that petitioners have failed to show that mr bosque meets the 750-hour service performance requirement of sec_469 for the years in issue because petitioners have failed to show that mr bosque meets the 750-hour service performance requirement we hold that he is not a real_estate_professional for purposes of sec_469 and that petitioners’ rental_real_estate_activities must therefore be treated as a passive_activity under sec_469 consequently it is not necessary to address whether mr bosque spent more than percent of his time in real_property trades_or_businesses or whether he materially participated in those businesses b active_participation although we find that petitioners’ rental real_estate losses are passive_activity_losses an exception to the general_rule mr bosque’s entry on date reports that he performed services for aci from p m even if we assumed that mr bosque performed services for aci for hours on each of the other days he still falls short of the 750-hour service performance requirement that passive_activity_losses cannot currently be deducted is provided in sec_469 which provides as follows in general --in the case of any natural_person subsection a shall not apply to that portion of the passive_activity_loss or the deduction_equivalent of the passive_activity_credit for any taxable_year which is attributable to all rental_real_estate_activities with respect to which such individual actively participated in such taxable_year the sec_469 exception is limited to dollar_figure per year sec_469 the dollar_figure maximum offset however begins to phase out for taxpayers whose adjusted_gross_income agi exceeds dollar_figure and is completely phased out for taxpayers whose agi is dollar_figure or more sec_469 for this purpose agi is derived without regard to any passive_activity_loss or any loss allowable by reason of subsection c modified agi sec_469 we have said that the active_participation standard is met as long as the taxpayer participates in a significant and bona_fide sense in making management decisions or arranging for others to provide services such as repairs see madler v commissioner tcmemo_1998_112 respondent concedes that petitioners actively participated in their rental_real_estate_activities during and consequently petitioners are entitled to offset their nonpassive_income for and by dollar_figure subject_to the phase-out limitation described above ii schedule c deductions sec_162 provides there shall be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business taxpayers are required to maintain records sufficient to establish the amounts of allowable deductions and to enable the commissioner to determine the correct_tax liability sec_6001 112_tc_183 when taxpayers establish that they have incurred deductible expenses but are unable to substantiate the exact amounts we can estimate the deductible amounts but only if the taxpayers present sufficient evidence to establish a rational basis for making the estimates see 39_f2d_540 2d cir 85_tc_731 a aci schedule c--business use of home as a general_rule sec_280a provides that no deduction shall be allowed with respect to the business use of a dwelling_unit that is used by the taxpayer during the year as a residence however sec_280a provides an exception for certain business use of a dwelling_unit provided however that a portion of the dwelling_unit is exclusively used on a regular basis for that business_purpose petitioners claimed on both their aci schedule c and their law practice schedule c deductions for the business use of their home although mr bosque used the same room for both businesses petitioners claimed the full amount of the deduction on each business’ schedule c respondent argues that because mr bosque used the same room in the house for both businesses petitioners are entitled to only one deduction for the business use of their home respondent reasons further that since petitioners were allowed to deduct the expense for the business use of their home on their law practice schedule c they are not entitled to the deduction claimed on their aci schedule c mr bosque admitted that he used the same home_office for both his law practice and aci as respondent states on brief to allow petitioners two deductions would be to double the amount of the allowed deduction under sec_280a accordingly we sustain respondent’s determination that petitioners are not entitled to the deduction for business use of their home claimed on their aci schedule c b aci--rental or lease of business property petitioners claimed on their aci schedule c a deduction of dollar_figure for rental or lease of business property petitioners did not have any documentation to substantiate the expense they also have failed to provide evidence that would allow us to estimate a deduction under the cohan_rule discussed supra see cohan v commissioner supra pincite accordingly we sustain respondent’s determination that petitioners are not entitled to the deduction claimed on their aci schedule c for rental or lease of business property c law practice--legal and professional services petitioners claimed on their law practice schedule c a deduction of dollar_figure for legal and professional services for the fees mr bosque paid his three paralegals respondent argues that petitioners have not provided sufficient evidence to substantiate the deduction we disagree mr bosque credibly testified about the amounts of and the purposes for petitioners’ claimed deduction for legal and professional services petitioners provided copies of checks from the andrew b bosque associates checkbook made out to mr bosque’s three paralegals each check contained either a case name the words paralegal fees or both respondent also argues that petitioners have not shown that the fees paid to mr johns were paid in carrying on mr bosque’s law practice specifically respondent points out that during trial mr bosque stated that mr johns was his real_estate expert and petitioners did not provide evidence that mr bosque’s law practice handled real_estate cases we believe that the payments to mr johns by mr bosque were made in carrying on mr bosque’s law practice of the checks mr bosque wrote to mr johns contained a case name or description of a case on the facts we believe there is sufficient evidence that mr johns’ services were provided to mr bosque’s law practice accordingly we find that petitioners are entitled to the deduction for legal and professional services claimed on their law practice schedule c d law practice--rental or lease of business property petitioners claimed on their law practice schedule c a deduction of dollar_figure for rental or lease of business property at trial mr bosque admitted that he did not know what the deduction pertained to and that petitioners currently did not have documentation to substantiate the deduction accordingly we sustain respondent’s determination that petitioners are not entitled to the deduction for rental or lease of business property claimed on their law practice schedule c iii accuracy-related_penalty respondent determined that petitioners are liable for sec_6662 accuracy-related_penalties for and dollar_figure pursuant to sec_6662 and b and a taxpayer may be liable for a penalty of percent of the portion of an respondent determined that petitioners’ underpayments for and are attributable to negligence or disregard of rules and regulations and a substantial_understatement_of_income_tax because we find that petitioners substantially understated their federal_income_tax for and we need not decide whether petitioners’ underpayments are attributable to negligence or disregard of rules or regulations see sec_6662 underpayment_of_tax attributable to negligence or disregard of rules or regulations or a substantial_understatement_of_income_tax an understatement is the difference between the amount of tax required to be shown on the return and the amount of tax actually shown on the return sec_6662 a substantial_understatement exists if the understatement exceeds the greater of percent of the tax required to be shown on the return for a taxable_year or dollar_figure see sec_6662 the burden of production is on respondent to produce evidence that it is appropriate to impose the relevant penalty see sec_7491 116_tc_438 respondent determined the amounts of tax required to be shown on petitioners’ and returns to be dollar_figure and dollar_figure respectively petitioners reported total_tax of dollar_figure for and zero for although we decided supra p that petitioners are entitled to the deduction for legal and professional services that respondent disallowed the rule calculation will show that petitioners substantially understated their federal_income_tax for and accordingly we find that respondent has met his burden of production the accuracy-related_penalty is not imposed with respect to any portion of the underpayment as to which the taxpayer shows that he acted with reasonable_cause and in good_faith sec_6664 higbee v commissioner supra pincite petitioners offered no evidence that they acted with reasonable_cause and in good_faith accordingly we hold that petitioners are liable for sec_6662 accuracy-related_penalties for and which shall be computed on the underpayments of tax computed under rule in reaching our holdings herein we have considered all arguments made and to the extent not mentioned above we conclude they are moot irrelevant or without merit to reflect the foregoing decisions will be entered under rule


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 4-plr-100681-00 date date re legen d settlor spouse child child grandchild grandchild grandchild grandchild individual a individual b date date year year year year year year dear this is in response to your letter of date in which rulings are requested on the application of the generation-skipping_transfer_tax and sec_1001 of the internal_revenue_code to the transaction described below the facts and representations submitted are as follows settlor created a_trust intervivos trust on date and transferred to it policies insuring his life settlor designated individual a as the trustee and a_trust company as successor trustee plr-100681-00 under the terms of intervivos trust beginning at settlor’s death all of the trust income is to be paid to settlor’s spouse quarterly for her life on spouse’s death the trust income is to be paid to settlor’s two children child and child in equal shares for their lives upon the death of the first child to die her share of the income is to be paid to her issue per stirpes if she has no surviving issue her share of the income is to be paid to the surviving child of settlor the intervivos trust is to terminate upon the death of the survivor of spouse child and child at termination the principal is to be distributed to the issue of child and child per stirpes if a child died without issue that child’s share is to be distributed to the issue of the other child per capita if there are no living issue of child or child the trust principal is to be distributed equally to two nieces of the settlor if a niece died survived by issue her share is to be distributed to her surviving issue per stirpes if a niece died without issue her share is to be distributed to the surviving issue of the other niece if both nieces have died without surviving issue the principal is to be distributed to the heirs at law of the last niece to die settlor died on date and a_trust testamentary_trust with individual a as trustee was created pursuant to settlor’s will the provisions of the testamentary_trust are identical to those of the intervivos trust in year individual a resigned as trustee of both trusts the trust company designated by settlor as successor trustee declined to act as successor trustee of the intervivos trust pursuant to decrees issued by the local probate_court spouse child and child were appointed trustees of both trusts and were required by the court to post joint corporate surety bonds the court also appointed a corporate fiduciary as depositary of the assets of both trusts and ordered that none of the assets were to be sold exchanged or reinvested without prior court approval in its decree relating to the intervivos trust the court restated the trust provisions in doing so the court omitted the name of one of settlor’s nieces as a contingent_remainder beneficiary of that trust in year spouse died child and child continued to serve as trustees of both trusts and the income of both trusts was distributed to them in equal shares in year child and child as trustees petitioned the local probate_court for removal of the requirement of court approval for the sale exchange or reinvestment of the trusts’ assets the court granted the petition in year child and child as trustees petitioned the local probate_court for termination of the fiduciary bond the court granted the petition in year child died since her death her share of income from both trusts has been distributed to her two children grandchild and grandchild plr-100681-00 in year child resigned as trustee of both trusts the local probate_court appointed individual b and grandchild and grandchild the children of child as trustees of both trusts at the present time child is receiving one-half of the income of both trusts child has two children grandchild and grandchild four grandchildren and four great-grandchildren the two children of child grandchild and grandchild are receiving one-half of the income of both trusts one-quarter each child was also survived by two grandchildren the trustees of both trusts propose to combine the two trusts into one trust and to divide the combined trust into four separate trusts the grandchild trust the grandchild trust the grandchild trust and the grandchild trust each of the four trusts will be funded to the extent possible with a pro_rata share of the assets of the combined trust individual b will be the trustee of the grandchild trust and the grandchild trust grandchild will be the trustee of the grandchild trust and grandchild will be the trustee of the grandchild trust each of the four new trusts will continue for the life of child child will continue to receive the income from the trusts for the benefit of her children grandchild and grandchild grandchild and grandchild will receive the income from their respective trusts if either grandchild or grandchild predeceases child the income of the deceased grandchild’s trust will be paid to the deceased grandchild’s issue per stirpes if the deceased grandchild is not survived by issue the income will be paid to the issue of child per stirpes if there are no living issue of child the income will be paid to child each of the four new trusts will terminate at the death of child and the principal of each trust will be distributed to the grandchild for whom the trust is named if a grandchild is not living at the time his or her trust terminates the principal of the deceased grandchild’s trust will be distributed to the deceased grandchild’s issue per stirpes if either grandchild or grandchild predeceases child ie dies before the termination of his or her trust and is not survived by issue the principal of his or her trust will be distributed to the living issue of child per stirpes if there are no living issue of child the principal will be distributed to the living issue of child per capita if either grandchild or grandchild predeceases child ie dies before the termination of her trust and is not survived by issue the principal of her trust will be distributed to the living issue of child per stirpes if there are no living issue of child the principal will be distributed to the living issue of child per capita if there are no surviving issue of child or child at the time the four new trusts terminate the principal of the trusts will be distributed to the nieces of the settlor in accordance with the terms of the original intervivos trust and testamentary_trust as modified by the decree of the local probate_court issued in year which omitted one of plr-100681-00 settlor’s nieces as a beneficiary of the intervivos trust in year the trustees of the intervivos trust and the testamentary_trust petitioned the local probate_court for orders with respect to the proposed transactions specifically orders were requested authorizing the combination of the trusts into a combined trust authorizing the division of the combined trust into the four new trusts each funded to the extent possible with a one-fourth pro_rata share of each and every asset of the combined trust accepting the resignation of the trustees of the intervivos trust and the testamentary_trust and appointing the trustees for each of the four new trusts terminating the depositary requirement imposed by the court in year and confirming that the new trusts are not subject_to the continuing supervision of the court under state law in year the court issued an order acquiescing to the petition contingent upon the trustees’ obtaining a favorable ruling from the service the following rulings have been requested the pro_rata distribution of assets from the intervivos trust and the testamentary_trust to the combined trust and from the combined trust to the four new trusts does not give rise to a realization event under sec_1001 the four new trusts are exempt from generation-skipping_transfer_tax and no additions have been made to the new trusts ruling 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 therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in such section for determining loss over the amount_realized sec_1_1001-1 of the income_tax regulations provides generally that the gain_or_loss realized from the exchange of property for other_property differing materially either in_kind or extent is treated as income or as loss sustained plr-100681-00 in 499_us_554 the supreme court addressed the issue of whether there is a sale_or_exchange resulting in the realization of gain_or_loss under sec_1001 under the facts of that case 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 institutions the court 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 id pincite 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 id 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 the loans in the present case the governing instruments of the intervivos trust and the testamentary_trust do not give the trustees authority to partition the trusts’ assets or to make any distribution of principal until the death of the survivor of spouse child and child therefore the proposed transaction is not a mere distribution pursuant to the trusts’ terms and constitutes an exchange by the trusts’ beneficiaries of their interests in the trusts for their interests in the new trusts the assets of the intervivos trust and the testamentary_trust are to be combined and distributed pro_rata to trusts for each of the four remainder beneficiaries it is consistent with the supreme court’s opinion in cottage savings to conclude that the interests of the beneficiaries in the intervivos trust and the testamentary_trust will not differ materially from their interests in the new trusts both before and after the proposed transaction each beneficiary is entitled to substantially the same income and or remainder interests in the trusts’ assets the proposed transaction is consistent with the dispositive provisions of the intervivos trust and the testamentary_trust under the proposed transaction if any of the settlor’s grandchildren predecease child without issue upon child 1's death the assets of the trust for that predeceased grandchild are to be distributed to the surviving remainder beneficiaries accordingly based on the facts submitted and representations made we conclude that the interests to be exchanged are not materially different and the proposed exchanges of property do not give rise to a realization event under sec_1001 ruling sec_2601 imposes a tax on every generation-skipping_transfer gst sec_2611 defines a generation-skipping_transfer as a taxable_termination a taxable_distribution or a direct_skip plr-100681-00 section b a of the tax_reform_act_of_1986 the act vol c b and sec_26_2601-1 of the generation-skipping_transfer_tax gstt regulations provide that the gstt shall not apply to any gst under a_trust that was irrevocable on date but only to the extent that such transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added sec_26_2601-1 provides that if an addition is made after date to an irrevocable_trust which is excluded from the gstt by section b a of the act a pro_rata portion of subsequent distributions from and terminations of interests in property held in the trust is subject_to the gstt in the present case the intervivos trust and the testamentary_trust were irrevocable prior to date and it is represented that no additions have been made to either trust after date the partitioning of a_trust that does not otherwise change the quality value or timing of any of the powers beneficial interests rights or expectancies originally provided for under the terms of the trust will not result in the loss of the trust’s exempt gst status under section b a of the act or sec_26_2601-1 of the regulations in the present case combining the intervivos trust and the testamentary_trust which have identical terms and beneficiaries and partitioning the combined trust into the four new trusts will not change the quality value or timing of the powers beneficial interests rights or expectancies originally provided for under the terms of the original trusts therefore based on the facts submitted and representations made we conclude that the pro_rata distribution of assets from the intervivos trust and the testamentary_trust to the combined trust and from the combined trust to the four new trusts will not cause any of the trusts to lose their exempt status for generation-skipping_transfer_tax purposes and will not constitute an addition to any of the trusts in addition the resignation of the trustees and appointment of new trustees the termination of the depositary requirement and the termination of court supervision are changes which are administrative in nature and do not affect the quality value or timing of the powers beneficial interests rights or expectancies originally provided for under the terms of the intervivos trust or the testamentary_trust therefore these changes will not cause any of the trusts to lose their exempt status for generation-skipping_transfer_tax purposes except as we have specifically ruled herein we express no opinion on the federal tax consequences of the proposed transaction under the cited provisions or under any other provision of the code in particular we express no opinion with respect to the omission of one of settlor’s nieces as a contingent_remainder beneficiary plr-100681-00 of the intervivos trust in the decree of the local probate_court issued in year this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours associate chief_counsel passthroughs and special industries by katherine a mellody senior technician reviewer branch enclosure copy for sec_6110 purposes


t c memo united_states tax_court michael cipolla petitioner v commissioner of internal revenue respondent docket no 7131-02l filed date michael cipolla pro_se theresa g mcqueeney for respondent memorandum findings_of_fact and opinion halpern judge pursuant to sec_6330 petitioner seeks review of respondent’s determination to proceed with collection of his income_tax on date respondent orally moved to have the court impose against unless otherwise indicated all section references are to the internal_revenue_code as amended petitioner a penalty pursuant to sec_6673 findings_of_fact some of the facts have been stipulated and are found accordingly the stipulation of facts with attached exhibits is incorporated herein by this reference at the time he filed his petition petitioner resided in brooklyn new york petitioner’s form_1040 for on or about date petitioner submitted to respondent a form_1040 u s individual_income_tax_return for petitioner did not describe his occupation on the form_1040 although he did attach a form_w-2 wage and tax statement identifying him as an employee petitioner entered zeros on all lines of the income portion of his form_1040 specifically including line for wages line for dividends line for alimony received line for total income and line sec_32 and sec_33 for adjusted_gross_income he also indicated his taxable_income to be zero petitioner entered a zero on line for tax petitioner then claimed a refund in the amount of dollar_figure which was equal to the amount of federal_income_tax that had been withheld from his wages by his employer the form_w-2 attached to the above form_1040 disclosed the payment of wages to petitioner during the form_w-2 was from new york telephone company it disclosed the payment of dollar_figure of wages to petitioner and the withholding of federal_income_tax in the amount of dollar_figure petitioner also attached to his form_1040 a two-page typewritten statement that stated in part i michael cipolla am submitting this as part of my income_tax return even though i know that no section of the internal_revenue_code establishes an income_tax_liability provides that income taxes have to be paid on the basis of a return in addition to the above i am filing even though the privacy_act notice as contained in a booklet clearly informs me that i am not required to file it does so in at least two places a in one place it states that i need only file a return for any_tax i may be liable for since no code section makes me liable for income taxes this provision notifies me that i do not have to file an income_tax return it should also be noted that i had zero income according to the supreme court’s definition of income see note please note that my return also constitutes a claim_for_refund pursuant to code sec_6402 i am also putting the i r s on notice that my tax_return and claim_for_refund does not constitute a frivolous_return pursuant to code sec_6702 in addition don’t notify me that the i r s is changing my return since there is no statute that allows the i r s to do that you might prepare a return pursuant to code sec_6020b where no return is filed but where as in this case a return has been filed no statute authorizes i r s personnel to change that return note the word income is not defined in the internal_revenue_code but as stated above it can only be a derivative of corporate activity respondent’s notice_of_deficiency on date respondent acting through carol m landy director of the brookhaven customer service_center in holtsville new york issued a notice_of_deficiency to petitioner for in the notice_of_deficiency respondent determined a deficiency of dollar_figure in federal_income_tax respondent determined that petitioner failed to report wages of dollar_figure as well as dividends of dollar_figure a gross distribution of dollar_figure interest of dollar_figure and a prior year refund of dollar_figure petitioner received the notice_of_deficiency petitioner did not file a petition for redetermination with the tax_court on date respondent assessed the determined deficiency plus statutory interest on that same date respondent sent petitioner a notice of balance due petitioner failed to pay the amount owing respondent’s notice_of_intent_to_levy and petitioner’s response on date respondent sent petitioner a notice entitled final notice--notice of intent to levy and notice of your right to a hearing respondent determined the deficiency without taking into account the tax withheld from petitioner’s wages as a statutory_notice_of_deficiency does not take such withheld amount into account see sec_31 sec_6211 however insofar as petitioner’s ultimate tax_liability is concerned respondent gives petitioner credit for the amount withheld from his wages on date petitioner submitted to respondent form request for a collection_due_process_hearing in the request petitioner stated that he would explain all his reasons for opposing the proposed levy at the hearing the appeals_office hearing in communications and correspondence between petitioner and respondent’s appeals_office from date through date petitioner raised several tax protestor arguments regarding his tax_liability by letter dated date appeals officer phyllis cayenne the appeals officer scheduled an administrative hearing with petitioner at respondent’s manhattan appeals_office in new york city in her letter to petitioner the appeals officer continued and stated in part our jurisdiction in this case is limited to hearing relevant issues relating to unpaid tax including appropriate spousal defenses challenges to the appropriateness of collection actions offer s of collection alternatives and challenges to the underlying tax_liability if you did not receive a statutory_notice_of_deficiency or did not otherwise have an opportunity to dispute the liability your letter dated to respondent’s appeals_office only provided constitutional arguments and did not include relevant issues that we may consider the arguments raised in your letter of are frivolous and your positions have no basis in law arguments such as yours have been considered and rejected repeatedly as being without merit by federal courts including the supreme court of the united_states pursuing them in a federal court could lead to monetary sanctions being imposed against you on or about date petitioner sent a letter to the appeals officer responding to her december letter that response by petitioner included inter alia a challenge to the underlying tax_liability for as well as allegations including petitioner never received a valid notice_of_deficiency no valid assessment of an income_tax_liability for had been made against petitioner and petitioner had not been issued a notice_and_demand for payment as required under sec_6303 petitioner also requested verification from the secretary that all applicable laws and administrative procedures were followed with respect to the tax_liability on date petitioner attended an administrative hearing in new york city conducted by the appeals officer at the hearing the appeals officer provided petitioner with a literal transcript of petitioner’s account for respondent’s notice_of_determination on date respondent’s appeals_office issued petitioner a notice_of_determination concerning collection action s under sec_6320 and or determining that the proposed levy against him for should be sustained petitioner’s petition and respondent’s motion to have a penalty imposed against petitioner pursuant to sec_6673 on date petitioner filed with the tax_court his petition seeking review of respondent’s notice_of_determination the petition included allegations that the appeals officer failed to obtain verification from the secretary that the requirements of any applicable law or administrative procedure were met as required under sec_6330 the appeals officer failed to identify the statutes making petitioner liable for federal_income_tax petitioner never received a proper notice_of_deficiency petitioner was not lawfully assessed a tax_liability for petitioner never received a notice_and_demand for payment and petitioner was denied the opportunity to challenge the existence or the amount of the underlying tax_liability for on date at the trial in this case respondent orally moved to have this court impose against petitioner a penalty pursuant to sec_6673 in the amount of dollar_figure opinion if any person neglects or refuses to make payment of any assessed federal tax_liability within days of notice_and_demand the secretary is authorized to collect the assessed tax by levy on that person’s property sec_6331 as a general_rule at least days before taking such action the secretary must provide the person with a written final notice_of_intent_to_levy that describes among other things the administrative appeals available to the person sec_6331 upon request the person is entitled to an administrative review hearing before respondent’s appeals_office sec_6330 if dissatisfied with the appeals_office determination the person may seek judicial review in the tax_court or a federal district_court as appropriate sec_6330 generally action on the proposed levy is suspended during the pendency of the administrative review hearing and any judicial review proceeding sec_6330 sec_6330 prescribes the relevant matters that a person may raise at an appeals_office hearing including spousal defenses the appropriateness of respondent’s proposed collection action and possible alternative means of collection a taxpayer may contest the existence or amount of the underlying tax_liability at an appeals_office hearing only if the taxpayer did not receive a statutory_notice_of_deficiency with respect to the underlying tax_liability or did not otherwise have an opportunity to dispute that liability sec_6330 where the underlying tax_liability is not at issue we generally review determinations made by the appeals_office for an abuse_of_discretion e g 118_tc_488 notice_of_deficiency petitioner received a notice_of_deficiency for he is therefore not entitled to challenge the underlying tax_liability at the hearing conducted under sec_6330 sec_6330 nonetheless he argues that the notice_of_deficiency was not signed by someone in authority and was invalid this position is frivolous and groundless 118_tc_162 noting that directors of service centers have been delegated the authority to issue notices of deficiency koenig v commissioner tcmemo_2003_40 n see schmith v commissioner tcmemo_2002_252 taxpayer’s denial of receiving valid notice_of_deficiency did not mean the taxpayer failed to receive notice_of_deficiency verification requirement we likewise reject petitioner’s argument that the appeals officer failed to obtain verification from the secretary that the requirements of all applicable laws and administrative procedures were met as required by sec_6330 the record shows that the appeals officer obtained and reviewed a literal transcript of petitioner’s account for and that she provided this transcript of account to petitioner at his appeals hearing the information in this transcript is also contained in the form_4340 certificate of assessments payments and other specified matters that the parties stipulated in evidence sec_6330 does not require the commissioner to rely on a particular document eg the summary record itself rather than a transcript of account to satisfy the verification requirement imposed therein see 118_tc_365 n and cases cited thereat standifird v commissioner tcmemo_2002_245 affd 72_fedappx_729 9th cir weishan v commissioner tcmemo_2002_88 in this regard we note that the transcript provided all the information prescribed in sec_301_6203-1 proced admin regs see weishan v commissioner supra lindsey v commissioner tcmemo_2002_87 affd 56_fedappx_802 9th cir petitioner has not raised any irregularity in the assessment procedure that would raise a legitimate question about the validity of the assessment or the information contained in the transcript and the form_4340 accordingly we conclude that the appeals officer here satisfied the verification requirement of sec_6330 notice_and_demand we similarly reject petitioner’s argument that he never received a notice_and_demand for payment of his unpaid tax_liability for the form_4340 shows that respondent sent as indicated above the appeals officer provided petitioner at his appeals hearing with the literal transcript of his account that she reviewed sec_6330 does not even require an appeals officer at or prior to a collection_due_process_hearing to give the taxpayer a copy of the verification that the requirements of any applicable law or administrative procedure have been met sec_301_6330-1 proced admin regs requires that the appeals officer obtain verification before issuing the determination not that he or she provide it to the taxpayer 118_tc_162 petitioner a notice of balance due on the date that respondent assessed the tax and interest for a notice of balance due constitutes a notice_and_demand for payment within the meaning of sec_6303 see eg 953_f2d_531 9th cir schaper v commissioner tcmemo_2002_203 weishan v commissioner supra the notice of balance due was sufficient to constitute notice_and_demand within the meaning of sec_6303 because it informed petitioner of the amount owed and requested payment standifird v commissioner supra see 908_f2d_521 9th cir the form on which a notice of assessment and demand for payment is made is irrelevant as long as it provides the taxpayer with all the information required under sec_6303 conclusion based upon our examination of the record before us we find that respondent did not abuse his discretion in determining to proceed with the collection action as determined in the notice_of_determination with respect to petitioner’s unpaid income_tax_liability for taxable_year in making that finding we have considered all arguments made by petitioner and to the extent not mentioned above conclude them to be irrelevant or without merit in respondent’s motion respondent requests that the court impose against petitioner a penalty pursuant to sec_6673 in the amount of dollar_figure in pertinent part sec_6673 authorizes the court to require a taxpayer to pay to the united_states a penalty in an amount not to exceed dollar_figure whenever it appears to the court that a proceeding before it was instituted or maintained primarily for delay sec_6673 or that the taxpayer’s position in such a proceeding is frivolous or groundless sec_6673 as evidenced by the petition and petitioner’s subsequent arguments petitioner’s legal arguments are frivolous and he has no grounds justifying his claim that the appeals officer erred in any manner we can see no reason for the petition but to delay the collection of the income_tax owing from petitioner petitioner has not only wasted his time but he has wasted the time of respondent’s agents officers and counsel not to mention the waste of the court’s time in disposing of this case we shall not penalize petitioner in the amount dollar_figure requested by respondent but we do believe that petitioner deserves a significant sec_6673 penalty we shall therefore require petitioner pursuant to sec_6673 to pay to the united_states a penalty in the amount of dollar_figure to reflect the foregoing an appropriate order and decision will be entered