internal_revenue_service number release date index number ------------------------------------------------- ------------------------------ -------------------------------------- --------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-101791-10 date date legend legend x ------------------------------------------------------------ ------------------------------ trust -------------------------------------------------------------------------------- ---------- ------------------------------------------------------------ ------------------ ----------------------- ------------------------- ---------------------- ----------------------- ------------------- ------- -- --------------- ------- state a d1 d2 d3 d4 n p dollar_figurew year dear ---------------- plr-101791-10 this letter responds to your letter dated date submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts x was incorporated under the laws of state on d1 x elected to be an s_corporation effective d2 at that time trust owned n shares of x a was the sole income_beneficiary of trust until a’s death on d3 prior to a’s death trust was a qualified_subchapter_s_trust qsst within the meaning of sec_1361 upon a’s death trust’s beneficiaries were a’s p living children because trust had more than one income_beneficiary after b’s death trust no longer qualified as a qsst x represents that trust was qualified to be an electing_small_business_trust esbt within the meaning of sec_1361 however no election was made under sec_1361 to treat trust as an esbt consequently trust became an ineligible shareholder and x’s s_corporation_election terminated on d3 x represents that there was no intent to terminate x’s s_corporation_election and that the failure to timely file the esbt election for trust was inadvertent x and x’s shareholders agree to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary with respect to the period specified by sec_1362 law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible shareholder and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than class of stock sec_1361 provides that for purposes of sec_1361 an esbt is a permissible shareholder sec_1361 provides that except as provided in sec_1361 the term electing_small_business_trust means any trust if i such trust does not have as a beneficiary any person other than i an individual ii an estate iii an organization described in sec_170 - or iv an organization described in sec_170 which holds a contingent_interest in such trust and is not a potential_current_beneficiary ii no plr-101791-10 interest in such trust was acquired by purchase and iii an election under sec_1361 applies to such trust sec_1361 provides that an election under sec_1361 shall be made by the trustee any such election shall apply to the taxable_year of the trust for which made and all subsequent taxable years of such trust unless revoked with the consent of the secretary sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides in relevant part that if an election under sec_1362 by any corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which the termination occurred and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make the adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to this period then notwithstanding the circumstances resulting in the termination the corporation shall be treated as an s_corporation during the period specified by the secretary sec_1_1362-4 provides that the commissioner may require any adjustments that are appropriate in general the adjustments required should be consistent with the treatment of the corporation as an s_corporation during the period specified by the commissioner conclusion based solely on the facts submitted and representations made we conclude that x’s s_corporation_election was terminated on d3 when trust ceased to qualify as a qsst and trust failed to timely file an esbt election under sec_1361 we further conclude that the termination was inadvertent within the meaning of sec_1362 pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation on and after d3 unless x’s s_corporation_election was otherwise terminated under sec_1362 and provided that the following conditions are met as an adjustment under sec_1362 a payment of dollar_figurew and a copy of this letter must be sent to the following address internal_revenue_service cincinnati service_center west rivercenter blvd covington ky stop terri lackey manual deposit this payment must be sent no later than d4 in addition the trustee of plr-101791-10 trust must file an esbt election effective d3 with the appropriate service_center within days of the date of this letter a copy of this letter should be attached to the esbt election finally the trustee of trust must make appropriate adjustments including filing amended tax returns if any are required for open tax years including year to bring trust in compliance with the esbt requirements except for the specific ruling above no opinion is expressed or implied concerning the federal tax consequences of the facts of this case under any other provision of the code specifically no opinion is expressed or implied regarding x’s eligibility to be an s_corporation or trust’s eligibility to be an esbt the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party 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 this ruling is directed only to the taxpayer who requested it according to sec_6110 this ruling 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 letter to your authorized representative sincerely david r haglund david r haglund chief branch office of the associate chief_counsel passthroughs special industries cc


internal_revenue_service number release date index number --------------------- --------------------------------- ---------------------------------------- re ---------------- legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------- telephone number ---------------------- refer reply to cc psi b04 plr-133679-17 date date ------------------------------------------------------- ----------------------- --------------------- ----------------------- ---------------------- ---------------------------- ------------------ ---------------------------------------- -------------------- --------------------- ------------------------------------------------------- ------------------------ -------------- ----------- -------------------------------------------------------------- grantor spouse child child father mother individual trustee representative representative trust date state state committee ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------- ---------------------------------------------- ------------------------------------- dear --------------- this letter responds to your authorized representative’s letter dated date requesting rulings under sec_671 sec_2501 sec_2514 and sec_2041 of the internal_revenue_code the facts submitted and representations made are as follows on date grantor created an irrevocable_trust trust for the benefit of himself his wife spouse his descendants his parents father and mother and individual collectively referred to as plr-133679-17 beneficiaries grantor is the only donor and all property contributed to trust will be grantor’s separate_property under state law the trustee trustee is a_trust company with its headquarter in state trust is governed by the laws of state currently grantor and spouse have two minor children child and child during grantor’s lifetime at any time or times trustee pursuant to an appointment of the committee or grantor while the committee is in existence shall distribute to the beneficiaries such amounts of net_income or principal of trust as the committee or grantor determines any appointment determination or action by the committee requires either i the unanimous written consent of the then serving members of the committee other than grantor unanimous member power or ii the written consent of grantor and a majority of the other then serving members of the committee grantor’s consent power in addition grantor in a non-fiduciary capacity may appoint such amounts of principal to one or more persons in the group consisting of grantor’s descendants father mother and individual as grantor deems advisable to provide for such person’s health support and education grantor’s sole power such power may not be exercised to discharge or satisfy grantor’s legal obligations any net_income not distributed shall be accumulated and added to the principal of trust if at any time a committee member fails or ceases to serve then the position of such committee member shall remain vacant subject_to exception for the appointment of representatives with legal authority to act on behalf of another committee member the trust agreement provides that if there is no committee the trustee other than a beneficiary-trustee may pay any one or more of the beneficiaries such amount or amounts of the net_income and principal for any purpose even to the extent of all or none at any time and from time to time as the trustee determines in his discretion and only with grantor’s written consent and in making such determinations the trustee may consider or ignore in the trustee’s discretion the beneficiaries’ other financial resources of any kind initially committee consists of grantor representative representative father and mother representative sec_1 and act on behalf of child and child respectively until each child reaches majority age as each of the minor children child and child reaches majority age that child will become a member of the committee replacing his representative trust provides that at any time members of the committee may by unanimous vote add one or more members to the committee other than spouse provided that such members are beneficiaries of trust the trust agreement as amended states that committee shall be deemed not to exist at any time there are fewer than two members other than grantor the committee shall also be dissolved and cease to exist upon grantor’s death upon grantor’s death the trustee shall distribute such amounts of trust property as grantor appoint to or in favor of any one person or more persons or entities other plr-133679-17 than grantor grantor’s estate the creditors of grantor or the creditors of grantor’s estate as grantor may appoint by will grantor’s testamentary power such power may not be exercised to discharge or satisfy grantor’s legal obligations upon grantor’s death the trustee shall divide the then remaining trust property into as many separate shares of equal value as necessary to dispose_of the property any balance which is not distributed pursuant to grantor’s testamentary power shall be distributed as follows one such equal share to father if he is then living one such equal share to mother if she is then living one such equal share to individual if he is then living and seven such equal shares to grantor’s then living descendants by right of representation to be held in further trust for such descendants if none of the remainder beneficiaries is living upon grantor’s death any balance which is not distributed pursuant to grantor’s testamentary power shall be distributed in equal shares in further trust for the benefit of individuals named in trust trust also provides that a person or corporate fiduciary shall not serve as a fiduciary of a_trust created under trust if such service would cause the trust to fail to be a u_s_person as defined in sec_7701 you have requested the following rulings as long as the committee is serving no portion of the items of income deductions and credits against tax of the trust shall be included in computing under sec_671 the taxable_income deductions and credits of grantor or of any member of the committee the contribution of property to trust by grantor will not be a completed_gift subject_to federal gift_tax any distribution_of_property by the committee from trust to grantor will not be a completed_gift subject_to federal gift_tax by any member of the committee any distribution_of_property by the committee from trust to any beneficiary of trust other than grantor will not be a completed_gift subject_to federal gift_tax by any member of the committee no member of the committee upon his or her death will include in his or her estate any property held in trust because such member is deemed to have a general_power_of_appointment within the meaning of sec_2041 and sec_2514 over property held in trust plr-133679-17 ruling sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter in computing taxable_income or credits against the tax of an individual sec_672 provides for purposes of subpart e the term adverse_party means any person having a substantial_beneficial_interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust sec_673 through specify the circumstances under which the grantor is treated as the owner of a portion of a_trust sec_673 provides that the grantor shall be treated as the owner of any portion of a_trust in which the grantor has a reversionary_interest in either the corpus or the income therefrom if as of the inception of that portion of the trust the value of such interest exceeds five percent of the value of such portion sec_674 provides in general that the grantor shall be treated as the owner of any portion of a_trust in respect of which the beneficial_enjoyment of the corpus or the income therefrom is subject_to a power of disposition exercisable by the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to the powers described in sec_674 regardless of by whom held sec_674 provides that sec_674 shall not apply to a power exercisable only by will other than a power in the grantor to appoint by will the income of the trust where the income is accumulated for such disposition by the grantor or may be so accumulated in the discretion of the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to a power to distribute corpus to or for a beneficiary provided that the power is limited by a reasonably_definite_standard under sec_675 and applicable regulations the grantor is treated as the owner of any portion of a_trust if under the terms of the trust agreement or circumstances plr-133679-17 attendant on its operation administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiary of the trust sec_676 provides that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under any other provision of part i subchapter_j chapter where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a nonadverse_party or both sec_677 provides in general that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under sec_674 whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a nonadverse_party or both may be distributed to the grantor or the grantor's spouse held or accumulated for future distribution to the grantor or the grantor's spouse or applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor's spouse sec_678 provides that a person other than the grantor shall be treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself or such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would within the principles of inclusive subject a grantor of a_trust to treatment as the owner thereof sec_679 provides that a united_states_person who directly or indirectly transfers property to a foreign_trust shall be treated as the owner for his taxable_year of the portion of such trust attributable to such property if for such year there is a united_states_beneficiary of any portion of such trust based on the facts submitted and representations made we conclude that an examination of trust reveals none of the circumstances that would cause grantor to be treated as the owner of any portion of trust under sec_673 sec_674 sec_676 sec_677 or sec_679 as long as trust is a domestic_trust and the committee remains in existence and serving because none of the members of committee have a power exercisable by himself to vest trust income or corpus in himself none shall be treated as the owner of trust under sec_678 we further conclude that an examination of trust reveals none of the circumstances that would cause administrative controls to be considered exercisable primarily for the benefit of grantor under sec_675 thus the circumstances attendant on the operation of trust will determine whether grantor will be treated as the owner of any portion of trust under sec_675 this is a question of fact the determination of which must be deferred until the federal_income_tax returns of the parties involved have been examined by the office with responsibility for such examination plr-133679-17 ruling sec_2 and sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident sec_2511 provides that the gift_tax applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-2 of the gift_tax regulations provides that a gift is complete as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in the donor no power to change its disposition whether for his own benefit or for the benefit of another but if upon a transfer of property whether in trust or otherwise the donor reserves any power over its disposition the gift may be wholly incomplete or may be partially complete and partially incomplete depending upon all the facts in the particular case accordingly in every case of a transfer of property subject_to a reserved power the terms of the power must be examined and its scope determined sec_25_2511-2 provides an example where the donor transfers property to another in trust to pay the income to the donor or accumulate it in the discretion of the trustee and the donor retains a testamentary power to appoint the remainder among the donor's descendants the regulation concludes that no portion of the transfer is a completed_gift however if the donor had not retained a testamentary_power_of_appointment but instead provided that the remainder should go to x or his heirs the entire transfer would be a completed_gift sec_25_2511-2 provides that a gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title in himself or herself a gift is also incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed_or_ascertainable_standard under sec_25_2511-2 a donor is considered as himself having a power if it is exercisable by the donor in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom a trustee as such is not a person having an adverse_interest in the disposition of the trust property or its income sec_25_2511-2 provides that the relinquishment or termination of a power to change the beneficiaries of transferred property occurring otherwise than by death of the donor is regarded as the event which completes the gift and causes the gift_tax to apply plr-133679-17 sec_25_2511-2 provides that if a donor transfers property to himself as trustee or to himself and some other person not possessing a substantial adverse_interest as trustees and retains no beneficial_interest in the trust property and no power over it except fiduciary powers the exercise or nonexercise of which is limited by a fixed_or_ascertainable_standard to change the beneficiaries of the transferred property the donor has made a completed_gift and the entire value of the transferred property is subject_to the gift_tax sec_25_2511-2 does not define substantial adverse_interest sec_25_2514-3 provides in part that a taker in default of appointment under a power has an interest that is adverse to an exercise of the power sec_25_2514-3 also provides that a co-holder of a power is considered as having an adverse_interest where he may possess the power after the possessor's death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in 308_us_39 the taxpayer created a_trust for the benefit of named beneficiaries and reserved the power_to_revoke the trust in whole or in part and to designate new beneficiaries other than himself six years later in the taxpayer relinquished the power_to_revoke the trust but retained the right to change the beneficiaries in the taxpayer relinquished the right to change the beneficiaries the court stated that the taxpayer’s gift is not complete for purposes of the gift_tax when the donor has reserved the power to determine those others who would ultimately receive the property accordingly the court held that the taxpayer's gift was complete in when he relinquished his right to change the beneficiaries of the trust a’s retention of a power to change the beneficial interests in a_trust causes the transfer to the trust to be incomplete for gift_tax purposes even though the power may be defeated by the actions of third parties 37_tc_897 see also 51_tc_352 in this case grantor retained the grantor’s consent power over the net_income and principal of trust under sec_25_2511-2 a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom the committee members are not takers in default for purposes of sec_25_2514-3 they are merely co-holders of the power under sec_25_2514-3 a co-holder of a power is only considered as having an adverse_interest where he may possess the power after the possessor's death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in this case the committee ceases to exist upon the death of grantor accordingly the committee members do not have interests adverse to grantor under sec_25_2514-3 and for purposes of sec_25_2511-2 therefore grantor is considered as possessing the power to distribute net_income and principal to any beneficiary himself because he retained the grantor’s consent power plr-133679-17 if the committee ceases to exist the trustee has the power to distribute net_income to a beneficiary however the trustee’s power is not a condition_precedent to each grantor’s consent power each grantor’s consent power over income is presently exercisable and not subject_to a condition_precedent thus the trustee’s power to distribute net_income does not cause the transfer of property to be complete with respect to the income_interest in trust for federal gift_tax purposes therefore each grantor is considered as possessing the power to distribute income to any beneficiary himself or herself because he or she retained the grantor’s consent power grantor also retained the grantor’s sole power over the principal of trust under sec_25_2511-2 a gift is incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed_or_ascertainable_standard in this case the grantor’s sole power gives grantor the power to change the interests of the beneficiaries even though grantor's power is limited by an ascertainable_standard ie health education and support grantor's power is not a fiduciary power accordingly the retention of the grantor’s consent power and the grantor’s sole power causes the transfer of property to trust to be incomplete for federal gift_tax purposes if the committee ceases to exist the trustee in its fiduciary capacity also has the power to distribute principal to one or more beneficiaries the powers of the trustee are not conditions precedent to the grantor’s powers grantor’s sole power over principal is presently exercisable and not subject_to a condition_precedent accordingly grantor retains dominion and control_over the principal of trust until the trustee exercises his or her power to appoint principal see 37_tc_897 thus the trustee’s powers to distribute principal do not cause the transfer of property to be complete with respect to the remainder in trust for federal gift_tax purposes accordingly the retention of grantor’s consent power and grantor’s sole power causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes further grantor retained the grantor’s testamentary power to appoint the property in trust to any persons other than to the grantor’s estate grantor’s creditors or the creditors of grantor’s estate under sec_25_2511-2 the retention of a testamentary power to appoint the remainder of a_trust is considered a retention of dominion and control_over the remainder accordingly the retention of this power causes the transfer of property to trust to be incomplete with respect to the remainder for federal tax purposes finally the committee members possess the unanimous member power over net_income and principal this power is not a condition_precedent to grantor’s powers grantor’s powers over the net_income and principal are presently exercisable and not subject_to a condition_precedent grantor retains dominion and control_over the net plr-133679-17 income and principal of trust until the committee members exercise their unanimous member power accordingly the unanimous member power does not cause the transfer of property to be complete with respect to the income_interest for federal gift_tax purposes see 37_tc_897 51_tc_352 accordingly based on the facts submitted and the representations made we conclude that the contribution of property to trust by grantor is not a completed_gift subject_to federal gift_tax any distribution from trust to grantor is merely a return of grantor’s property therefore we conclude that any distribution_of_property from trust by the committee to grantor will not be a completed_gift subject_to federal gift_tax by any member of the committee further upon the death of grantor the fair_market_value of the property in trust is includible in his gross_estate for federal estate_tax purposes ruling sec_4 and sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power sec_2514 provides that the term general_power_of_appointment means a power which is exercisable in favor of the individual possessing the power possessor the possessor's estate the possessor's creditors or the creditors of the possessor's estate sec_25_2514-1 provides that a power_of_appointment is not a general power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the possessor or his creditors or the possessor's estate or the creditors of the estate or expressly not exercisable in favor or the possessor or his creditors or the possessor’s estate or the creditors of his estate sec_2514 provides that in the case of a power_of_appointment created after date if the power is exercisable by the possessor only in conjunction with the creator of the power such power is not deemed a general_power_of_appointment sec_2514 provides that in the case of a power_of_appointment created after date if the power is not exercisable by the possessor except in conjunction with a person having a substantial interest in the property subject_to the power which is adverse to the exercise of the power in favor of the possessor such power shall not be deemed a general_power_of_appointment for purposes of sec_2514 a person who after the death of the possessor may be possessed of a power_of_appointment with respect to the property subject_to the possessor's power plr-133679-17 which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the possessor’s power sec_25_2514-3 provides in part that a co-holder of a power has no adverse_interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power however a co-holder of a power is considered as having an adverse_interest where he may possess the power after the possessor's death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate thus for example if x y and z held a power jointly to appoint among a group of persons which includes themselves and if on the death of x the power will pass to y and z jointly then y and z are considered to have interests adverse to the exercise of the power in favor of x similarly if on y's death the power will pass to z z is considered to have an interest adverse to the exercise of the power in favor of y sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power by a disposition which is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent's gross_estate under sec_2035 to inclusive under sec_2041 the term general_power_of_appointment is defined in relevant part to mean a power which is exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_2041 provides however that in the case of a power_of_appointment created after date if the power is not exercisable by the decedent except in conjunction with the creator of the power such power is not deemed a general_power_of_appointment sec_2041 provides however that in the case of a power_of_appointment created after date if the power is not exercisable by the decedent except in conjunction with a person having a substantial interest in the property subject_to the power which is adverse to the exercise of the power in favor of the decedent -- such power shall not be deemed a general_power_of_appointment for purposes of sec_2041 a person who after the death of the decedent may be possessed of a power_of_appointment with respect to the property subject_to the decedent's power which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the decedent's power plr-133679-17 sec_20_2041-3 of the estate_tax regulations provides in part that a co-holder of a power_of_appointment has no adverse_interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power however a co-holder of a power is considered as having an adverse_interest where he may possess the power after the decedent's death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate thus for example if x y and z held a power jointly to appoint among a group of persons which includes themselves and if on the death of x the power will pass to y and z jointly then y and z are considered to have interests adverse to the exercise of the power in favor of x similarly if on y's death the power will pass to z z is considered to have an interest adverse to the exercise of the power in favor of y the power held by the committee members under the grantor’s consent power is a power that is exercisable only in conjunction with the creator grantor accordingly under sec_2514 and sec_2041 the committee members do not possess general powers of appointment by virtue of possessing this power further the power held by the committee members under the unanimous member power is not a general_power_of_appointment for purposes of sec_2514 and sec_2041 as in the examples in sec_25_2514-3 and sec_20_2041-3 the committee members have substantial adverse interests in the property subject_to this power accordingly any distribution made from trust to a beneficiary other than to grantor pursuant to the exercise of these powers the grantor's consent power and the unanimous member power are not gifts by the committee members instead such distributions are gifts by grantor based on the facts submitted and representations made we conclude that any distribution_of_property by the committee from trust to any beneficiary of trust other than grantor will not be a completed_gift subject_to federal gift_tax by any member of the committee accordingly any distribution_of_property from trust to a beneficiary other than to grantor will be completed gifts by grantor finally we conclude that the powers held by the committee are not general powers of appointment for purposes of sec_2041 and accordingly no member of the committee upon his or her death will include in his or her estate any property held in trust because such member is deemed to have a general_power_of_appointment within the meaning of sec_2041 over property held in trust except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code specifically we express no opinion on the trust provisions permitting trustee to distribute income or principal to trustees of other trusts decanting plr-133679-17 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely lorraine e gardner lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter


t c memo united_states tax_court robert and eileen lopez ortega petitioners v commissioner of internal revenue respondent docket no filed date robert and eileen lopez ortega pro sese nathan c johnston for respondent memorandum findings_of_fact and opinion goeke judge respondent determined a deficiency in petitioners’ federal_income_tax of dollar_figure and an accuracy- related penalty under sec_6662 a and b of dollar_figure for tax_year the issue sec_2 for decision are whether petitioners are entitled to deduct as ordinary business_expenses dollar_figure for legal fees and other items reported on schedule c profit or loss from business for we hold they are not and whether petitioners are liable for the accuracy-related_penalty under sec_6662 and b we hold they are findings_of_fact petitioners resided in california at the time their petition was filed mr ortega owned real_estate in mexico the properties in question cover big_number acres including miles of beachfront mr ortega has held these properties since respondent has disallowed deductions related to these properties the expense deductions at issue were claimed on two schedules c one showed expenses of dollar_figure and listed mr ortega’s principal business as real_estate develope sic the other reported expenses of dollar_figure and listed the business as the rancho loreto bay 1unless 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 procedures 2other issues are computational and will be resolved according to the outcome of issue petitioners also reported real_estate activities on two schedules e supplemental income and loss as part of their return the relationship of the activities reflected on the schedules e and the expenses in dispute is not clear in the record respondent makes no adjustment to the schedule e items mr ortega divided his mexican real_estate holdings into three distinct units los cocos los cocos was intended to be a recreational vehicle rv park this property is adjacent to the only marina in the area rancho notri during mr ortega testified he was developing rancho notri as a planned community he intended to develop and sell homes and condominiums from this property he also planned to develop a marina and other businesses to benefit from the seaside location of this property in the land was zoned agricultural for mexican tax purposes nevertheless rancho notri was not an operational ranch and had no agricultural function in mr ortega undertook a number of improvements for the area including clearing the land inserting ground markers and showing lot delineation however no lots had been sold through miramar the miramar property comprises beachfront lots subdivided into smaller parcels mr ortega intended that the lots would be sold as building sites he expected the lots would be sold in phases but no sales occurred in petitioners timely filed their form_1040 u s individual_income_tax_return as stated the return included two schedules e the first for two properties in the united_states and los cocos rv park los cocos showed dollar_figure in expenses the second for the rancho loreto bay also known as rancho notri property showed dollar_figure in expenses none of these amounts were reported on line of petitioners’ form_1040 because of the passive_activity_loss limitations under sec_469 on the schedule c with the stated business of developing real_estate petitioners claimed and respondent disallowed the following deductions car and truck expenses--dollar_figure depreciation-- dollar_figure supplies--dollar_figure travel--dollar_figure meals and entertainment--dollar_figure taxes and licenses--dollar_figure laundry and cleaning--dollar_figure and telephone--dollar_figure on the other schedule c petitioners claimed a deduction for legal fees of dollar_figure and at trial mr ortega identified what were characterized as web site expenses of dollar_figure which were not reflected on the return these two items are also in dispute mr ortega testified that the legal expenses related to a cash settlement paid to squatters on certain parcels of the mexican property to allow clear legal_title to be established respondent sent petitioners a notice_of_deficiency for and petitioners timely filed a petition with this court i burden_of_proof opinion the taxpayer bears the burden of proving by a preponderance_of_the_evidence that the commissioner’s determinations are incorrect rule a 290_us_111 however under sec_7491 if the taxpayer produces credible_evidence with respect to any factual issue relevant to ascertaining the taxpayer’s liability for tax and meets other requirements the burden_of_proof shifts from the taxpayer to the commissioner as to that factual issue we find that petitioners have failed to produce sufficient evidence to cause the burden to shift to respondent accordingly the burden_of_proof remains on petitioners ii expense deductions deductions are a matter of legislative grace and taxpayers must maintain adequate_records to substantiate the amounts of their income and entitlement to any deductions or credits claimed rule a 503_us_79 292_us_435 sec_162 authorizes a deduction for all the ordinary and necessary business_expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business whether an expense is ordinary is determined by time place and circumstance certain expenses may not be estimated because of the strict substantiation requirements of sec_274 this strict substantiation rule overrides the general_rule of cohan that we may estimate deductions where evidence is inadequate 39_f2d_540 2d cir estimation of deductions bearing heavily against taxpayer whose inexactitude is of his or her own making 50_tc_823 strict-substantiation provision takes precedence over cohan_rule affd 412_f2d_201 2d cir the heightened substantiation requirements of sec_274 apply to any traveling expense including meals_and_lodging away from home any item with respect to an activity in the nature of entertainment amusement or recreation any expense for gifts or the use of listed_property as defined in sec_280f including any passenger automobiles in the present case sec_274 applies to the disputed automobile travel and meals expenses petitioners must substantiate these expenses by contemporaneous_records showing the amount of each expense the time and place of the travel and the business_purpose of the expense as to the dollar_figure in legal expenses the cost of defending or perfecting title to property constitutes a capital_expenditure and no current deduction shall be allowed for it estate of franco v commissioner tcmemo_1980_340 cowden v commissioner tcmemo_1965_278 affd per curiam 365_f2d_832 1st cir sec_1_263_a_-2 income_tax regs another issue in this case is whether the activities for which schedule c deductions have been claimed are distinct trades_or_businesses from the activities petitioners reported on schedule e which were subject_to the passive_activity_loss limitations respondent argues that petitioners did not adequately establish distinct trades_or_businesses and that petitioners also failed to substantiate the disputed deductions in any event we will discuss the individual expense items but we also find no trade_or_business operated in separate from the activities reported in the two schedules e a travel_expenses petitioners claimed a deduction for travel_expenses of dollar_figure for tax_year to substantiate their claimed expenses mr ortega created an air travel log and provided copies of ticket stubs and credit card statements however the air travel log was not created contemporaneously but rather was a reconstruction near the time of trial petitioners could not connect the receipts and other documentation with the flights and amounts stated on the air travel log some of the ticket stubs listed passengers other than petitioners and the credit card statements did not indicate the destination of the air travel or the names of the passengers who purchased the tickets in sum given the inadequacy of the evidence produced petitioners have failed to substantiate the travel_expenses respondent’s determination is sustained b meals and entertainment_expenses petitioners claimed a deduction of dollar_figure for meals and entertainment_expenses to substantiate the meals and entertainment petitioners provided receipts however the receipts failed to indicate the business_purpose of the meals or the meals’ relationship to a trade_or_business petitioners have failed to adequately substantiate these expenses respondent’s determination is sustained c car and truck expenses petitioners claimed a deduction of dollar_figure for car and truck expenses in to substantiate these expenses petitioners created a mileage log the mileage log was not created contemporaneously but rather at or near the time of trial the mileage log fails to specify how any of the stated business trips relate to any of petitioners’ properties or to a trade_or_business respondent’s determination is sustained d supplies expenses petitioners claimed a deduction of dollar_figure for supplies petitioners provided four receipts however the receipts lacked adequate notation of a business_purpose in addition petitioners failed to provide a business_purpose for the purchases of the supplies respondent’s determination is sustained e taxes and licenses expenses petitioners claimed a deduction of dollar_figure for taxes and licenses to substantiate these expenses petitioners provided seven receipts from the mexican government which had been stamped paid mr ortega testified that one receipt was for rancho notre three were for los cocos and the remaining receipts were for a property called malicon which was the office headquarters however some of these receipts were in the names of mr ortega’s two brothers petitioner testified that although some of these receipts did not show his name he paid the taxes and thus was entitled to the deductions mr ortega testified that the receipts showed different owners because of a municipal law which provided that no one can hold or own property more than big_number square meters so in order to keep the property intact i asked my brothers if i could put big_number square meters in their respective names to work around this local ordinance while we find that petitioners have provided adequate documentation in the receipts for taxes and licenses expenses they have failed to establish that the reported expenses were not more properly associated with the activities reported on schedules e of their income_tax return accordingly we find these expenses are not deductible as schedule c expenses f cleaning and laundry expenses petitioners claimed a deduction of dollar_figure on their schedule c for laundry and cleaning expenses mr ortega stated that although these expenses were listed on their schedule c as laundry and cleaning expenses it was a misposting the expenses were described by mr ortega as cleaning experiences which consisted of clearing the grounds of any fallen trees or debris after storms mr ortega stated that most of the cleaning expense was related to los cocos petitioners provided receipts which showed the location date hours worked and work done by trabajadores or laborers mr ortega testified that these receipts provided the information that he would need in order for the laborers to get paid the laborers would sign and mr ortega would then give a conversion from pesos to dollars and pay them the court finds that petitioners’ receipts provide documentation of the deduction for the cleaning and laundry expenses but as a schedule e expense which does not create a current deduction for because of the passive_loss_rules accordingly respondent’s adjustment is sustained g telephone and web site expenses petitioners claimed a deduction of dollar_figure on their schedule c for telephone expenses mr ortega also testified at trial that web site expenses of dollar_figure were an unresolved business_expense petitioners provided copies of verizon wireless bills to substantiate their claimed expenses mr ortega testified that he has a combination of services on his cell phone which he stated is primarily an international cell phone petitioners’ verizon wireless bills did not indicate whether the cell phone was used exclusively for business purposes and thus we conclude that petitioners have failed to substantiate that these expenses were associated with a trade_or_business similarly the web site expense was not properly substantiated as a schedule c expense accordingly we sustain respondent’s determination h depreciation petitioners claimed a deduction of dollar_figure for depreciation on their schedule c however petitioners have not provided any evidence to explain or substantiate this deduction therefore petitioners are not entitled to this deduction and we sustain respondent’s determination i legal fees petitioners claimed a deduction for a dollar_figure legal settlement expense on their schedule c the amount is the result of a legal action taken by petitioners to force squatters or parachuters off their properties because of rising attorney’s fees petitioners felt that it would be easier to pay the squatters to vacate their properties petitioners are claiming the legal expense as a theft_loss seeking to establish that there was an illegal act petitioners provided documentation of an agreement whereby each individual was paid dollar_figure to vacate petitioners’ properties respondent argues that these expenses are not based upon a currently active trade_or_business and are not current deductions respondent argues in the alternative that petitioners may be entitled to capitalize these expenses we agree with respondent’s analysis that these expenses are capital and do not relate to an active trade_or_business in iii accuracy-related_penalty respondent determined that petitioners are liable for an accuracy-related_penalty under sec_6662 and b sec_6662 and b and imposes a 20-percent penalty on an underpayment_of_tax required to be shown on a return if the underpayment is attributable to a taxpayer’s negligence or disregard of rules or regulations or substantial_understatement_of_income_tax sec_6662 defines a substantial_understatement_of_income_tax as a tax understatement that exceeds the greater of percent of the tax required to be shown on the tax_return or dollar_figure sec_6662 defines negligence as including any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws negligence has also been defined as the failure to exercise due care or the failure to do what a reasonable and prudent person would do under the circumstances 85_tc_934 negligence also includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs courts deciding a taxpayer’s liability for a negligence_penalty generally look both to whether the underlying investment was legitimate and to whether the taxpayer exercised due care in the position taken on the return 82_f3d_918 9th cir affg tcmemo_1994_217 when an investment has such obviously suspect tax claims as to put a reasonable taxpayer under a duty_of inquiry a good_faith investigation of the underlying viability financial structure and economics of the investment is required roberson v commissioner tcmemo_1996_335 affd without published opinion 142_f3d_435 6th cir sec_6664 provides an exception to the accuracy- related penalty if it is shown that the taxpayer had reasonable_cause and acted in good_faith sec_1_6664-4 income_tax regs the decision as to whether the taxpayer acted with reasonable_cause and good_faith depends upon all the pertinent facts and circumstances 116_tc_438 see sec_1_6664-4 income_tax regs relevant factors include the taxpayer’s efforts to assess his proper tax_liability including the reasonableness and good_faith of reliance on the advice of a professional such as an accountant sec_1_6664-4 income_tax regs reliance on the advice of a professional tax adviser can be a defense to the negligence_penalty but does not necessarily demonstrate reasonable_cause and good_faith 469_us_241 respondent has carried the threshold burden of production under sec_7491 and petitioners bear the burden of proving reasonable_cause respondent argues that petitioners were negligent in failing to maintain adequate_records and to substantiate their items properly respondent argues that petitioners should have know that the claimed schedule c expenses were not associated with active trades_or_businesses petitioners managed the accounting and bookkeeping for the foreign properties carelessly during they failed to keep records contemporaneous with the expenses and they claimed expenses for businesses which were in the development stage and not yet operational we find petitioners’ underpayment negligent and lacking in good_faith or reasonable_cause accordingly the court finds that petitioners have failed to carry their burden and we sustain respondent’s determination of the accuracy-related_penalty under sec_6662 and b for tax_year to reflect the foregoing decision will be entered for respondent


t c memo united_states tax_court estate of charles b grant jr deceased charles b grant iii executor petitioner v commissioner of internal revenue respondent docket no filed date jo karen parr for petitioner linda k west for respondent memorandum opinion gerber judge we consider here petitioner’s motion to amend the petition respondent has objected on the ground that the subject matter of the proposed amendment is not relevant we therefore consider whether the relevance of the matter pleaded is prereguisite to our granting leave to amend a pleading unless otherwise stated all rule references are to the court’s rules_of_practice and procedure in response to a notice_of_deficiency dated date the petition contained allegations of error concerning respondent’s valuation of stock and concerning respondent’s determinations that the decedent made gifts to the shareholders of a corporation and that life_insurance_proceeds are includable in his gross_estate petitioner now seeks leave to amend the petition to include facts learned from freedom_of_information_act requests approximately months after the original petition was filed the facts alleged in the proposed amendment were derived from the examining agent’s report on the valuation of the stock at issue in the deficiency_notice respondent objects to petitioner’s proposed amendment on the ground that such matters are irrelevant rule a provides a party may amend a pleading once as a matter of course at any time before a responsive pleading is served otherwise a party may amend a pleading only by leave of court or by written consent of the adverse_party rule a further provides that leave to amend shall be given freely when justice so requires this court has looked to cases decided under rule a of the federal rules of civil procedure for guidance on the interpretation of rule a see 89_tc_1081 like rule a rule a of the federal rules of civil procedure mandates that leave to amend shall be freely given when justice so requires in this case the motion for leave was not filed before the responsive pleading and respondent has not consented to the motion the court may use its discretion to grant petitioners leave to amend see kramer v commissioner supra pincite in exercising that discretion the courts consider various factors including the timeliness of the motion the reasons for the delay and whether granting the motion would result in issues being presented in a seriatim fashion see 661_f2d_1022 5th cir leave to amend may be inappropriate where there is undue delay bad faith prejudice resulting from the amendment or a dilatory motive of the movant see 371_us_178 98_tc_28 the liberal attitude towards amendment is reflective of the liberal policy generally applied to pleadings the federal rules reject the approach that pleading is a game of skill in which one misstep by counsel may be decisive to the outcome and accept the principle that the purpose of pleading is to facilitate a proper decision on the merits 355_us_41 rather pleadings should be construed to do substantial justice id even where as here the complaint may contain unnecessary detail and evidentiary matter the most important requirement of the pleadings is that the opposing party be made aware of the claims he will be called upon to meet see 159_fsupp_706 s d n y though certain evidentiary facts may be unnecessary to a complaint they may remain in the complaint unless they are prejudicial 2_frd_300 the liberal policy of pleadings allows parties to introduce issues that may be more fully developed in the pretrial process respondent has not accused petitioner of any inappropriate practice such as delay bad faith or dilatory motive in moving to amend nor has respondent shown that the proposed amendment would prejudice respondent in any respect to the contrary respondent contends that the amendment would have no effect on the outcome of this action we see no reason to deny petitioner leave to amend its petition because of the reference to irrelevancy it is unclear if respondent meant to make a motion under rule to strike a portion of the pleadings as amended rule permits a party within certain time limits to move to strike any insufficient claim or defense or any redundant immaterial impertinent frivolous or scandalous matter rule was derived from rule f of the federal rules of civil procedure and the federal rules of civil procedure will be considered in applying rule 81_tc_999 see also note to tax_court rule 60_tc_1093 in estate of jephson v commissioner supra pincite we set forth various principles along with citations omitted here to be followed in connection with motions to strike as follows motions to strike under frcp f have not been favored by the federal courts matter will not be stricken from a pleading unless it is clear that it can have no possible bearing upon the subject matter of the litigation a motion to strike should be granted only when the allegations have no possible relation to the controversy when the court is in doubt whether under any contingency the matter may raise an issue the motion should be denied if the matter that is the subject of the motion involves disputed and substantial questions of law the motion should be denied and the allegations should be determined on the merits in addition a motion to strike will usually not be granted unless there is a showing of prejudice to the moving party citations omitted as discussed above respondent does not allege that any prejudice will occur if petitioner is allowed to amend the petition to include the new factual allegations there appear to be no new issues raised by or with these factual allegations and respondent appears not to question the truth of the allegations respondent questions only the legal weight or relevancy that should be given to those alleged facts respondent’s objection to allegations concerning the examination agent’s conclusions about the stock valuation is premature we cannot decide at this juncture that petitioner’s allegations can have no possible bearing upon the subject matter of the litigation to pursue further evidence about the relevancy of the disputed facts at this time would be contrary to interests of judicial economy for the above reasons petitioner’s motion to amend the petition will be granted an appropriate order will be issued


internal_revenue_service number release date index number r ---------------------------------- -------------------------- ---------------------------- --------------------------------------------- ---------------------------------- in re ---------------------------------------------------- --------------------------------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ------------------------ id no ------------------ ---------------------------------------------------- telephone number ---------------------- refer reply to cc ita plr-138380-13 date date legend taxpayer state a state b date a date b date c date d date e date f x square feet y square feet z square feet dollar_figurex term a x y z partnership llc llc llc manager finance master tenant fund sublessee building building ---------------------------------------------------------- -------------- --------------- ---------------------- ---------------- ----------------- --------------------- --------------------- --------------------- ------------------------- --------------------------- ------------------------- ------------------- --------------- --------------- ---------------- ---------------- --------------------------------------------------- ----------------------------------------------- ----------------------------------------- ------------------------------------------------------ ------------------------------------ ----------------------------------------- ---------------------------------------------------- ------------------------------------ ---------------------------------------------------- ---------------------------------------------------------------- ---------------------------------------------------------------- ---------------------------------------------------------------- ------------------------------------------------------------------------------------- ---------------------------------- ------------------------------------------------------------- plr-138380-13 vacant land block community dear ------------------ this is in response to taxpayer’s request for a private_letter_ruling dated on date and subsequent correspondence requesting a ruling that the rehabilitation of two contiguous properties be treated as part of the same project and thus be considered one property for purposes of sec_168 of the internal_revenue_code code facts taxpayer is a state a limited_liability_company organized in date b to acquire develop renovate and construct three adjacent properties into a mixed-use commercial development containing a cultural center a performing arts facility office space educational classroom space educational studio space and a commercial surface parking lot the three properties are building building and vacant land the three properties are located on separate but contiguous parcels that run the entire length of block and are located in a low-income district known as community only building and building collectively buildings are subject_to this ruling_request taxpayer is operating pursuant to its amended and restated operating_agreement dated date f by an among partnership a state b non-profit corporation as a member with an x ownership_interest llc a state a limited_liability_company as a member with an y ownership_interest llc a state a limited_liability_company as a member with an z ownership_interest and llc a state b limited_liability_company as non-member manager taxpayer acquired building a historic building building a historic building and vacant land in date b taxpayer transferred vacant land to finance in date c taxpayer retains site control_over buildings buildings are physically connected by an existing party wall which they share building will be renovated as office space educational classroom space and architectural space the projected completion date and placed-in-service date for building is on or about date d building will be renovated as a cultural center and performing arts facility the projected completion date and placed-in-service date for building is on or about date e which is a few months after date d building will contain approximately x square feet of office space educational classroom space and educational studio space building will contain y square feet of cultural center space and performing arts space vacant land will be used as a shared surface parking lot serving both buildings a legal servitude executed plr-138380-13 and recorded in date c ensures that during and following the renovation and construction_period vehicular and pedestrian access between buildings will be in place on date f taxpayer closed on dollar_figurex in federal new_markets_credit financing for the renovation of the two historic buildings and the construction of improvements for a surface parking lot on the contiguous parcels that comprise this project the financing includes a combination of debt and equity that originated from a single community development entity lender the loans are evidenced by promissory notes and loan agreements and secured_by guaranties taxpayer represents that it plans to operate lease market manage and otherwise deal with the historic buildings as a single integrated mixed-use development taxpayer envisioned and will carry out this project as a cultural hub as all tenants will be engaged in creative endeavors and cultural activities within their respective spaces taxpayer’s selection of creative tenants was intentional buildings will be managed as one project under a single asset management agreement with manager which will oversee rent collection and contracting for shared repair and maintenance services for buildings taxpayer leased buildings to master tenant a state a limited_liability_company pursuant to a master lease agreement to provide for the coordinated combined management of buildings by a single management entity taxpayer and master tenant will execute a single asset management agreement with manager which will manage buildings pursuant to his agreement an asset management fee will be paid to manager for its management services master tenant subleased building to the administrators of the fund a state a nonprofit corporation for_the_use_of building as office space educational classroom space and educational studio space the sublease is for the approximately x square feet for building which includes z square feet of built out net rentable area contained in building and non-exclusive access to sidewalks parking access landscaped areas and other areas serving building the sublease term is ten years with an option to renew for another five years the sublease term began on date f the sublease contains an option to purchase the property by the fund at other than the property’s fair_market_value accordingly the sublease of building to fund is a disqualified_lease for purposes of sec_168 taxpayer represents master tenant subleased the y square feet in building to sublessee pursuant to a sublease agreement that is not a disqualified_lease taxpayer further represents that it is constructing the entire project involving building and building under a single comprehensive development and construction budget each month during the construction phase of the project taxpayer will submit plr-138380-13 a single draw to the lender of the debt requesting that loan proceeds be used to make progress payments to the construction contractors taxpayer requests a ruling that building and building be considered part of the same project and thus treated as one property for purposes of the 50-percent threshold test is sec_168 h b iii of the code law and analysis sec_47 as amended by section a of the housing assistance tax act of provides that the term qualified_rehabilitation_expenditure does not include any expenditure in connection with the rehabilitation of a building which is allocable to the portion of the property which is or may reasonably be expected to be tax-exempt_use_property within the meaning of sec_168 except that percent shall be substituted for percent in sec_168 section b of the act provides that the amendment made by section shall apply to expenditures properly taken into account for periods after date sec_168 states that in the case of non-residential real_property the term tax-exempt_use_property means that portion of the property leased to a tax- exempt entity in a disqualified_lease under sec_168 the term disqualified_lease means any lease of the property to a tax-exempt_entity but only if i part or all of the property was financed directly or indirectly by an obligation the interest on which is exempt from tax under sec_103 and such entity or a related_entity participated in such financing ii under such lease there is a fixed or determinable price purchase or sale option which involves such entity or a related_entity or there is the equivalent of such an option iii such lease has a lease_term in excess of years or iv such lease occurs after a sale or other transfer of the property by or lease of the property from such entity or a related_entity and such property has been used by such entity or a related_entity before such sale or other transfer or lease under sec_168 property will be considered tax-exempt_use_property only if the portion of the property leased to tax-exempt entities in disqualified leases is more_than_35_percent_of_the_property the 35-percent exception sec_168 provides that improvements to a property other than land will not be treated as a separate_property sec_1_168_j_-1t q a-6 of the temporary income_tax regulations provides that the phrase more_than_35_percent_of_the_property means more than percent of the net rentable floor space of the property the net rentable floor space in a building does not include the common areas of the building regardless of the terms of the lease for purposes of the more_than_35_percent_of_the_property rule two or more buildings will be treated as separate properties unless they are part of the same project in which plr-138380-13 case they will be treated as one property two or more buildings will be treated as part of the same project if the buildings are constructed under a common plan within a reasonable_time of each other on the same site and will be used in an integrated manner sec_168 provides that property will not be treated as tax-exempt_use_property if the portion of the property leased to tax-exempt entities in disqualified leases is no more_than_35_percent_of_the_property under sec_47 the test is no more than percent for purposes of the rehabilitation_credit taxpayer posits that even if building is leased to tax-exempt entities in disqualified_lease the determination of whether the 50-percent threshold is crossed should be made by reference to the total net rentable floor space in the buildings combined because the buildings are part of the same project under q a-6 of the temporary regulations and thus the buildings together constitute one property for purposes of sec_168 therefore if this 50-percent threshold is not crossed with respect to the total net rentable floor space in the buildings no portion of the property will be tax-exempt_use_property within the meaning of sec_168 as modified for purposes of the rehabilitation_credit by sec_47 for purposes of determining if the buildings in this case should be considered part of a single project for purposes of q a-6 of the temporary regulations and sec_168 taxpayer represents that the buildings are constructed under a common plan within a reasonable_time of each other located on the same site and will be used in an integrated manner with respect to the same site requirement taxpayer represents that building and building are historic buildings physically connected by an existing party wall they are on contiguous parcels of land there is a legal recorded servitude that allows direct access to the shared parking lot at vacant land from both buildings further buildings will be placed_in_service within a few months of each other which is certainly within a reasonable_time concerning the integrated use factor both building and building will be managed under a single asset management agreement with manager which will oversee rent collection and contract for shared repair and maintenance services for buildings taxpayer plans to operate lease manage and otherwise deal with buildings as a single integrated mixed-use development taxpayer envisioned and will carry out the use of the buildings as a cultural hub as all tenants will be engaged in creative endeavors and cultural activities the selection of creative tenants was intended by taxpayer concerning management of the buildings taxpayer leased both buildings pursuant to a master lease agreement with master tenant to provide for the combined coordinated management of the buildings as a single project by a single management entity taxpayer represents that an asset management agreement will be executed with manager which will manage and operate the buildings as a single property plr-138380-13 concerning financing the buildings taxpayer represents that it closed on a coordinated common plan of federal new_markets_tax_credit financing for the renovation of the buildings with one community development entity lender the loans are evidenced by promissory notes and loan agreements and are secured_by a mortgage on buildings with respect to accounting taxpayer is utilizing a single comprehensive development and construction budget for the renovation of the buildings the budget will flow into a single set of books a consolidated income statement and balance_sheet and a single federal_income_tax return reflecting the aggregate operations of this project interim accounting reports and annual operating projections will pertain to the buildings as a single project we have no facts or reason to doubt or challenge these representations the facts show that the buildings will be renovated at the same time and on the same site separated only by an existing wall construction and renovation will be completed and the buildings placed_in_service within a reasonable_time of each other ie approximately a couple of months the facts and representations in the submission indicate that the buildings will be operated in an integrated manner and developed as a cultural and entertainment hub in addition the buildings will be managed by the same manager and be treated as one project on the taxpayer’s books_and_records conclusion based on the facts submitted and representations made the buildings constitute one project for purposes of sec_1_168_j_-1t q a-6 of the temporary regulations accordingly we conclude that for purposes of the rehabilitation tax_credit and the application of sec_47 and sec_168 h b iii to taxpayer’s rehabilitation and leasing of buildings the property will include all of the net rentable floor space in the building and building no opinion is expressed or implied regarding the application of any other provision in the code or regulations specifically no opinion is expressed or implied regarding whether the rehabilitation of buildings is a substantial rehabilitation or certified_rehabilitation or whether expenditures incurred to rehabilitate historic building are qualified_rehabilitation_expenditures under sec_47 in addition no opinion is expressed or implied concerning whether any lease or sublease mentioned in this ruling letter is a true lease for federal_income_tax purposes plr-138380-13 this ruling is directed only to the taxpayer that requested it under sec_6110 it may not be used or cited as precedent in accordance with a power_of_attorney filed with the request a copy of this letter is being sent to your authorized representative we are sending a copy of this letter to the appropriate sbse office sincerely william a jackson chief branch office of associate chief_counsel income_tax accounting enclosures copy of this letter copy for sec_6110 purposes


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 b02 plr-122899-12 date date legend x -------------------------------------- --------------------------------------------------------------------------------------------------- a -------------------------- --------------------------------------------- trust ------------------------------------------ ---------------------------------------------------------------------------- state ------------ date ------------------------ date ----------------------- date ------------------------------ date ------------------ dear --------------- this letter responds to a letter dated date submitted by x’s authorized representative on behalf of x requesting inadvertent termination relief under sec_1362 of the internal_revenue_code the information submitted states that x was formed under the laws of state and elected to be treated as an s_corporation on date on date a a shareholder of x established trust also on date trust became a shareholder of x trust is an plr-122899-12 irrevocable_trust but all relevant parties have treated a as the owner of trust under sec_675 and have also treated trust as an eligible s_corporation shareholder under sec_1361 in date x discovered that the transfer shares in of x to trust may have caused an inadvertent termination of x’s s election on date trust transferred its shares of x stock to a such that trust ceased to be a shareholder of x x represents that the above transactions were not motivated by tax_avoidance or retroactive tax planning during the years at issue all tax returns for x were filed on form_1120s all relevant parties have treated x as an s_corporation at all times x and all shareholders of x agree to make any adjustments consistent with the treatment of x as an s_corporation that the secretary may require sec_1361 of the code defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that a small_business_corporation cannot have as a shareholder a person other than an estate and other than a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides in part that for purposes of sec_1361 a_trust all of which is treated under subpart e of part of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be an s_corporation shareholder sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the taxable_year for which a corporation is an s_corporation such corporation ceases to be a small_business_corporation a termination of an s_corporation_election under sec_1362 is effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under paragraph or of sec_1362 the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the plr-122899-12 circumstances resulting in such ineffectiveness or termination the corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the information submitted and the representations made we conclude that x’s s_corporation_election may have terminated on date the date trust acquired shares of x we also conclude that any termination was inadvertent within the meaning of sec_1362 and that under the provisions of sec_1362 x will be treated as an s_corporation from date and thereafter provided that x’s s election was valid and was not otherwise terminated except as specifically ruled upon above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code specifically no opinion is expressed on whether x was otherwise eligible to be treated as an s_corporation this ruling is directed only to the taxpayer who requested it section sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely melissa c liquerman chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc