internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc psi b09-plr-130935-02 date date re legend taxpayer taxpayer date trust foundation foundation x company y company a b c accounting firm year year plr-130935-02 accounting firm dear this is in response to your letter dated date on behalf of taxpayer and taxpayer requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to make allocations of generation-skipping_transfer gst_exemption the facts and representations submitted are summarized as follows on date taxpayer and taxpayer husband and wife established the trust an irrevocable_trust for the benefit of the children and other issue of taxpayer the terms of the trust provide the trustees discretion to use the principal and income of the trust for loans or distributions to the trust beneficiaries specific provisions are included for loans and distributions for post-secondary education for purchase of a residence to establish or expand a business to enable a beneficiary to forgo employment in order to stay at home with young children to match certain charitable_contributions to support a disabled beneficiary to fund emergency health care and for travel to certain locations and for missionary work the trust continues until taxpayer 1's line of issue fails unless earlier termination is required by operation of local law if earlier termination is required by operation of local law the remaining assets of the trust are to be distributed to taxpayer 1's then living issue by right of representation if taxpayer 1's line of issue should fail the remaining assets of the trust are to be distributed to foundation or if foundation is not then in existence to foundation on date taxpayer transferred to the trust x shares of company stock and y shares of company stock taxpayer and taxpayer represent that the x shares of company stock had an aggregate value of dollar_figurea and the y shares of company stock had an aggregate value of dollar_figureb at the time of the transfer on date taxpayer and taxpayer each also transferred dollar_figurec cash to the trust taxpayer and taxpayer relied on accounting firm to prepare their year form sec_709 united_states gift and generation-skipping_transfer_tax return taxpayer and taxpayer each reported the transfers to the trust on timely filed year gift_tax returns on taxpayer 1's gift_tax_return taxpayer consented to have the gifts made by taxpayer and himself to third parties during the calendar_year as made one-half by each of them on the year gift_tax returns accounting firm failed to allocate any of taxpayer 1's and taxpayer 2's gst exemptions to the year transfers to the trust in year accounting firm reviewed taxpayer 1's and taxpayer 2's year gift_tax returns and discovered that none of taxpayer 1's or taxpayer 2's gst_exemption plr-130935-02 had been allocated to the year transfers to the trust no additional transfers have been made to and no distributions have been made from the trust taxpayer and taxpayer have requested the following rulings an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-1 and sec_301_9100-3 to make allocations of taxpayer 1’s and taxpayer 2's gst_exemption for the transfers to the trust in year and that such allocation shall be made based on the value of the property transferred to the trust as of the date of the original transfers sec_2601 imposes a tax on every generation-skipping_transfer gst a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that an allocation of gst_exemption to property transferred during the transferor’s lifetime other than in a direct_skip is made on form_709 sec_2642 provides that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer or is deemed to be made under sec_2632 or c the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period its value at the time of the close of the estate_tax_inclusion_period and such allocation shall be effective on and after the date of such transfer or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period on and after the close of such estate_tax_inclusion_period sec_2642 provides generally that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph plr-130935-02 sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_34_irb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a generation-skipping_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than 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_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a gst_trust are to be treated as if not expressly prescribed by statute accordingly taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore taxpayer and taxpayer are granted an extension of time of days from the date of this letter to make allocations of taxpayer 1’s and taxpayer 2's respective available gst plr-130935-02 exemptions with respect to taxpayer 1's and taxpayer 2’s transfers to the trust in year the allocations will be effective as of date the date of the transfers to the trust and the gift_tax value of the transfers to the trust will be used in determining the amount of gst_exemption to be allocated to the trust these allocations should be made on supplemental form sec_709 united_states gift and generation-skipping_transfer_tax return and filed with the cincinnati service_center at the following address internal_revenue_service center cincinnati oh a copy of this letter should be attached to the supplemental form sec_709 copies are enclosed for this purpose the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code in addition we express or imply no opinion regarding the value of the property transferred to trust in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer and taxpayer this ruling is directed only to the taxpayers requesting it sec_6110 provides that it may not be used or cited as precedent sincerely william p o’shea acting associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter


se on government entities division department of the treasury internal_revenue_service washington d c nov tep rat r th uil no 408a legend company x investment advisory account a investment advisory account b investment advisory account c dear this is in response to your letter dated date submitted on your behalf by your authorized representative concerning the treatment of certain fees assessed in connection with investment advisory account services provided to owners of traditional individual_retirement_arrangements iras as described in sec_408 and roth iras as described in sec_408a of the internal_revenue_code the code under penalty of perjury the following facts and representations have been submitted in support of the rulings requested company x is a securities broker-dealer and investment adviser offering investment planning advice and related financial services to its clients company x offers iras and roth iras to its clients you represent that company x was approved as a non-bank custodian for iras pursuant to sec_408 of the code and sec_1_408-2 of the income_tax regulations regulations and that the service has approved the original and amended versions of company x’s prototype individual retirement custodial_account agreement company x the custodian of each of the iras has established investment advisory account options that provide ira account holders with investment advice and trade execution services for a quarterly fee the fee is a percentage of assets under management and is not related to the number of trades executed in any account this fee is referred to as a wrap fee page of following is a list and description of the advisory account options company x currently offers to its ira and roth_ira account holders a investment advisory account a is an investment advisory account through investment advisory account a which clients receive discretionary and or non-discretionary investment advice regarding the investment in eligible securities with the exception of the discretionary services provided by separate_account managers the client is responsible for making all investment decisions in the account company x provides customized and professional investment advisory services through investment advisory account a which offers access to independent professional separate_account managers mutual funds and exchange traded funds company x assists the client in identifying investment goals risk tolerance and investment preferences and monitors the investment portfolio and goals the client can choose to invest in a mutual_fund portfolio an exchange-traded fund etf portfolio and or through a separate_account manager if the client chooses the mutual_fund portfolio assets are allocated among an approved list of mutual funds if the client chooses the etf fund portfolio assets are invested in one or more etfs which are a customized portfolio of underlying securities designed to capture performance of a particular index or industry sector clients can choose to have their mutual_fund and or etf portfolios automatically rebalanced on annual semi-annual or quarterly basis or can elect not to have the account automatically rebalanced rebalancing restores the balance of asset classes in a portfolio to its original target asset allocation the mutual_fund and etfs are screened by an independent third party provider if the client chooses a separate_account manager the manager provides portfolio management for a particular asset class and or investment style on a discretionary basis the separate_account manger makes investment decisions and executes transactions on the client’s behalf the separate_account manager option can be combined with the mutual_fund and or etf portfolios each client receives a quarterly performance report that allows the client to monitor his or her portfolio and compare its performance against industry benchmarks additional services provided by company x to accountholders include custody of securities and brokerage transaction execution when opening investment advisory account a a client must also open a companion brokerage account with company x this companion account is used to effect brokerage transactions for the account the wrap fee for investment advisory account a is an asset-based fee based on the value of the assets held in the account the amount of the fee varies depending on the amount of assets under management and page of type of investments in the account separate brokérage fees are not assessed under the companion brokerage account the wrap fee covers brokers’ commissions and fees b investment advisory account b in investment advisory account b company x provides financial planning and investment guidance financial_market and securities research quarterly performance reporting periodic portfolio review and brokerage transaction execution clients that select this account receive non- discretionary advice regarding investment in eligible securities and the client makes all investment decisions clients can choose to invest their ira assets in a wide range of eligible securities including equity securities bonds mutual funds and etfs when opening investment advisory account b a client must also open a companion brokerage account with company x this companion account is used to effect brokerage transactions for the account the wrap fee for investment advisory account b is an asset-based fee based on the value of the assets held in the account the wrap fee does not cover and clients are responsible for paying certain other expenses including commissions charged by brokers other than company x interest on debit account balances interest charges on margin loans the entire public offering price including underwriting commissions and discounts on securities purchased from an underwriter or dealer involved in a distribution of securities bid-ask spreads odd lot differentials exchange fees transfer_taxes and other fees required_by_law transaction charges on the liquidation of assets not eligible for the account and short-term trading charges for purchases and corresponding redemptions of certain mutual_fund shares made within short periods of time as defined by the fund prospectus other expenses in addition any trade exceeding the trade caps specified in the account terms and conditions will be charged a dollar_figure active trader fee separate brokerage fees are not assessed under the companion brokerage account although there may be some additional expenses under the brokerage account the wrap fee covers brokers’ commissions and fees regardless of the number of trades executed c investment advisory account c investment advisory account c is a non-discretionary investment advisory account in this account option company x offers account holders a choice of one of five risk-based portfolios invested in mutual funds as follows e e aggressive portfolio moderate aggressive portfolio page of e e moderate portfolio moderate conservative portfolio and conservative portfolio a company x advisor assists the account_holder in selecting an appropriate portfolio based on his or her financial goals time horizon to invest and risk tolerance each portfolio features professional risk allocation and quarterly rebalancing including monitoring and review of the underlying funds in the account by a research specialist focused on portfolio management the wrap fee for investment advisory account c is a quarterly asset- based fee based on the value of the assets held in the account clients are also responsible for paying any other expenses assessed against the account each investment advisory account described above includes a securities trading service the cost of which is included in the wrap fee clients who participate in these accounts are predominantly paying for investment advisory money management custodial and other administrative services currently the fees are invoiced to and paid from the ira assets on a quarterly basis company x would like to offer clients the option of paying the wrap fee with non-ira assets without such payment being a deemed contribution to the client’s ira and or roth_ira based on these facts and representations the following rulings are requested under code sec_408 for ira accountholders and code sec_408a for roth_ira accountholders who select investment advisory account a the payment of the wrap fee with funds that are not part of the clients’ ira and or roth_ira will not be treated as deemed contributions to such clients’ ira and or roth_ira under code sec_408 for ira accountholders and code sec_408a for roth_ira accountholders who select investment advisory account b the payment of the wrap fee with funds that are not part of the clients’ ira and or roth_ira will not be treated as deemed contributions to such clients’ ira and or roth_ira under code sec_408 for ira accountholders and code sec_408a for roth_ira accountholders who select investment advisory account c the payment of the wrap fee with funds that are not part of the clients’ ira and or roth_ira will not be treated as deemed contributions to such clients’ ira and or roth_ira page of sec_162 of the code allows a deduction for the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_212 of the code provides that in the case of an individual there shall be allowed as a deduction of all the ordinary and necessary expenses paid_or_incurred during the taxable_year for the production_or_collection_of_income for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income or in connection with the determination collection_or_refund_of_any_tax sec_1_212-1 of the regulations provides in part that sec_212 does not allow the deduction of any expenses which are disallowed by any of the provisions of subtitle a of the code relating to income taxes even though such expenses may be paid_or_incurred for one of the purposes specified in sec_212 sec_219 of the code provides that there shall be allowed as a deduction an amount equal to the qualified retirement contributions of the individual for the taxable_year sec_219 provides that such contributions include amounts paid_by or on behalf of an individual to an ira sec_408a of the code provides that an eligible_individual may make a non-deductible contribution to a roth_ira up to the limit specified in sec_408a sec_1_404_a_-3 of the regulations provides that any expenses_incurred by the employer in connection with a qualified employees’ plan such as trustee's and actuary's fees which are not provided for by contributions under the plan are deductible by the employer under sec_162 of the code relating to trade_or_business_expenses or sec_212 relating to expenses for the production_of_income to the extent that such expenses are ordinary and necessary amounts that are not ordinary and necessary expenses are not deductible under sec_162 revrul_84_146 1984_2_cb_61 discusses the deductibility of trustee's fees with respect to iras it holds that consistent with the rules governing deductions in connection with qualified_plans amounts paid_by the ira owner for such fees in connection with an ira are deductible under sec_212 of the code to the extent they satisfy the requirements of that section but that the amounts paid that are not ordinary and necessary expenses such as capital expenditures and disguised ira contributions are not deductible under sec_212 revrul_86_142 1986_2_cb_60 considered the deductibility of broker's commissions charged in connection with the purchase and sale of securities for a qualified employee's trust or an ira it notes that brokers’ fees are not recurring administrative or overhead expenses_incurred in connection with the maintenance of the trust or ira rather brokers' commissions are intrinsic to the page of value of the trusts or account's assets buying commissions are part of the cost of securities purchased and selling commissions are an offset against the sales_price based on this analysis ira contributions to pay broker's commissions on transactions involving ira assets are not deductible under sec_162 or sec_212 such contributions and payments treated as ira contributions are deductible subject_to the limits of sec_219 with respect to each investment advisory account offered by company x the services provided to its accountholders include investment advice performance monitoring and review trade execution money management and custodial services the wrap fees assessed by company x for services it provides with respect to investment advisory accounts a b and c are based on a fee structure calculated as a percentage of the value of the assets held in the respective account the fees do not vary with the frequency of the transactions performed and are distinct from the cost or volume of any assets purchased or sold even though the companion brokerage account with each investment advisory account provides brokerage services the fee charged is still calculated as a percentage of the total assets under management and clients’ can make an unlimited number and amount of trades without incurring additional fees the fees assessed by company x for its services with respect to investment advisory accounts a b and c are recurring administrative or overhead expenses_incurred in connection with the maintenance of clients' respective iras and or roth iras therefore with respect to your ruling requests one two and three we conclude that the payment of wrap fees by accountholders that participate in investment advisory accounts a investment advisory account b and or investment advisory account c will not be deemed contributions to such clients’ traditional iras under sec_408 of the code and or roth iras under sec_408a of the code if paid directly from funds that are not part of the accountholders’ respective iras and or roth iras no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this ruling is limited to the treatment of program fees paid to company x in the manner herein described and is not intended to apply to any additional fees that may be charged by company x to its ira and roth_ira clients that participate in any of the investment advisory accounts described herein this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent page of a copy of this ruling letter has been sent to your authorized representative in accordance with power_of_attorney on file in this office if you wish to inquire about this ruling please contact d no at please address all correspondence to se t ep ra t4 sincerely yours pn bo sabine laura b warshawsky manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose ce


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc corp b06 - plr-162633-01 date date legend parent sub1 sub2 purchaser disregarded_entity target seller date a date b date c company official company official tax professional state a this letter responds to a letter dated date submitted on behalf of plr-162633-01 parent requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election the extension is being requested by parent as common parent of a consolidated_group that includes sub1 the united_states_shareholder of the foreign purchasing_corporation to file a sec_338 election under sec_338 of the internal_revenue_code and sec_1_338-1 and g with respect to purchaser’s acquisition through disregarded_entity of the stock of target sometimes hereinafter referred to as the election on date b all citations in this letter to regulations under sec_338 are to regulations in effect on date b additional information was received in letters dated november november and date the material information is summarized below parent a state a corporation is the common parent of an affiliated_group that files a federal_income_tax return on a consolidated basis parent indirectly owns all of the stock of sub1 sub1 owns all of the stock of sub2 sub2 owns all of the stock of purchaser purchaser owns all of the stock of disregarded_entity a foreign_corporation disregarded as a separate_entity from its owner sub1 is a domestic_corporation included in parent’s consolidated_return sub2 purchaser seller and target are foreign_corporations prior to the transaction seller wholly owned target target does not have any subsidiaries on date a disregarded_entity and seller entered into a purchase agreement for disregarded_entity to acquire all of the target stock from seller on date b disregarded_entity acquired all of the stock of target from seller in exchange for cash pursuant to the purchase agreement it is represented that the acquisition of the stock of target qualified as a qualified_stock_purchase as defined in sec_338 prior to the acquisition target did not file a united_states income_tax return was not subject_to united_states income_taxation nor was required under sec_1_6012-2 to file a united_states income_tax return in addition target was not a controlled_foreign_corporation within the meaning of sec_957 a passive_foreign_investment_company for which an election under sec_1295 was in effect or a foreign_investment_company or a foreign_corporation the stock ownership of which is described in sec_552 purchaser is a controlled_foreign_corporation as defined in sec_957 and is not required under sec_1_6012-2 other than sec_1_6012-2 to file a united_states income_tax return for its taxable_year that includes the acquisition_date parent intended to file the election the election was due on date c but for various reasons a valid election was not filed after the due_date for the election it was discovered that the election had not been filed subsequently this request was submitted under sec_301_9100-1 for an extension of time to file the election the period of limitations on assessment under sec_6501 has not expired for parent’s consolidated group’s or target’s taxable years in which the acquisition occurred the taxable years in which the election should have been filed or any taxable years that would have been affected by the election had it been timely filed plr-162633-01 sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election or a sec_338 election and the acquisition is a qualified_stock_purchase under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_338-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for parent to file the election provided parent acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent company official company official and tax professional explain the circumstances that resulted in the failure to timely file a valid election the information establishes that parent reasonably relied on qualified_tax professionals who failed to make or advise parent to make the election and that the interests of the government will not be prejudiced if relief is granted see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that parent has shown it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-1 until days from the date on this letter for parent to file the election with respect to the acquisition of the stock of target as described above the above extension of time is conditioned on the filing within days of the date on this letter of all returns and amended returns if any necessary to report the transaction in accordance with the election and the taxpayers' parent’s consolidated group’s and target’s tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers’ tax_liability for the years involved a determination plr-162633-01 thereof will be made by the applicable director’s office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers’ tax_liability is lower sec_301_9100-3 parent must file the election in accordance with sec_1_338-1 and sec_1_338-1 that is a new election on form_8023 must be executed on or after the date of this letter which grants an extension and filed in accordance with the instructions to the form a copy of this letter must be attached to the election form parent purchaser and target must file or amend as applicable their returns to report the transaction as a sec_338 transaction for the taxable_year in which the transaction was consummated and for any other affected_taxable_year and to attach to the returns a copy of this letter and a copy of the election we express no opinion as to whether the acquisition of the target stock qualifies as a qualified_stock_purchase under sec_338 or whether disregarded_entity qualifies as an entity disregarded as separate from its owner or any other tax consequences arising from the election in addition we express no opinion as to the tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by the taxpayers however the director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any continue to apply this letter is directed only to the taxpayer s who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file in this office a copy of this letter is being sent to your authorized representative sincerely yours ken cohen senior technician reviewer branch office of associate chief_counsel corporate cc


tcmemo_2010_256 united_states tax_court constantine sakkis et al petitioners v commissioner of internal revenue respondent docket nos filed date shawn r perez for petitioners christian a speck for respondent memorandum opinion holmes judge constantine sakkis is a shrewd and successful businessman with his wife carol he filed a form_1040 for as they had done for many years the sakkises filled out and we consolidated the cases filed by carol ann sakkis docket nos and with those filed by her husband constantine sakkis docket nos and attached numerous schedules on which they reported their income and deductions only this time there was one major difference on line of the form 1040--the line designated for other income --they listed a completely frivolous section deduction of dollar_figure the commissioner recoiled and treated the entire return as both frivolous and fraudulent the sakkises have since repented of the deduction but argue that they committed no fraud by taking it they also admit that they should have filed a tax_return which they did only after the commissioner caught them and sent a notice_of_deficiency there are numerous contested deductions for both years looming over the sakkises is the question of just what penalties the bad deduction will subject them to for the tax_year background constantine sakkis began working as a real-estate salesman in the mid-1970s within a couple of years he took some state- required courses--including a course on real-estate law--and became a fully licensed real-estate broker by sakkis’s business focus had swiveled from selling to managing rental unless otherwise noted all section references are to the internal_revenue_code in effect for the years at issue all rule references are to the tax_court rules_of_practice and procedure the gist of the sec_861 argument is that only foreign-source income is taxable and therefore a taxpayer’s domestically earned money isn’t internal_revenue_service the truth about frivolous tax arguments sec i b pincite date http www irs gov pub irs-utl friv_tax pdf property and other types of investments but he kept his real- estate broker’s license to do business for past clients and referrals carol sakkis worked for the local phone company until shortly after she and sakkis married and then stayed at home to raise their three children who were born in and the sakkises’ tax trouble began with a great windfall in the 1980s the fcc gave away rural cell-phone licenses via a lottery many people formed partnerships at the time to enter the fcc lottery as often as possible to try to win as many licenses as possible an organizer typically solicited investors who would each put up about dollar_figure and would be more or less randomly put into a partnership consisting of about investors sakkis learned of this and entered several times using both his own name and his wife’s they won big metacomm cellular one of the partnerships in which sakkis invested using his wife’s name received two licenses it sold one immediately but kept the other--a license entitling it to build a cell-phone system in northwest wyoming this eventually became a franchise of cellularone and metacomm eventually converted from a partnership to an llc in spite of the fact that the investment was in his wife’s name and although she was aware of it it was sakkis himself who actively participated in metacomm this was consistent with their usual division of labor--though she balanced the couple’s checkbook each month she otherwise let her husband manage all their business decisions in western wireless offered to buy the assets of the wyoming cell-phone operation metacomm negotiated a sale for dollar_figure million--a return of approximately times the investors’ initial investments the deal closed in date and metacomm disbursed the sakkises’ share of the profits by sending a total of four checks in carol’s name--two in date one in date and the final check in date carol received more than dollar_figure in and then another dollar_figure in toward the end of sakkis began to look for ways to avoid paying taxes on the gain he first tried to use a multi- trust tax_shelter which he learned of during a capital preservation seminar on the remote pacific island of vanuatu the shelter involved setting up domestic and foreign trusts and moving the money around between these trusts until it could allegedly be repatriated tax free sakkis tried to create such a_trust which he named the carolina trust and retroactively transfer his wife’s metacomm interest into it as the first step in this plan but metacomm had already made three distributions into the sakkises’ personal bank account sakkis eventually realized that he had not properly funded the trust and that it was therefore ineffective as a tax_shelter on date he sent metacomm a letter telling it that the carolina trust had been abandoned effective date and that his wife’s interest in metacomm should be transferred back to her joseph pakin the sakkises’ accountant and tax preparer for the previou sec_15 or so years prepared their tax_return in date after filing the necessary requests for extension he also reported the metacomm distributions on the return as long- term capital_gains which is exactly what they were according to pakin’s return the sakkises owed over dollar_figure in taxes including dollar_figure in self-employment taxes plus an estimated-tax penalty the return also calculated an alternative_minimum_tax of dollar_figure unwilling to pay that much sakkis took pakin’s return and handed it over to douglas rosile rosile was an accountant who specialized in providing taxpayers with a multipage argument to attach to their tax returns which claimed that the taxpayer didn’t owe any taxes due to sec_861 rosile took pakin’s return and added a dollar_figure deduction on line of the first page with a notation reading sec_1_861-8 excl -big_number thi sec_3 a district_court in florida issued a preliminary injunction banning rosile from preparing or helping to prepare tax returns for others less than one year after sakkis used his services united_states v rosile aftr 2d ustc par big_number m d fla order granting preliminary injunction rosile was later sentenced to months followed by three years supervised release for his part in actor wesley snipes’s use of the sec_861 argument see united_states v snipes no 06-cr-00022 m d fla date sentencing minutes for douglas p rosile deduction reduced the taxable_income on the second page of the return to zero the self-employment tax--which wouldn’t have been reduced by the deduction--mysteriously disappeared as did pakin’s calculation of alternative_minimum_tax otherwise this return showed everything pakin’s return had both sakkises signed and filed this new return they didn’t file amended returns for any previous year and didn’t use the argument for any later year either they didn’t tell their children--who had begun to file their own returns by this time--about this supposedly miraculous section of the tax code that would absolve them of their tax obligations sakkis did mention the sec_861 argument to pakin but when pakin expressed skepticism he went against the advice of his longtime accountant and instead followed the advice of someone he had spoken to only over the phone the sakkises also didn’t use the sec_861 argument the following year--instead they just didn’t bother to file a return at all sakkis had met his third tax-avoidance specialist eduardo rivera rivera was a licensed attorney who encouraged his clients not to file tax returns but instead to wait for the government to send a notice indicating the income it had in it sec_4 a district_court in california would later permanently enjoin rivera from interfering with the enforcement of the internal revenue laws united_states v rivera aftr 2d ustc par big_number c d cal order granting default judgment and permanent injunction system and only then present all possible deductions paying taxes only on that possibly much smaller amount sakkis followed rivera’s advice and the sakkises didn’t file a tax_return the irs treated the sakkises’ return as frivolous and rejected it completely which meant that as far as the irs was concerned the sakkises didn’t file a valid_return for either or the commissioner initially sent notices of deficiency to sakkis for and to both sakkis and his wife separately for the sakkises filed timely petitions while residing in california and we tried the cases in san francisco before trial the sakkises retained a new accountant and a new attorney to represent them as a result the sakkises have now conceded their sec_861 argument and agree that the profits from the metacomm sale are taxable the commissioner however alleges that their use of the argument in the first place was fraudulent and asks that we impose on any deficiency either a fraudulent failure-to-file penalty or if we find that the return was valid for filing purposes a fraud_penalty there are also many other contested items we sort out the contested because the metacomm income was improperly reported as income of the carolina trust in it wasn’t until when the commissioner discovered the mixup that he realized carol sakkis had income for that year and issued a separate notice_of_deficiency to her for she contested the deficiency in this court and we consolidated that case with the others that the sakkises had filed deductions and exemptions for both years and then discuss the penalties that the commissioner determined for i substantiation discussion because the commissioner determined the return to be invalid and because the sakkises didn’t file a tax_return for the commissioner at first denied almost all the sakkises’ deductions and exemptions for both years the commissioner has since conceded most of these items either by stipulation or in his posttrial briefs several remain unresolved and we address them by year and type a tax_year schedule c--business deductions a dome realty investment dome realty investment was the sole_proprietorship under which sakkis managed his various investments and acted as a broker the parties agree that the late-filed return is subject_to a failure-to-timely-file penalty the commissioner also asserted a sec_6654 penalty for failure to pay estimated_tax the parties didn’t stipulate this issue away but the evidence supports the commissioner and the sakkises haven’t contested it the commissioner also determined in the notice_of_deficiency for that sakkis had received dollar_figure of nonemployee compensation from nevada titan energy inc the parties stipulated various amounts of nonemployee compensation but did not specifically dispose_of this item sakkis had the burden of contesting it so we treat his failure to do so as a concession see rule e and 89_tc_46 on the rare occasions when a former client or a referral asked him to the commissioner conceded many of the business deductions sakkis claimed but continues to contest the following wealth creations ago options jaja group independent investor british american investors international duane gomer seminars dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure sakkis argues that each of these expenses is substantiated by the credit-card statements he provided we agree that the credit- card statements can substantiate expenses even if some of the other charges on the credit card were personal see eg nelson v commissioner tcmemo_2001_117 we also believe sakkis’s testimony that the first six payments above were for investment_expenses and that the payment to duane gomer seminars was in preparation for renewing his real-estate broker’s license we therefore find in sakkis’s favor for all these deductions but only the payment to duane gomer seminars is a business_expense reportable on schedule c the other_payments are all schedule a miscellaneous deductions under sec_212 see also sec_67 b mobile-radio business one of sakkis’s side businesses that didn’t at first require his personal management was the direct ownership of a specialized mobile radio license in los angeles in the company that managed his license for him went out of business and sakkis had to become personally involved according to his testimony that meant driving down to los angeles two or three times to be physically present which resulted in dollar_figure of car and truck expenses and dollar_figure in travel_expenses although we have the power to estimate most business_expenses see 39_f2d_540 2d cir those expenses listed in sec_274 require more detailed and precise substantiation both car-and-truck and travel_expenses are covered by sec_274 this means that to claim such expenses a taxpayer must substantiate his deductions with adequate_records such as a logbook or diary sec_1 5t c i temporary income_tax regs fed reg date and such records must include among other information the amount of the expense and its business_purpose sec_274 sakkis’s records do not we therefore disallow them schedule e--rental properties a monument property in the sakkises bought a 50-percent interest in a shopping center on monument boulevard in concord california to finance the purchase the sakkises and the owners of the other 50-percent interest the tsakoyias together signed an all- inclusive note for dollar_figure payable to the previous owners of the shopping center at least some of the landlord-tenant agreements for the shopping center provided that taxes insurance and maintenance and repairs--or triple-net expenses--would be paid_by the tenants but all other expenses were to be borne by the landlords the sakkises sold their 50-percent ownership in this property in date for the four months that they owned it during that year they claimed dollar_figure in triple-net expenses and dollar_figure for interest_paid on the all-inclusive note both of these deductions are typical of the type of expenses usually incurred with rental property and are subject_to the cohan_rule allowing us to estimate we must however have some basis upon which to make the estimate 85_tc_731 there is nothing in this record to help us estimate these triple-net expenses so we disallow them for the interest_expense however we have a copy of the all- inclusive note which indicates equal ownership of the property by the sakkises and tsakoyiases as well as repayment terms for the loan we find sakkis credible that the interest rate was kept pincite percent after the first 10-year period we therefore allow the entire dollar_figure as a rental expense on schedule e b capri motel the capri motel is a 32-room building originally built as a motel near highway in fresno california and which sakkis bought in the early 1980s as an investment around turning point of central california--a nonprofit social-service agency-- took over the capri motel lease keeping the same terms as the previous tenant one of those terms was that the tenant would pay more than the rent each month to cover fire insurance repairs and maintenance the landlord would then write a check for a predetermined amount back to the tenant each month and the tenant would place that money into a separate_account the tenant would then pay the fire insurance and the cost of repairs and maintenance from that account ie it was something like an escrow account according to the ceo of turning point the reason for using rent refunds like this rather than just paying for the repairs directly was so that there would be a ready pool of cash from which turning point could make any unexpectedly costly repairs without having to contact sakkis or come up with the additional money on short notice each year turning point would issue a to sakkis for the full amount of rent paid including the excess which would be sent back sakkis would in turn report the amount shown on the and then deduct the rent refunds as business_expenses in sakkis claimed rent refunds of dollar_figure the commissioner doesn’t dispute this amount--the sakkises provided canceled checks made out to turning point to substantiate it--but instead claims that the arrangement wasn’t a binding contractual obligation and therefore wasn’t a necessary expense deductions are allowed under sec_162 for ordinary and necessary expenses_incurred while carrying on any trade_or_business there is no dispute that fire insurance maintenance and repairs are ordinary expenses for rental property or that they were incurred in carrying on any trade_or_business the only question is whether it was necessary for sakkis to refund a portion of the rent paid_by turning point to cover those expenses under 290_us_111 the supreme court equated the term necessary in sec_162 with appropriate and helpful see also 27_tc_921 noting legal_obligation not required for expenditure to be deductible and explaining that the basic question is whether in all the circumstances the expenditure is ordinary and appropriate to the conduct of the taxpayer’s business nevertheless the ninth circuit has said that voluntary prepayment of expenses is generally not necessary without a legal_obligation albeit with two exceptions 679_f2d_159 9th cir affg 76_tc_789 one exception is when the taxpayer has an appropriate or compelling business reason for making a payment in advance other than that it is due such as to take advantage of depressed prices or to secure future deliveries or preferential treatment id pincite we find that there was an appropriate business reason for the rent-refund arrangement between sakkis and turning point the obligation to make repairs was on turning point and sakkis was in truth a mere conduit for the funds which were immediately returned to turning point so that it could fulfill its obligation to repair according to credible testimony the arrangement is not unique to this particular landlord and tenant for these reasons we find that the rent-refund payments are allowable as a schedule e expense schedule a--home mortgage interest sec_163 allows a tax deduction for interest_paid on the mortgage of a taxpayer’s primary or secondary residence sec_163 h d this deduction is only for acquisition_indebtedness --ie a loan used to acquire construct or substantially improve a residence when that residence also secures the loan--up to dollar_figure million and home_equity_indebtedness --any other type of loan secured_by a qualified residence--up to dollar_figure sec_163 b and c the sakkises originally paid cash for the land on which their primary residence sits sakkis credibly testified that they then borrowed money to build the home and converted the construction loan into a permanent loan when the house was finished although there was some confusion at trial as to when exactly the construction loan converted into a permanent loan--sakkis testified that they moved into their home in but that construction ended in 1993--we nonetheless find his testimony to be credible on the purpose and continuity of the loans this original permanent loan was later refinanced but that doesn’t affect eligibility for an interest_deduction as long as the new loan doesn’t exceed the refinanced amount see sec_163 the sakkises’ original permanent loan was for dollar_figure which is well below the statutory limit of dollar_figure the form_1098 mortgage interest statement for shows a starting loan balance of dollar_figure and an ending loan balance of dollar_figure-- both of which are below the acquisition_indebtedness of dollar_figure we therefore find that the entire dollar_figure of mortgage interest as shown on the form_1098 is deductible as qualified_residence_interest b tax_year the sakkises filed a return only as trial neared the commissioner accepted almost all of the items we address those that remain schedule e--capri motel in the sakkises claimed dollar_figure in rent refunds to turning point for the reasons we’ve already discussed above we find that this deduction is allowable schedule a--home mortgage interest as explained above the sakkises are entitled to a deduction of their home-mortgage interest as shown on their form_1098 for this amounts to dollar_figure schedule d--capital gains the sakkises claimed in their posttrial reply brief that they had dollar_figure in capital_gains for however this appears to be a mere computational error rather than a modification of the previously stipulated values we therefore hold that the sakkises had dollar_figure in capital_gains for which is the total agreed to in the stipulation of facts exemptions for dependents in an adult child of a taxpayer could be listed as a dependent on the taxpayer’s return if during the tax_year the taxpayer provided more than one-half of his support sec_152 he was a student who had not yet turned by the end of the tax_year sec_151 he couldn’t claim an exemption on his own tax_return sec_151 and he was a u s citizen or resident or a resident of a country contiguous with the united_states sec_152 the sakkises’ three children turned and during the only direct proof we have that the rest of the requirements were met comes from the testimony of the sakkises themselves we do however also have pakin’s testimony that he prepared tax returns for each child for the prior two years and and that the children didn’t claim themselves as dependents in those years we also have sakkis’s credit-card receipts from showing that he paid basic living_expenses for the oldest child we therefore find credible the sakkises’ testimony that they continued to support all three children through that none of the children claimed personal exemptions for themselves and that the children were enrolled in college based on the indirect evidence from prior years and the sakkises’ credible testimony we find that the sakkises are entitled to claim dependency_exemptions for all three children on their tax_return ii penalties for even the sakkises now concede that the sec_861 deduction on their tax_return was improper and we specifically find that the sakkises did not have a good-faith belief in the validity of the sec_861 argument the question is whether taking that deduction amounted to fraud for an action to rise to the level of fraud there must be an intentional wrongdoing with the intent to evade tax believed to be owing 796_f2d_303 9th cir affg tcmemo_1984_601 the commissioner can prove fraudulent intent with certain types of circumstantial evidence known as badges_of_fraud id before we can decide whether the sakkises committed fraud however we will first decide if their return was a valid_return under the code a the return as a valid_return in 82_tc_766 affd 793_f2d_139 6th cir we distilled the supreme court precedent defining a valid tax_return into a four-part test first there must be sufficient data to calculate tax_liability second the document must purport to be a return third there must be an honest and reasonable attempt to satisfy the requirements of the tax law and fourth the taxpayer must execute the return under penalties of perjury the parties here do not contest that the sakkises’ return has sufficient data to calculate the tax_liability that the return purports to be a return or that the sakkises executed the return under penalties of perjury the commissioner asserts only that the return was not an honest and reasonable attempt under the third part of the beard test although there have been many cases applying beard few of these are what one can accurately if clumsily call stand-alone third-prong cases in beard itself we stated that when tax- protester arguments--like the sec_861 deduction--are used it is obvious that there is no ‘honest and genuine’ attempt to meet the requirements of the code id pincite that was however in the context of a taxpayer who impaled himself on the first prong by intentionally tampering with the tax form in a way that prevented the commissioner from being able to determine the tax due we’ve similarly held that a taxpayer didn’t make an honest and reasonable attempt to file when the taxpayer wrote down all zeros or asterisks or similarly uninformative entries see eg 120_tc_163 zeros coulton v commissioner tcmemo_2005_199 same turk v commissioner tcmemo_1991_198 asterisks hintenberger v commissioner tcmemo_1990_36 lines blank affd without published opinion 922_f2d_848 11th cir thomas v commissioner tcmemo_1985_241 the word object but just as in beard in all of these cases failure to satisfy the third prong was coupled with a skewering on the first prong in most every tax-protester case that we have found the taxpayer had either refused to enter the correct income for the year or had altered the form in some way that the form itself or the attestation at the bottom was void the sakkises’ cases are more similar to the situation we analyzed in steines v commissioner tcmemo_1991_588 affd without published opinion 12_f3d_1101 7th cir the taxpayer in steines attached schedules c for fictitious businesses and claimed outrageous deductions for a cumulative business loss of exactly dollar_figure billion but aside from three small items of income the taxpayer coulton v commissioner tcmemo_2005_199 also distinguishes a line of ninth circuit cases starting with 618_f2d_74 9th cir which held that a return with all zeros was still a return for purposes of the willful failure-to-file misdemeanor in sec_7203 these items of income totaled dollar_figure and appear to have consisted entirely of earned interest correctly reported all of his wages and earnings as well as his name address social_security_number and proper filing_status proper number of exemptions and the correct amount of income taxes withheld with all this information one could determine the taxpayer’s proper tax_liability despite the frivolous deductions and we found that the return was a valid tax_return rather than a legal nullity although of course a tax_return subject_to negligence penaltiesdollar_figure we made the distinction in steines between that case and those protester returns that contain frivolous legal claims and that contain no information or figures from which a determination of tax_liability can be made id emphasis added although the sakkises used a frivolous legal claim to reduce their tax_liability to zero the rest of their return--like the return in steines--contained complete and accurate information from which the commissioner could determine their tax liabilitydollar_figure with the exception of the frivolous deduction itself and the this holding is in line with other cases dealing with frivolous deductions and credits where a negligence_penalty was inflicted but the validity of the tax_return itself was never even addressed in the opinion see eg dwight v commissioner tcmemo_1988_100 war-tax credit the sakkises even filed a schedule se self-employment_tax that shows the amount of the self-employment_tax and deduction that appear on the return prepared by pakin as well as a form_6251 alternative minimum tax--individuals showing the amt calculated by pakin although those numbers wandered off the the sakkises did still send them to the irs on these supporting schedules disappearance of the self-employment_tax and alternative_minimum_tax the sakkises made an honest and reasonable attempt to comply with the tax laws and while the use of that deduction may indicate negligence it does not nullify their entire tax_return we therefore find that the sakkises filed a valid return b sec_861 return as fraud or fraudulent_failure_to_file there are two different sections under which one can be penalized for fraud sec_6651 for a fraudulent_failure_to_file and sec_6663 for an underpayment attributable to fraud because we have determined that the sakkises filed a valid_return for the tax_year any fraud_penalty must come under sec_6663 the commissioner has the burden of proving fraud with clear_and_convincing evidence sec_7454 rule b to meet this burden the commissioner must show that the taxpayer intended to evade taxes known to be owing by conduct intended to conceal mislead or otherwise prevent the collection of such taxes 80_tc_1111 the commissioner’s initial offer of proof was the fact that the sakkises understated their tax_liability the typical badge of fraud is an understatement of income see bradford v commissioner f 2d pincite but we may also infer fraud from claiming excess_deductions see 56_tc_982 affd 470_f2d_87 1st cir in this case however we find the mere fact that the sakkises understated their tax_liability with an obviously bogu sec_861 deduction is not--when seen in conjunction with the otherwise accurate or at least contestible if inaccurate numbers on their return--enough to show clear_and_convincing evidence of a fraudulent intent the commissioner next argues that the sakkises went along with rivera’s strategy of not reporting income to the irs but we point out yet again that for the sakkises did report all of their income while it is true that they didn’t file for that is the only year for which they failed to file a return the commissioner also argues that the carolina trust was a sham trust designed to conceal income although that might have been the sakkises’ initial intent in creating the carolina trust they never actually used that trust and in fact reported all the income from the metacomm sale on their return the fact that metacomm improperly reported this income on a k-1 to the carolina trust doesn’t by itself rise to the level of fraud finally the commissioner points out that the sakkises were very uncooperative and lacked candor during the appeals process and throughout pretrial preparation we agree however we find that their lack of candor and cooperation just aren’t enough especially for carol sakkis we find her testimony that her husband handled all the taxes and investments to be credible and to explain her apparent evasiveness the clear_and_convincing standard of proof is rather high and the commissioner just didn’t satisfy his burden we find that the sakkises are not liable for a fraud_penalty c alternative to fraud penalty on the other hand the sakkises are liable for the 20-percent penalty for negligence or disregard of rules or regulations under sec_6662 and b for underpaying their taxes they completely disregarded the advice of their longtime tax preparer and instead followed the advice of someone they had never met and to whom they had only recently been introduced pakin told the sakkises that he was skeptical of the sec_861 argument but the sakkises didn’t investigate it beyond talking to the shysters they’d become entangled with pakin’s warning eliminates any good-faith reliance defense d other penalties the commissioner also asserts that the sakkises owe a sec_6654 penalty for failure to pay estimated_tax and has shown evidence of their underwithholding and in the later-issued notice_of_deficiency the commissioner asserted in the alternative a failure-to-pay penalty under sec_6651 against carol though he had specifically denied asserting the same penalty against constantine the record supports the commissioner on these items and the sakkises don’t present any evidence in their defense so the penalties stick this opinion and the parties’ concessions require that decisions will be entered under rule


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-143997-11 date november legend x ------------------------------------------------------------------------------------------------------ ---------------------- state ---------- date ------------------- dear --------------- this responds to a letter dated date submitted on behalf of x by x’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was formed in state on date x’s shareholder intended for x to be an s_corporation effective date however no form_2553 election by a small_business_corporation was timely filed for x accordingly x requests a ruling that it will be treated as an s_corporation effective date sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 an s election made after the first two and one-half months of a corporation’s taxable_year results in the corporation not being treated as an s_corporation until the taxable_year following the year in which the s election is filed plr-143997-11 sec_1362 provides that if a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year and sec_1362 shall not apply x did not timely file an election under sec_1362 to be treated as an s_corporation for x’s taxable_year beginning date based solely on the facts and the representations submitted we conclude that x established reasonable_cause for failing to make a timely election to be an s_corporation effective date accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective date within days following the date of this letter then such election will be treated as timely made for x’s taxable_year beginning date a copy of this letter should be attached to the form_2553 except as expressly set forth above no opinion is expressed or implied concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 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 pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely bradford poston senior counsel branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number ---------------------- ----------------------------- -------------------------------------------- ------------------------------------------------------- ------------------------------------ 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 fip b01 plr-124269-17 date date parent -------------------------------------------------------------------- ----------------------------------------------------- subsidiary -------------------------------------------------------------------- ------------------------------------------------------------------ -------------------------- oldparent1 ---------------------- -------------------------------------------------------------------- oldparent2 -------------------------------------------------------------------- ----------------------------------- oldparent3 oldparent4 ---------------------------------- ------------------------- oldsub1 --------------------- -------------------------------------------------------------------- oldsub2 -------------------------------------------------------------------- ---------------------------- oldsub3 oldsub4 --------------------------------- ---------------------------------------------------- plr-124269-17 fund company firm firm state a state b year year date date date date date date ------------------------------------------- ------------------------------------------------ ---------------------------------------- -------------------------- ------------ ------------- ------ ------ ------------------ ------------------ ------------------ ----------------------- ---------------------- ----------------------- dear ------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of parent in its capacity as successor to oldparent1 and oldparent2 and subsidiary in its capacity as successor to oldsub1 and oldsub2 taxpayers taxpayers request an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations so that i parent in its capacity as successor to oldparent1 and subsidiary in its capacity as successor to oldsub1 can elect under sec_856 of the internal_revenue_code the code to treat oldsub1 as a taxable_reit_subsidiary trs of oldparent1 as of date and ii parent in its capacity as successor to oldparent2 and subsidiary in its capacity as successor to oldsub2 can elect under sec_856 to treat oldsub2 as a trs of oldparent2 as of date plr-124269-17 facts parent is a state a corporation that has elected to be treated as a real_estate_investment_trust reit for u s federal_income_tax purposes subsidiary is a state b limited_liability_company parent directly or indirectly owns stock in subsidiary formation and succession as described below parent is the successor to oldparent1 and oldparent2 and subsidiary is the successor to oldsub1 and oldsub2 fund formed each of oldparent1 oldparent2 oldparent3 and oldparent4 the original parents on date as a state b limited_liability_company to acquire properties each of oldparent1 oldparent3 and oldparent4 elected to be treated as a reit for u s federal_income_tax purposes beginning on date oldparent2 elected to be treated as a reit for u s federal_income_tax purposes beginning on date each of the original parents formed a state b limited_liability_company as its subsidiary oldsub1 oldsub2 oldsub3 and oldsub4 the original subs each of oldsub1 oldsub3 and oldsub4 filed a form_8832 entity classification election to elect to be classified as an association_taxable_as_a_corporation for u s federal_income_tax purposes effective on date oldsub2 elected to be classified as an association_taxable_as_a_corporation for u s federal_income_tax purposes effective on date on date through a series of transactions fund caused each of the original parents to merge into parent with parent surviving the merger additionally parent caused oldsub1 oldsub2 and oldsub3 to merge with and into oldsub4 taxpayers represent that in each case the merger transactions described in this paragraph were reorganizations within the meaning of sec_368 resulting in parent’s succession to the tax_attributes of the original parents and oldsub4’s succession to the tax_attributes of oldsub1 oldsub2 and oldsub3 under sec_381 on date as a result of a requirement imposed by a lender oldsub4 transferred all of its assets to subsidiary in an exchange that taxpayers represent was a reorganization within the meaning of sec_368 resulting in subsidiary’s succession to the tax_attributes of oldsub4 under sec_381 trs elections taxpayers represent that oldparent1 and oldsub1 always intended to jointly elect under sec_856 to treat oldsub1 as a trs of oldparent1 as of date and oldparent2 and oldsub2 always intended to jointly elect under sec_856 to treat oldsub2 as a trs of oldparent2 as of date to make trs elections effective on the plr-124269-17 intended dates forms taxable_reit_subsidiary election should have been properly completed and filed with the service by date for oldparent1 and oldsub1 and by date for oldparent2 and oldsub2 taxpayers represent that both forms were filed by the foregoing dates each form_8875 was signed by an individual who was the chief financial officer of both the electing reit and the intended trs cfo in connection with the pending acquisition of parent by company it was discovered that the file copies of the forms were missing a signature on the line provided in the form for signature of an officer of the electing reit at the time the original parents and original subs were formed neither they nor fund had an internal tax department fund and its subsidiaries relied on outside tax advisors including firm and firm for assistance with tax planning and compliance in connection with the year acquisitions and how they were structured cfo relied upon firm and firm for advice on tax matters related to the original parents and the original subs parent’s director of tax was not personally involved in the filing of the forms firm and firm recommended that each of the original parents form a trs to provide tenant services firm also assisted with tax compliance including the filing of the forms firm personnel were not involved with the process of filing the forms cfo who is no longer employed by taxpayers or fund does not remember whether she signed either form_8875 as an officer of the electing reit cfo believes that she may have signed both forms properly but that a file copy was not made of the fully executed forms taxpayers request relief under sec_301_9100-1 and sec_301_9100-3 because of their uncertainty about the effectiveness of the elections described above taxpayers represent that the statute_of_limitations has closed for taxpayers’ year and year taxable years taxpayers make the following additional representations the request for relief was filed by taxpayers before the failure to make the regulatory elections properly was discovered by the service granting the relief will not result in taxpayers having a lower tax_liability in the aggregate for all years to which the regulatory elections plr-124269-17 apply than taxpayers would have had if the regulatory elections had been properly made taking into account the time_value_of_money taxpayers did not seek to alter a return position for which an accuracy- related penalty has been or could have been imposed under sec_6662 at the time they requested relief and the new position requires or permits the regulatory elections for which relief is requested being fully informed of the required regulatory election and related tax consequences taxpayers did not choose not to file the regulatory elections no specific facts have changed since the due_date for making the regulatory elections that make the regulatory elections advantageous to taxpayers in addition affidavits on behalf of taxpayers have been provided as required by sec_301_9100-3 law and analysis sec_856 provides that a reit and a corporation other than a reit may jointly elect to treat such corporation as a trs to be eligible for treatment as a trs sec_856 provides that the reit must directly or indirectly own stock in the corporation and the reit and the corporation must jointly elect such treatment the election is irrevocable once made unless both the reit and the subsidiary consent to its revocation in addition sec_856 specifically provides that the election and any revocation thereof may be made without the consent of the secretary in announcement 2001_1_cb_716 the service announced the availability of new form_8875 taxable_reit_subsidiary election according to the announcement this form is to be used for taxable years beginning after for eligible entities to elect treatment as a trs the instructions to form_8875 provide that the subsidiary and the reit can make the election at any time during the taxable_year however the effective date of the election depends on when the form_8875 is filed the instructions further provide that the effective date cannot be more than months and days prior to the date of filing the election or more than months after the date of filing the election if no date is specified on the form the election is effective on the date the form is filed with the service sec_301_9100-1 of the procedure and administration regulations provides that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g plr-124269-17 h and i sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by regulations or by a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 through c sets forth rules that the service generally will use to determine whether under the particular facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer i requests relief under this section before the failure to make the regulatory election is discovered by the service ii failed to make the election because of intervening events beyond the taxpayer’s control iii failed to make the election because after exercising reasonable diligence taking into account the taxpayer’s experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election a taxpayer will be deemed to have not acted reasonably and in good_faith if the taxpayer i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief sec_301_9100-3 provides that a reasonable extension of time to make a regulatory election will be granted only when the interests of the government will not be prejudiced by the granting of relief sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 provides that the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer’s receipt of a ruling granting relief under this section plr-124269-17 under all the facts and circumstances of this case as represented by taxpayers we have determined that the interests of the government are not prejudiced under the standards set forth in sec_301_9100-3 conclusion based on the information submitted and representations made we conclude that taxpayers have satisfied the requirements for granting a reasonable extension of time so that i parent in its capacity as successor to oldparent1 and subsidiary in its capacity as successor to oldsub1 can elect under sec_856 to treat oldsub1 as a trs of oldparent1 as of date and ii parent in its capacity as successor to oldparent2 and subsidiary in its capacity as successor to oldsub2 can elect under sec_856 to treat oldsub2 as a trs of oldparent2 as of date accordingly parent and subsidiary have days from the date of this letter to file the intended elections this ruling is limited to the timeliness of the filing of form_8875 this ruling’s application is limited to the facts representations and code and regulation sections cited herein except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed on a the qualification of parent oldparent1 or oldparent2 as a reit b the classification of subsidiary oldsub1 or oldsub2 as an association_taxable_as_a_corporation for u s federal_income_tax purposes or c the qualification of subsidiary oldsub1 or oldsub2 as a trs no opinion is expressed with regard to whether the tax_liability of parent oldparent1 oldparent2 subsidiary oldsub1 and oldsub2 is not lower in the aggregate for all years to which the elections apply than such tax_liability would have been if the elections had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the director’s office will determine such tax_liability for the years involved if the director’s office determines that such tax_liability is lower that office will determine the federal_income_tax effect the rulings contained in this letter are based upon information and representations submitted by taxpayers and accompanied by a penalty of perjury statement executed by appropriate parties 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 taxpayers sec_6110 of the code provides that it may not be used or cited as precedent plr-124269-17 in accordance with the terms of the powers of attorney on file in this office copies of this letter are being sent to your authorized representatives sincerely _______________________________ steven harrison branch chief branch office of associate chief_counsel financial institutions products enclosure copy of this letter for sec_6110 purposes cc


internal_revenue_service number release date index number ----------------- ------------------------------ ----------------------------------------- ------------------------------------------ ------------------------------------- ------------------ - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc corp b02 plr-131093-06 date october ----------- ----------- ---------------------------------------- ----------------------------------------- parent ------------------------------------------------------------------- ------------------------------------------------------------ sub ------------------------------------------------------------------- ----------------------------------------------------------- ------------------------------ purchaser ------------------------------------------------------------------- target ------------------------------- ------------------------------------------------------------------- country x date a date b company official ------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------- dear -------------- ----------------------- ------------------ ------------------ ---------- plr-131093-06 this letter responds to a letter dated date submitted on behalf of parent and sub hereinafter collectively taxpayers requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election taxpayers as united_states_shareholders of purchaser are requesting an extension to file a sec_338 election under sec_338 with respect to purchaser’s acquisition of the stock of target sometimes hereinafter referred to as the election on date a citations in this letter to regulations under sec_338 are to regulations in effect on date a additional information was received in a letter dated date the material information is summarized below parent owns all of the outstanding_stock of sub parent and sub do not file a consolidated federal_income_tax return prior to the transaction described below sub owned all of the stock of purchaser a country x corporation on date a purchaser acquired all of the stock of target also a country x corporation from target’s shareholders in exchange for cash it is represented that purchaser’s acquisition of target was a qualified_stock_purchase as described in sec_338 taxpayers have represented that at all times parent and sub have treated the transaction and will continue to treat the transaction as if a sec_338 election had been made and filed taxpayers have further represented that target was not a controlled_foreign_corporation a passive_foreign_investment_company or a foreign_personal_holding_company at any time during the portion of its taxable_year that ends on the acquisition_date as defined in sec_338 finally taxpayers have represented that purchaser is a controlled_foreign_corporation as defined in sec_957 taking into account sec_953 and was not required under sec_1_6012-2 other than sec_1 g i b to file a united_states income_tax return for its taxable_year that includes the acquisition_date taxpayers intended to file the election the election was due on date b but for various reasons a valid election was not filed after the due_date of the election it was discovered that the election had not been filed subsequently this request was submitted under sec_301_9100-3 for an extension of time to file the election the period of limitations on assessment under sec_6501 has not expired for parent’s sub’s or target’s taxable years in which the acquisition occurred the taxable years in which the election should have been filed or any taxable years that would have been affected by the election had it been timely filed sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election or a sec_338 election and the acquisition is a qualified_stock_purchase under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than plr-131093-06 six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1 d therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for taxpayers to file the election provided taxpayers show they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by taxpayers and company official explain the circumstances that resulted in the failure to timely file a valid election the information establishes that the request for relief was filed before the failure to make the election was discovered by the internal_revenue_service and that the government will not be prejudiced if relief is granted see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that taxpayers have shown they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-3 until days from the date on this letter for taxpayers to file the election with respect to the acquisition of the stock of target as described above within days of the date on this letter taxpayers must file the election on form_8023 in accordance with sec_1_338-1 and g and the instructions to the form a copy of this letter must be attached to form_8023 within days of the date on this letter all relevant parties must file or amend as applicable all returns and amended returns if any necessary to report the transaction as a sec_338 transaction for the taxable_year in which the transaction was consummated and for any other affected_taxable_year a copy of this letter and a copy of form_8023 or form_8883 if appropriate must be attached to the returns alternatively instead of attaching a copy of this letter to the returns taxpayers filing their returns electronically may attach a statement to their return that provides the date and control number of the letter_ruling plr-131093-06 the above extension of time is conditioned on the taxpayers' taxpayers’ and target’s tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers’ tax_liability for the years involved a determination thereof will be made by the applicable director’s office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers’ tax_liability is lower sec_301_9100-3 we express no opinion as to whether the acquisition of the target stock qualifies as a qualified_stock_purchase under sec_338 or any other tax consequences arising from the election in addition we express no opinion as to the tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-3 we relied on certain statements and representations made by the taxpayers however the director should verify all essential facts in addition notwithstanding that an extension of time is granted under sec_301_9100-3 to file the election penalties and interest that would otherwise be applicable if any continue to apply 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 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 pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely _____________________________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate