department of the treasury internal_revenue_service washington d c cc dom fs proc tl-n-784-99 number release date uilc internal_revenue_service national_office field_service_advice memorandum for from sara m coe chief field service procedural branch cc dom fs proc subject recovery_of earned_income_credit fsa assistance this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend year year year eic earned_income_credit issue whether amounts offset under sec_6402 against an overpayment should be retrieved by the service from the state of and credited to the taxpayer’s account when it is subsequently discovered that the taxpayer was not entitled to the refund against which the offset was applied facts on or about was mailed to the and claimed a refund relating to tax_liability in the taxpayer filed his income_tax return for year on an eic of the amount of resulted from excess withholding of paid to the state of the offset of past-due child_support payments against overpayments to be refunded after the offset during balance due of under the provisions of sec_6402 c which provides for the eic credit was reversed resulting in a the overpayment the refund was plus interest and eic of filed his income_tax return for year on on or about a refund relating to and claimed an eic of tax_liability in the amount of from excess withholding of state of was mailed to the state of the overpayment resulted and eic of the refund was paid to the under the provisions of sec_6402 c after the offset during the eic credit was reversed resulting in a balance due of plus interest filed his income_tax return for year on and claimed an eic of dollar_figure on or about a refund relating to tax_liability in the was refunded to the state of amount of dollar_figurefrom the eic the refund was paid to the state of sec_6402 after the offset during resulting in a balance due of dollar_figure plus interest the overpayment resulted under the provisions of the eic credit was reversed refunds were paid to the state of since he was obligated to make child-support payments and had failed meet this obligation and his former wife applied for welfare benefits from the state of aid to families with dependent_children has required as a condition of eligibility that applicants for welfare assign to the state concerned any right to child-support payments that have accrued at the time of assignment thus is indebted to the state of to the extent of the state benefits received by his dependents since the program for does not dispute the disallowance of the eic position is that he made a mistake which he tried to correct with amended returns when he filed the returns and claimed the eic as a result of this mistake he now has a debt to the service in the amount of the eic and in addition he owes current and past due child- support state of he has the continuing obligation of child-support argues that the service should secure the return of the refund from the to alleviate his hardship of making repayments of the refund while law and analysis under sec_6401 if an individual’s eic exceeds his tax_liability the excess_amount is considered an overpayment sec_6402 gives the secretary the authority to credit the amount of any overpayment against any liability of the person who made the overpayment and requires a refund of the balance to such person 475_us_851 the provisions of sec_6402 provide a mechanism for disbursing the overpayments and includes the requirement under sec_6402 that child-support payments be offset against any refund under sec_6402 the amount of any overpayment to be refunded to the person making the overpayment is to be reduced by the amount of any past-due_support owed by that person of which the secretary has been notified by a state in accordance with the social_security act u s c sec_464 does not dispute that under the offset provision the service’s actions were proper in remitting the refunds to the state of his liability to the state of not entitled to the eic the service should contact the state of from it the repayment of these refunds which can then be applied to his account argues that since it was determined he was and secure does not dispute since under sec_301_6402-3 the original returns filed by claims for refunds to the extent of any overpayment disclosed on the returns the returns as filed claimed eic credit sec_6401 provides that eic credits shall be considered overpayments constitute under sec_6402 the refund of the overpayment was made to the amounts required under sec_6402 thus under sec_6402 received the full amount of eic at issue even though the funds were disbursed to the state of is treated as if he but was reduced by after the refunds were processed the eic was reversed it was determined that a deficiency in the amount of the eic generated erroneous refunds was owed assessments were made under sec_6213 g in the amounts of dollar_figure and dollar_figure dollar_figure for the taxable years and respectively since the service is recovering the erroneous refund under the deficiency procedures we anticipate no additional action will be taken to collect the erroneous refund the transcripts in the file indicate that basis is making payments on these assessment on a monthly has no appeal rights relative the offset to either the secretary or to in this case a court sec_6402 provides no court of the united_states shall have jurisdiction to hear any_action whether legal or equitable brought to restrain or review a reduction authorized by subsection c or d no such reduction shall be subject_to review by the secretary in an administrative_proceeding no action brought against the united_states to recover the amount of any such reduction shall be considered to be a suit_for_refund of tax in the recent case of columbus v commissioner tcmemo_1998_60 the tax_court held that no court had jurisdiction to hear an action to review or restrain a reduction authorized by sec_6402 claim amounts to a request that the service recover the erroneous refund from rather than from him in revrul_84_171 1984_2_cb_310 the state of situation the taxpayer was entitled to a refund of dollar_figure the service in compliance with a request from a state offset dollar_figure of the refund for past-due child_support it later developed that the state made an error and the correct amount of the offset should have been dollar_figure the revenue_ruling held that the service would not issue a subsequent refund and that the taxpayer must seek relief from the state while the reasoning of the revenue_ruling is not stated we believe that it is apparent that under sec_6402 and sec_6402 the service’s policy is to offset the amount requested by a state and the decision to offset will not be open to subsequent appeals the offset amount is an issue between the taxpayer and the state in the instant case the same approach should be applied cfr section g provides a mechanism by which an erroneous offset payment can be corrected this section provides a procedure for adjusting an erroneous offset payment that has been made to hhs or a state when fms learns that the offset payment paid to hhs or the state exceeds the debtor’s past-due_support this mechanism is limited to the recovery_of payments by fms of amounts that were paid in excess of the debtors’ past-due_support amount in the instant matter the offset payment did not exceed would be appropriate under this provision past-due_support so no adjustment under such an approach excess payments under sec_6402 are not subject_to any_action by the service with respect to repayment from the state of taxpayer must seek whatever relief is available from the state the state of should contact the case development hazards and other considerations the facts as stated have been given to the service by the taxpayer during a problem solving day the service has not investigated this case we do not believe that the service has any litigation hazards as to the taxpayer’s request that the service recover the erroneous refund from the state of the taxpayer should be informed that if he is unable to make payments on the tax_liabilities for years involved this he should discuss this with the local collection office while it appears inequitable to the taxpayer that the service cannot correct its error by recovering the erroneous refund from the state of not disclose any statutory authority which provides the service a method to initiate adjustments to a taxpayer’s account the problem resolution personnel handling this matter may wish to explore recommending a regulatory solution to the fms which now administers the refund offset program our research does if you have any further questions please call the branch telephone number sara m coe branch chief field service procedural branch by blaise g dusenberry assistant to the branch chief cc dom fs proc


department of the treasury internal_revenue_service te_ge eo examinations commerce street dallas tx tax_exempt_and_government_entities_division release number release date legend org organization name org address dear date xx date address address uil person to contact identification_number contact telephone number in reply refer to te_ge review staff ein this is our final adverse determination_letter as to your exempt status under sec_501 of the internal_revenue_code our adverse determination was made because for the year s of the examination you were not operated as an insurance_company within the meaning of sec_501 of the internal_revenue_code your exempt status is revoked effective january 20xx you properly signed form 6018-a consent to proposed action agreeing to this action because this case involves exemption under sec_501 you cannot contest the adverse determination in a declaratory_judgment action under sec_7428 you can however contest the revocation of exempt status in the context of any related deficiency case involving adjustments that flow from the loss of exemption thus you may file suit in united_states tax_court the united_states court of federal claims or united_states district_court from any deficiency_notice issued in this case or a related case after satisfying procedural and jurisdictional requirements you are required to file federal_income_tax returns for the tax period s shown above for all years still open under the statute_of_limitations and for all later years you have properly filed the 1120-pc federal tax returns for the tax period s shown above with the ogden service_center file returns for later tax years with the appropriate service_center indicated in the instructions for those returns you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely yours vicki l hansen acting director eo examinations commerce street dallas tx schedule number or exhibit ‘ form 886-a explanations of items name of taxpayer rev date tax identification_number 20xx year period ended org legend org organization name county motto motto issue xx date xyz state address address county co-1 company cpa cpa whether org hereinafter the org meets the new requirements for tax-exempt status under irc c as described in the pension funding equity act of facts org was originally incorporated in the xyz on march 19xx under the name org the corporation operates under the laws of the xyz as enacted by the general assembly may 18xx chapter section inclusive general statutes to _ subject the primary purpose of org is to reduce the minimum cost of insurance to members the secretary of state of the on june 19xx of xyz certified the articles of incorporate in accordance with amended articles of incorporation were filed with the xyz department of insurance on january 19xx changing the name of org to org org also filed an article of amendment on april 20xx again changing the name to org with its principal_place_of_business located in city county xyz the amendment also changed the membership requirement to add additional_member territories of county and county the primary purpose of org remained unchanged from its original purpose specifically org is authorized to transact the business of motto of xyz in the internal_revenue_service records reveal that the latest ruling letter issued to org granting exemption under sec_501 as a small insurance_company is dated june 19xx org is required to file annual information_return form_990 and employment_tax returns form sec_941 and the form_990 return filed for the year ended december 20xx was examined by te_ge city post of duty during the initial inspection of the form_990 for 20xx it was noted that org accurately reported being exempt under sec_501 on line j in the heading of the return on its form_990 return filed for the years ended december 20xx org reported the following sources of income 20xx form 886-a catalog number 20810w page 10f6 publish no irs gov department of the treasury-internal revenue service schedule number or exhibit i form 886-a explanations of items rev date name of taxpayer tax identification_number 20xx year period ended org dollar_figure -0- gifts grants and contributions program service revenue membership dues assessments interest of savings and investments dividends and interest from securities gain from sale of assets other income totals _-0-_ dollar_figure during the examination of the 20xx form_990 it was determined that the primary activity of org is to insure property such as rural buildings personal residences farm property farm equipment and rural commercial buildings owned by its members org insures such property from losses primarily due to fire windstorm theft and vandalism org operates a self-funded insurance program that insures property of members in county county county county county and county counties in the xyz org maintains an office located at address city xyz the office is operated by a staff of approximately eight employees staff positions included a bookkeeper clerical support receptionist and four insurance agents and adjusters org requires all purchasers of insurance to complete a formal application process each policyholder is considered a member of the corporation and has one vote at each membership meeting premiums are collected at time of sale of new policies and upon renewal of annual and five year policies premiums are invested and accumulated until claims are received from policyholders during 20xx org earned premium income of dollar_figure and insured policies with a total value face of dollar_figure a portion of its risks to ceded to co-1 an unrelated third party insurance_company claims are reported by policyholders directly to org org assigns claims to an adjuster for investigation and collection of information when claims are settled the policyholder is required to execute a release and settlement of claim and then funds are disbursed to settle the claim during 20xx org settled claims for losses due primarily to fire and windstorm in the amount of dollar_figure org did not recover any of its risk under the aggregate excess loss reinsurance agreement with co-1 there is no evidence of any other activities conducted by the corporation the examination also revealed that the actual income and expense items shown on the 20xx form_990 were accurately reported in total however the manner in which that income items was reported did accurately reflect the financial position of org in particular certain income on the return was reported as membership dues and assessments when it actually represented premiums collected from policyholders such amounts should have been reported as program service revenue on the form_990 as indicated by the instructions to the return for line part i therefore the actual sources of income for tax_year ended december 20xx is summarized below 20xx form 886-a catalog number 20810w page of 6____ publish no irs gov department of the treasury-internal revenue service schedule number or exhibit explanations of items tax identification_number year period ended a form rev date name of taxpayer org 20xx dollar_figure -0- gifts grants and contributions program service revenue membership dues assessments interest of savings and investments dividends and interest from securities gain from sale of other income totals dollar_figure since more than half of its business during the year involved the insuring of insurance or reinsuring of insurance risks org is operated as an insurance_company as described in subchapter_l of the internal_revenue_code however org does not qualify for tax-exempt status under sec_501 for the tax_year ended december 20xx because gross_receipts exceeded the dollar_figure limitation described in notice_2006_42 i r b date law prior_law lr c sec_501 provides that certain entities are exempt from taxation included in these entities are i nsurance companies or associations other than life including interinsurers and reciprocal underwriters if the net written premiums or if greater direct written premiums for the taxable_year do not exceed dollar_figure sec_501 if an entity is a part of a consolidated_group all net written premiums or direct written premiums of the members of the group are aggregated to determine whether the insurance_company meets the requirements of sec_501 the prior_law was effective for tax years beginning after date through date the effective date of the pension funding equity act of current law for tax years beginning after date an organization must meet the following two-part test to qualify for exemption under sec_501 gross_receipts for the year may not exceed dollar_figure and premiums must be more than of the organization’s total gross_receipts mutual insurance_companies must meet either the above test or the following alternative test gross_receipts for the year may not exceed dollar_figure and premiums must be more than of the organization’s total gross_receipts form 886-a catalog number 20810w page 3o0f6__ publish no irs gov department of the treasury-internal revenue service ‘ schedule number or exhibit form 886-a rev date explanations of items tax identification_number year period ended 20xxx name of taxpayer org the alternative test for a mutual_insurance_company does not apply if an employee of the company or a member of the employee’s family as defined in sec_2032a is an employee of another company exempt from tax or would be exempt under sec_501 if an organization is in a receivership liquidation or similar proceeding under the supervision of a state court on date the new law applies to taxable years beginning after the date such proceeding ends or date whichever is earlier government’s position internal_revenue_code sec_501 originally referred only to certain mutual insurance_companies or associations other than life or marine the tax_reform_act_of_1986 tra-86 eliminated the distinction between small_mutual insurance_companies and other small insurance_companies and extended exemption under sec_501 to all eligible small insurance_companies whether stock or mutual tra also changed the nature of the ceiling_amount for tax exemption from certain gross_receipts to direct or net written premiums the ceiling_amount was changed from dollar_figure to dollar_figure therefore under tra to qualify for exemption as a small insurance_company the direct or net written premiums received by an organization could not exceed dollar_figure for a taxable_year the requirements established under tra posed serious problems for the service because the requirements did not place any limitation of the amount of investment_income small insurance_companies could earn many taxpayers and tax professionals took advantage of the tax-exempt treatment allowed to small insurance_companies by contributing highly appreciated income producing assets to the tax-exempt organizations the assets produced substantial investment_income that was not taxed due to the tax-exempt status of the small insurance_companies congress intended to curb this loophole in the law by including language in section of the pension funding act of which one again changed the requirements for tax-exempt status for small property and casualty insurance_companies on date president bush signed h_r the pension funding equity act of p l one purpose of the legislation was to tighten the rules for property and casualty insurance_companies to qualify as tax-exempt under sec_501 of the code or to elect to be taxed only on their investment_income the bill contained the following comments from the conference_report the limitation to mutual companies and the limitation on employees are intended to address the conferees’ concern about the inappropriate use of tax-exempt insurance_companies to shelter investment_income including in the case of companies with gross_receipts under dollar_figure it is intended that the provision not permit the use of small companies with common owners or employees to shelter investment_income for the benefit of such owners or employees the new legislation amended sec_501 for tax years beginning after date the new law replaced the written premiums test with a gross_receipts and percentage of premiums test form 886-a catalog number 20810w page of6___ publish no irs gov department of the treasury-internal revenue service a f gov janaenie54 orm explanations of items schedule number or exhibit tax identification_number year period ended name of taxpayer org 20xx the new law placed an overall_limitation on the amount of gross_receipts small insurance_companies could earn for each taxable_year therefore for years beginning after date small insurance_companies could not have gross_receipts in excess of dollar_figure to qualify for tax-exempt status under sec_501 in addition of its total gross_receipts more than must be derived from premium income the facts present in this case clearly demonstrate that org does not meet the new requirements for tax-exempt status under sec_501 because its gross_receipts for 20xx exceed the dollar_figure limitation imposed by the new law furthermore the corporation also failed to meet the new requirements for exemption under sec_501 for 20xx and form 1120-pc was filed by company on a timely basis during the audit gross_receipts were calculated based on notice_2006_42 as follows 20xkxk gross_receipts program service revenue assessments premiums survey fees insurance tax fees retained total program service revenue interest and dividends gain on sale of securities gross_receipts per audit notice do gross_receipts exceed the dollar_figure limitation of gross_receipts premiums from insurance are premiums more than of gross_receipts do gross_receipts exceed the dollar_figure limitation of gross_receipts premiums from insurance are premiums more than of gross_receipts qualification status return required yes yes yes yes taxable corp 1120-pc the principal and alternative gross_receipts tests consist of two parts org must satisfy both parts of the dollar_figure gross_receipts_test or the dollar_figure alternative test the dollar_figure or dollar_figure gross_receipts limitation permitted for small insurance_companies in this case org does not meet either once org form 886-a catalog number 20810w paae of publish no irs aov department of the treasurv-internal revenue service schedule number or exhibit form 886-a explanations of items rev date tax identification_number year period ended name of taxpayer org 20xxx failed to dollar_figure and dollar_figure gross_receipts limitations premium percentage component of the principal and alternative tests is moot based on the above analysis it is determined that org was properly recognized as a tax-exempt mutual_insurance_company for years prior to december 20xx however due to the change in law org no longer qualifies for tax-exempt status for the tax_year ended december 20xx because it is not operated as a small insurance_company since its gross_receipts for the year exceed the limitations imposed by the pension fund equity act of as such it is recommended that org’s tax-exempt status under sec_501 be revoked effective january 20xx taxpayer’s position form_5701 notice of proposed_adjustment was mailed to org’s representative cpa on may 20xx the purpose of the form_5701 was to explain the change in law applicable to small tax-exempt insurance_companies and to explain the nature of the proposed revocation of tax-exempt status effective january 20xx the issue was also discussed with cpa during a phone call held on june 20xx cpa verbally agreed that org did not qualify for tax-exempt status under sec_501 for the 20xx tax_year because its gross_receipts exceed the dollar_figure limitation described in notice_2006_42 the form_5701 will be completed confirming the agreement with the proposed revocation action on described in the preliminary report the form_5701 was signed by the service received a signed form_5701 agreeing with the proposed revocation issue cpa on 20xx conclusion a org is an insurance_company pursuant to subchapter_l of the code for the taxable_year ended december 20xx b although org is an insurance_company pursuant to subchapter_l of the code it does not qualify as a tax- exempt small insurance_company because its gross_receipts exceeded the new limitations imposed under sec_501 of the internal_revenue_code as described in the pension funding equity act of and notice_2006_42 c therefore revocation of org’s tax-exempt under sec_501 is proposed effective january 20xx d org is required to file an income_tax return form 1120-pc for the tax_year ended december 20xx form 886-a catalog number 20810w page of 6____ publish no irs gov department of the treasury-internal revenue service date date org address te_ge division golden gate avenue stop san francisco ca taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your organization's exempt status is necessary if you do not agree with our position you may appeal your case the enclosed publication the examination process explains how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process if you request a conference we will forward your written_statement of protest to the appeals_office and they will contact you for your convenience an envelope is enclosed if you and appeals do not agree on some or all of the issues after your appeals_conference or if you do not request an appeals_conference you may file suit in united_states tax_court the united_states court of federal claims or united_states district_court after satisfying procedural and jurisdictional requirements as described in publication letter rev catalog number 34801v you may also request that we refer this matter for technical_advice as explained in publication exempt_organization appeal procedures for unagreed issues if a determination_letter is issued to you based on technical_advice no further administrative appeal is available to you within the irs on the issue that was the subject of the technical_advice if you accept our findings please sign and return the enclosed form_6018 consent to proposed adverse action we will then send you a final letter revoking your exempt status if we do not hear from you within days from the date of this letter we will process your case on the basis of the recommendations shown in the report of examination and this letter will become final in that event you will be required to file federal_income_tax returns for the tax period s shown above file these returns with the ogden service_center within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely marsha a ramirez director eo examinations enclosures publication publication form_6018 report of examination envelope letter rev catalog number 34801v


t c no united_states tax_court jt usa lp john ross and rita gregory partners other than the tax_matters_partner petitioners v commissioner of internal revenue respondent docket no filed date r issued a notice of final_partnership_administrative_adjustment fpaa to partnership j and its partners without providing a notice under sec_6223 i r c ps partners of j other than the tax_matters_partner attempted to elect out of the partnership-level proceeding only in their capacity as indirect partners held sec_6223 allows partners holding different partnership interests in the same partnership to make different elections for each interest ps’ election otherwise conforming to the requirements of sec_301_6223_e_-2t c proced admin regs is therefore effective held further the tax_matters_partner of j may be substituted as petitioner and ps will be stricken from the case in their capacity as indirect partners ernest s ryder richard v vermazen and lauren a rinsky for petitioners johnathan h sloat and donna f herbert for respondent opinion holmes judge in the 1970s john ross gregory and his wife rita founded the business which became jt usa lp it was very successful in selling accessories to enthusiasts of motocross and paintball over years later the gregorys decided to sell and were faced with the problem of a large tax on a very large capital_gain their solution was to use an alleged tax_shelter to create losses large enough to offset their gain the commissioner has challenged those losses but the gregorys think they’ve found a way to keep them or at least greatly increase the odds of keeping them because of a procedural flub by the irs background the gregorys were both pharmacists near san diego when john an off-road motorcycle enthusiast started selling motorcycle socks at a local dirt track the small side business was a success and jt usa was born the company focused first on motocross accessories but when that market started to become crowded in the early 1990s the gregorys expanded their operation to include accessories for paintball paintballing took off and jt usa took off with it in less than a decade it had become so successful that a superpower of paintball-equipment manufacturers brass eagle inc was willing to pay dollar_figure million in cash for the business’s assets when brass eagle became interested jt usa’s ownership structure was already a bit involved http www jtusa com company about_us the jt usa partnership tax_return for the tax_year shows partnership interests before change or termination totaling we believe this is because of the shifts in ownership during the year though there is no explanation in the record the exact ownership percentages don’t affect our decision jt racing llc jtr-llc was the general_partner and jt racing inc jtr-inc an s_corporation was a limited_partner the other direct but limited partners at the beginning of were the gregorys themselves their two daughters and their grandson by the time of the asset sale jt usa’s ownership had been scaled back and was wholly owned by the gregorys indirectly through jtr-llc and jtr-inc the individual limited partners had sold back their partnership_interest sec_3 so that the only partners were jtr-llc and jtr-inc as the general and limited_partner respectively this change in ownership was part of a larger reorganization of interests that the gregorys undertook to minimize or eliminate their income_tax the record states that jt usa redeemed the partnership interests of the two daughters and the grandson it doesn’t explain what happened to the gregorys’ partnership interests except to indicate that they no longer had direct ownership interests in jt usa by the end of the year on the asset sale through an alleged son-of-boss transaction they also created a new general_partnership called gregory legacy partners whose partners consisted of the gregorys as trustees of a revocable family_trust the gregorys’ daughters their grandson and jt usa all of this was done to help make the alleged son-of-boss transaction work adding even more complexity to an already complex business structure in date the gregorys executed a short_sale of treasury note sec_5 and then contributed the proceeds and obligation to replace those notes along with some separately purchased stock to jtr-inc as a nontaxable addition to the capital of a corporation under sec_351 allegedly receiving a basis in the newly acquired jtr-inc stock of a little more than dollar_figure million jtr-inc then contributed the cash obligation and additional stock to jt usa as a nontaxable contribution to the capital of a partnership under sec_4 see 128_tc_192 for a description of these transactions see kligfeld holdings t c pincite n for an explanation of the short_sale and see id pincite for an explanation of how taxpayers use a short_sale in son-of-boss deals 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 sec_351 general_rule --no gain_or_loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately_after_the_exchange such person or persons are in control as defined in sec_368 of the corporation a allegedly receiving a basis in the partnership_interest of dollar_figure million finally jt usa contributed the cash obligation and additional stock to legacy partners as a nontaxable contribution to that partnership’s capital also allegedly receiving a basis in its partnership_interest of about dollar_figure million when everything was finished the structure looked like this sec_721 general_rule --no gain_or_loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership in date legacy partners redeemed jt usa’s partnership_interest for dollar_figure million--the fair_market_value of the interest at that time with its alleged basis of dollar_figure million jt usa claimed a capital_loss of dollar_figure million that loss more than offset the capital_gain from the sale to brass eagle which in turn meant that jtr-llc and jtr-inc could supposedly claim a flow-through capital_loss instead of a huge flow-through capital gain--and the gregorys as sole members and shareholders of those organizations could supposedly do the same jt usa timely filed its tax_return the commissioner challenged the transaction by sending a notice to jt usa on date just before the statute_of_limitations would expire but with this notice he also sent the following letter which we quote at length because of its significance we were unable to mail you the notice of beginning of administrative_proceeding before the conclusion of the partnership proceeding therefore under sec_6223 of the internal_revenue_code you have the right to elect to have your partnership items treated according to either this notice a final court decision or a settlement agreement with any partners for the taxable_year to which the adjustment relates if you do not make this election the partnership items for the partnership these figures are from jt usa’s schedule d capital_gains_and_losses and as the commissioner noted there are some inconsistencies between the partnership schedule d and the schedules k-1 partner’s share of income credits deductions etc but the differences don’t affect our decision taxable_year to which the proceeding relates shall be treated as nonpartnership_items to elect to have your interest in the partnership items treated as partnership items you must file a statement of the election with my office within days from the date of this letter it is required that the statement be clearly identified as an election under sec_6223 specify the election being made ie application of final_partnership_administrative_adjustment court decision or settlement agreement identify yourself as a partner making the election and the partnership by name address and taxpayer_identification_number specify the partnership taxable_year to which the election relates and be signed by the partner making the election per sec_301_6223_e_-2 this was almost certainly a form letter and the commissioner concedes it was the wrong form letter see infra p n but the gregorys responded to it a total of four times john and rita each sent a statement of election by indirect_partner under sec_6223 which asked to have the partnership items of the indirect_partner treated as nonpartnership_items these statements then went on to say note this reference to e rather than e as mentioned in the first paragraph--it’ll turn out to be important the undersigned who is an indirect_partner is also a direct partner of the partnership this election does not apply to the undersigned as a direct partner they also each sent a statement of election by direct partner under sec_6223 which asked to have the partnership items of the direct partner treated as partnership items and stated this election is made in response to irs correspondence dated date a copy of which is attached hereto for your reference which correspondence seems to imply that a partner must elect to be a party to the proceeding in order to have partnership items treated as partnership items and pursuant to regulation sec_301_6223_e_-2t which applies to partnership taxable years beginning prior to date the gregorys sent all four statements of election on date in date the gregorys filed a petition with this court in date the gregorys moved to strike themselves as indirect partners from this case--arguing that they had properly opted out of the proceedings as part of the same motion they also requested that we grant jtr-llc permission to take over the case in their stead because of the importance of the issue the court held oral argument on the motion in san diego--both gregorys were california residents when they filed the petition and the partnership had its principal_place_of_business in california we must now decide whether the gregorys met the requirements for electing to opt_out whether their elections out as indirect partners were effective and who the proper parties will be in this proceeding discussion the tax equity and fiscal responsibility act of tefra publaw_97_248 96_stat_324 is a set of special tax and audit rules that automatically applies to all partnerships with exceptions that aren’t relevant here sec_6231 one of these rules requires jt usa to designate one of its partners as the tax_matters_partner tmp to handle its administrative issues with the commissioner and manage any resulting litigation sec_6231 jt usa’s tmp is jtr-llc the goal of tefra is to have a single point of adjustment for all partnership items at the partnership level thereby making any adjustments to a particular partnership_item consistent among all the various partners see kligfeld holdings t c pincite tefra procedures generally apply if the adjusted item is a partnership_item defined as any item more appropriately determined at the partnership level than at the partner level sec_6221 sec_6231 partnership items include the income gains losses deductions and credits of a partnership sec_301_6231_a_3_-1 proced admin regs nonpartnership_items are those that aren’t partnership items--and their tax treatment is determined at the individual level sec_6231 finally affected items are those that are affected by the determination of a partnership itemdollar_figure sec_6231 see 127_tc_75 outlining the different categories of adjustments under tefra this adjustment of partnership items is done through a formal process which--if everything is working as it’s supposed to--starts with the irs sending a notice at the beginning of an audit to each notice_partner defined as a partner whose name and address is furnished to the commissioner sec_6223 sec_6231 this notice alerts the partners that an audit is underway and gives them a chance to participate see generally sec_6223 and the gregorys filed the petition in this case under sub sec_6226 in their capacity as notice partners--thus the caption identifying them as partners other than the tax_matters_partner once the commissioner completes the audit but no sooner than days after he sends the first notice he is supposed to send out a notice of final partnership affected items come in two varieties the first are purely computational adjustments which reflect changes in a taxpayer’s tax_liability triggered by changes in partnership items sec_6231 the second are adjustments other than penalties additions to tax and additional_amounts that relate to adjustments to partnership items see sec_6226 that require the commissioner to follow normal deficiency procedures because the adjustments depend on factual determinations that have to be made at the individual partner level sec a a i see also 129_tc_97 administrative adjustment fpaa to the tmp outlining any changes to be made sec_6223 the commissioner then sends the fpaa to other notice partners within days sec_6223 the tmp ha sec_90 days from the date the fpaa is sent to file a petition to contest any adjustments that the fpaa proposes sec_6226 if he doesn’t the window for challenging the fpaa stays open for more days during which any notice_partner can start a case sec_6226 once there’s a determination of all the partnership-level items--either because no one challenges the fpaa or because a decision in the case challenging the fpaa becomes final--the commissioner may begin deficiency proceedings against any partner with affected items that require a partner- level proceeding and may immediately assess the amount due against any other partners with affected items that don’t sec a and the irs is a large organization and congress had the foresight to enact rules to apply after the inevitable snafus including the snafu that happened here--the commissioner’s sending out an fpaa just in time to beat the statute_of_limitations but without any notice that audit proceedings had begun the code has two default rules that might apply in this situation if the commissioner waits so long to notify a partner that the time to challenge the fpaa in court has passed the default rule is that an unnotified partner’s partnership items are treated as nonpartnership_items unless the partner opts in to the proceedings for example if an unnotified partner learns of a favorable settlement agreement that he would like to glom onto sec_6223 if however the commissioner notices his mistake before the fpaa becomes unchallengeable the default rule is that an unnotified partner’s partnership items remain partnership items subject_to the outcome of the partnership-level proceeding unless the partner opts out at which point those items become nonpartnership_items sec_6223 any items that become nonpartnership_items under sec_6223 are subject_to the standard deficiency procedures of sec_6211 through sec a a ii and the commissioner generally has one year from the time a partner’s partnership items become nonpartnership_items to send a notice_of_deficiency to that partner secs f a the problems in this case began when the irs sent the fpaa to jt usa just before the statute_of_limitations was to expire none of jt usa’s partners received an advance notice that an audit was coming but sending them the fpaa meant they did get notice before the time to challenge the adjustments proposed by the fpaa had run this meant that the default rule_of e not e applied and any partner entitled to receive notice had the right to opt_out and not the right to opt indollar_figure the gregorys tried to do just that in their capacity as indirect partners the fpaa proposed adjustments only to partnership items reflecting the alleged son-of-boss transaction by the time jt usa did that transaction the gregorys argue their entire_interest was held only in their capacity as indirect partners so if we determine that their election was valid they may well not be subject_to any deficiency proceedings since their attempted election was made more than one year ago a the gregorys’ election the regulations have specific requirements for an election to opt_out of tefra proceedings for the tax_year those requirements were listed in sec_301_6223_e_-2t c temporary proced admin regs fed reg date the election must be made within days after the fpaa was mailed and the commissioner has conceded that the original notice sent to the gregorys with the fpaa was incorrect and should have been a notice giving the partners the option to opt_out of the tefra proceedings under sec_6223 however sec_6223 is only available to partners entitled to receive notice in the first place sec_6223 the gregorys were entitled to notice as direct partners since they were named on the partnership return but it is unclear if that means they were also entitled to notice as indirect partners the regulation suggests that they were see sec_301_6223_e_-1t b temporary proced admin regs fed reg date in any event the parties did not raise the issue of what if any effects that possible distinction might have for this case the statement must a b c d clearly identify that it’s an election under sec_6223 specify that the election is to have partnership items treated as nonpartnership_items identify the electing partner and the partnership by name address and taxpayer_identification_number specify the partnership taxable_year to which the election relates and e be signed by the electing partner the election once made shall apply to all partnership items for the partnership taxable_year to which the election relates sec_301_6223_e_-2t c temporary proced admin regs fed reg date the gregorys have shown they made the elections exactly days after the irs sent the fpaa to the tmp each election clearly stated that it was made by the undersigned pursuant to sec_6223 of the internal_revenue_code to have the partnership items of the indirect_partner treated as nonpartnership_items each election also clearly stated the identity of both the indirect_partner and the partnership by name address and taxpayer identification as well as the partnership taxable_year to which the election related none was signed by the gregorys themselves but the commissioner has since conceded that their power_of_attorney sufficed to allow him to sign on their behalf the most important question left in the case though is whether their election is valid in the light of their choice to limit it only to all partnership items in their capacity as indirect partners b effect of the gregorys’ elections the commissioner focuses on the language of sec_6223 b -- to have the partnership items of the partner treated as nonpartnership_items --and insists that letting an individual partner with different partnership interests make different choices in his different capacities would create a situation where some of a partner’s partnership items would be treated as nonpartnership_items and some aren’t he argues that the word partner in sec_6223 refers to the person holding any such interest not to that person in his capacity as holder of a particular partnership_interest as he sums up his position what the gregorys are trying to do with elections limited to their capacity as indirect partners is simultaneously opt in and opt out--and such a self-contradictory election must necessarily be ineffective the gregorys have two arguments in reply first they argue that at least in this case there is no possible bifurcation of any partnership item--no self-contradictory election in other words--because the only items involved in this case all arise from the alleged son-of-boss deal and all those items are allocable to the gregorys as indirect partners the words of limitation that they chose to use in their elections are thus without any practical effect their second argument is that there’s nothing self- contradictory or prohibited about having the same person make two different elections as long as each election relates to a different partnership_interest the gregorys admit that tefra and its regulations do not specifically address the possibility of the same person acting in each of two different capacities but they argue that we must fill in this gap the most reasonable way we can in light of tefra’s overall structure and general background principles of partnership law they claim that the more reasonable way to fill the gap is by construing the term partner in sec_6223 to refer to a person holding a particular partnership_interest not a person holding any number of partnership interests from this perspective a single_person with two different interests in a single partnership can make different elections for each we begin by quickly disposing of the gregorys’ first argument as the commissioner carefully notes this case is only at the pretrial stage and the gregorys have not proven how the challenged partnership items were allocated to the partners or that they were in fact no longer direct partners when the deal was done and even though the gregorys may well be able to prove that they were no longer direct partners by the time they got the fpaa or even by the end of sec_6226 tells us to treat as a party any partner who was a partner in such partnership at any time during such year this leaves us with the more difficult problem of whether the same person holding different partnership interests can make different elections for each we begin with the text both parties agree that sec_6231 defines the term partner for purposes of tefra they also both agree that this definition includes indirect partners as well as direct partners the term direct partner isn’t actually defined in the code but it is the common term for someone who holds a partnership_interest directly in the partnership and not through another entity that’s reasonable tefra defines an indirect_partner as someone who holds a partnership_interest through or more pass- thru partners sec_6231 a pass-thru_partner is a partnership estate_trust s_corporation nominee or other similar person through whom other persons hold an interest in the partnership with respect to which proceedings under this subchapter are conducted sec_6231 the commissioner also doesn’t dispute that the gregorys held both indirect partnership interests through jtr-llc and jtr- inc and direct partnership interests in jt usa at different times during the tax_year however the commissioner seems to be arguing that partner in the code is an ontological category--that once one acquires the status of a partner by owning either direct or indirect partnership interests or both any reference in the code or regulations to one’s partnership interests means all of one’s partnership interests the gregorys argue that being a partner is not a status one acquires and then must exercise in only one way instead we should recognize that an individual can have more than one interest in a partnership that he can treat in different ways and if an individual has different bundles of rights arising from different interests he should be viewed as a partner in relation to each bundle empowered to exercise his different rights in the different bundles in different ways rather than answer such metaphysical disputes abstractly we look to the code and regulations governing partners to try to discover if they take one side or the other in the dispute the gregorys helpfully point out that there are several places in the regulations that seem to recognize the possibility of treating different partnership interests held by the same person differently the two examples we find most persuasive are the following a partner p is both a direct partner in a partnership ps and an indirect_partner in ps through a pass-thru_partner ptp p reports his source partnership items as a direct partner consistently with ps under sec_301 a - 1t a temporary proced admin regs fed reg date however ptp reports its share of partnership items inconsistently with ps and informs the irs of this inconsistency under sec_301_6222_b_-1t temporary proced admin regs fed reg date p reports his share of partnership items flowing through to him from ptp consistently with ptp’s treatment of the items under sec_301 a - 2t c temporary proced admin regs fed reg date a single partner may--indeed should--thus take inconsistent positions if he has both direct and indirect partnership interests the tmp for a partnership ps enters into a settlement agreement with the commissioner a partner p is bound by this settlement agreement as a nonnotice direct partner of ps sec_301_6224_c_-1t a temporary proced admin regs fed reg date p is also an indirect_partner of ps through a pass-thru_partner ptp and hasn’t been separately identified under sec_6223 ptp enters into a separate settlement agreement with the commissioner as an unidentified indirect_partner p is bound by ptp’s settlement agreement sec_301_6224_c_-2t a temporary proced admin regs fed reg date we find the second example above especially relevant since sec_301_6224_c_-2t a specifically states that if an indirect_partner holds a separate interest in that partnership either directly or indirectly through a different pass-thru_partner the indirect_partner shall not be bound by that settlement agreement with respect to that separate interest it is hard to imagine a clearer indication that different partnership interests held by the same person may be treated differently and indeed at oral argument we hypothesized a situation in which jt usa’s two direct partners had different tmps who made different elections--say if jtr inc elected out and jtr-llc elected in the commissioner conceded as he must given the regulation’s language that the two different direct partners are allowed to make two different elections yet the gregorys are indirect partners through both these direct partners necessarily implying that they could indeed be treated as simultaneously in and out the concept of one person with multiple interests or roles that he can defend or play in different ways is nothing new in tefra law the prime example of this can be found in 85_tc_900 we held there that one partner could be both a tmp and a notice_partner and that such a partner would be entitled to days to file a petition from an fpaa under sec_6226 b --the initial days in his capacity as the tmp plus an additional days in his capacity as a notice_partner w e are simply saying here that petitioner wore two hats--one as the tax_matters_partner and another as a notice_partner since a timely petition was not filed by petitioner as the tax_matters_partner we see no statutory prohibition which precludes petitioner from proceeding on its own behalf by filing a petition as a notice_partner id pincite our tentative conclusion that one person meeting the definition of both direct partner and indirect_partner can have multiple rights and choose to exercise them in different ways is strengthened by the similar rules governing limited_partnerships under state law both the uniform_limited_partnership_act and the revised_uniform_limited_partnership_act recognize that the same person can have a dual capacity as the former act states a person may be both a general_partner and a limited_partner a person that is both a general and limited_partner has the rights powers duties and obligations provided by this act and the partnership_agreement in each of those capacities when the person acts as a general_partner the person is subject_to the obligations duties and restrictions under this act and the partnership_agreement for general partners when the person acts as a limited_partner the person is subject_to the obligations duties and restrictions under this act and the partnership_agreement for limited partners cal corp code sec dollar_figure west supp see also cal corp code secs and west unif ltd pship act sec_113 6a u l a revised unif ltd pship act sec_404 6b u l a a careful reading of the regulation also supports this rea- soning that regulation doesn’t say that an election must cover all a partner’s partnership interests it says that the election shall apply to all partnership items for the partnership taxable_year to which the election relates sec_301_6223_e_-2t c temporary proced admin regs supra the phrase all partnership items obviously needs to be read as limited in some sense lest the election of one partner in a partnership bind all his partners but if partner a can’t bind partners b and c then we can’t see why--especially given the regulations and background principles of partnership law--partner a shouldn’t be able to make different elections for each of his partnership interests as long as each election applies to all the partnership items allocable to each partnership_interest the commissioner nevertheless argues that permitting the same partner to make different elections under sec_6223 would increase the administrative burden on the irs and lead to inconsistent results two consequences contrary to tefra’s major purpose see h conf rept pincite 1982_2_cb_600 we agree that at a very general level allowing this to happen seems to be at odds with tefra’s overall goal to consolidate partnership proceedings and increase consistency the elections under sec_6223 are only available however when the commissioner fails to provide proper notice ie when the tefra process has already gone awry and the rules need to be construed to supply a reasonable fix inconsistency may also be inevitable when tiered partner- ships with multiple tmps are involved--something the commissioner seems to forget there are simply too many outside factors to have every partner both direct or indirect treated identically just because the gregorys had control_over the pass-thru partners in this particular situation doesn’t change the fact that they held two separate partnership interests we therefore hold that the gregorys were allowed to make separate elections as direct and indirect partners and that their elections to opt_out as indirect partners were valid the grego- rys’ elections to opt in in their capacity as direct partners have no effect because the default rule dictates the same result under sec_6223 a partner is bound by the tefra pro- ceedings unless a proper election is made to opt_out the elec- tions in were just a result of the incorrect letter sent out with the fpaa and have no effect one way or the other c proper parties to this proceeding the gregorys ask to be stricken from this proceeding since they no longer have an interest in the outcome as indirect part- ners sec_6226 they ask that we let jtr-llc take over as the tmp for whatever is left of the proceedings rule a makes the tmp a party and rule requires the court to identify the tmp when as here the petition is filed by a partner other than the tmp sec_6226 provides that the tax_matters_partner may intervene in any_action brought under this subsection our rule a gives him days from the date that the petition was served to do so but rule c allows us to enlarge that time for cause the commissioner has raised no objection and in the absence of any argument against allowing the tmp to intervene we will construe our rule liberally and let jtr-llc see this case through to its end an appropriate order will be issued


uniform issue list apr legend taxpayer a amount b ira c amount d bank e city l state m association n dear taxpayer a this is in response to a request submitted on your behalf by your authorized representative by letter dated rollover requirement contained in sec_408 of the internal_revenue_code code _ for a ruling to waive the 60-day the following facts and representations have been submitted under penalties of perjury to support the ruling_request page you have been receiving amount d in equal distributions from ira c since between properties rentals and one as your second home in city l in state m you purchased five condominium units for investment and were in violation of the zoning code of city around you and all the other owners received a letter from association n indicating that the association n’s covenants conditions and restrictions cc rs passed in l the violation resulted in city l requesting that the number of tenants in the dwellings units had to be decreased by one half in order to meet the zoning ordinance requirements of city l this request created a substantial financial burden on some of the owners of the rental units association n and city l could not reach a satisfactory compromise on the violation therefore the number of tenants had to be reduced by one half in order to comply with city l’s zoning code faced with large expenses and lower than estimated income you decided that withdrawing amount b from ira c in order to pay down a portion of the mortgage while aiso trying to sell the units was the best solution you called your stockbroker and requested that amount b be withdrawn from ira c to pay the outstanding mortgages and then re-negotiate the mortgages with the lender later your accountant advised you not to request the distributions because of the adverse tax consequences you then called the broker and tried to stop the distribution requested but the request was already being processed you received a check for amount b on and deposited it in bank e on within the statutory 60-day period amount b became a taxable_distribution you represent that no other amount was distributed from ira c within the one year period since the original distribution - since the distribution was not rolled over you request a waiver of the 60-day rollover limitation under sec_408 of the code in order to allow you to repay amount b back into ira c sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if- page i ii the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment or distribution or the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ra for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 of the code where failure to waive such requirement would be against equity or good conscience including casuaity disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred it appears from the information submitted that you intended to use the funds from your ira distribution to help pay off some of your outstanding mortgages and page then to re-negotiate with the lender the existing mortgages in order to obtain lower mortgage payments soon after you received amount b you deposited the entire amount b into bank e where it has been ever since thereafter you planned to make a re-deposit of amount b into ira c within the statutory rollover period of 60-day you understood that you were still entitled to rollover amount b into ira c since you were still within the 60-day rollover period however when you attempted to do the rollover you were incorrectly informed by the stockbroker that you could not do it because the 60-day rollover period had already expired you relied entirely on the stockbroker information regarding the ira c distribution your trust in the distribution advice from a professional broker and their errors prevented you from timely redepositing amount b into ira c and it was beyond your reasonable control therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount b taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount b into ira c provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contributions these amounts will be considered rollover_contributions within the meaning of sec_408 of the code 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 directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent a copy of this letter has been sent to your authorized representative in accordance with a power_of_attorney on file in this office if you have any questions please contact please address all correspondence to at sincerely yours fe manager employee_plans technical group page enclosures deleted copy of this letter notice of intention to disclose notice


internal_revenue_service number release date index number --------------------- ----------------------------------------- ---------------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-155037-04 date date legend x ----------------------- d1 ------------------ country ------ --------------------------------------------------------------------------------------------------- --------------------------------------------------- this letter responds to your letter dated date on behalf of x entity dear --------------- requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an election to be classified as an entity disregarded from its owner for federal tax purposes effective d1 facts changed its status for country law purposes from an entity that is classified as a per_se_corporation under sec_301_7701-2 to an entity that is eligible to change its classification for federal tax purposes under sec_301_7701-3 x has a single owner the default status for this new entity is a corporation x intended to elect to be treated as a disregarded_entity however due to inadvertence x’s form_8832 entity classification election was not filed timely law and analysis classified as a corporation under sec_301_7701-2 or an according to the information submitted x was formed in country on d1 x sec_301_7701-3 provides in part that a business_entity that is not sec_301_7701-3 provides that an eligible_entity may elect to be plr-155037-04 eligible_entity can elect its classification for federal tax purposes it further provides that an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the default classification of a foreign eligible_entity for federal tax purposes sec_301_7701-3 provides that unless it elects otherwise a foreign eligible_entity is an association if all members have limited_liability classified other than as provided in ' b by filing form_8832 entity classification election with the service_center designated on the form sec_301_7701-3 provides that an election under ' c i will be effective on the date specified on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 cannot be more than days prior to the date the election is filed and cannot be more than months after the date on which the election is filed sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in and to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register making certain elections determine whether to grant an extension of time for regulatory elections that do not meet the requirements of ' under ' a request for relief will be granted when the taxpayer provides 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 conclusions based on the facts submitted and the representations made we conclude the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 with the appropriate service_center and elect to be classified as a disregarded_entity for federal tax purposes effective d1 a copy of this letter should be attached to the form_8832 sec_301_9100-2 provides the rules governing automatic extensions of time for sec_301_9100-3 sets forth the standards the commissioner will use to this ruling is directed only to the taxpayer on whose behalf it was requested except as specifically set forth above no opinion is expressed or implied as to under a power_of_attorney on file with this office we are sending a copy of this plr-155037-04 the federal tax consequences of the transaction described above under any other provision of the code letter to x sec_6110 provides that it may not be used or cited as precedent enclosures copy of this letter copy for sec_6110 purposes sincerely heather c maloy associate chief_counsel passthroughs and special industries s


internal_revenue_service number release date index number --------------------------------------- ------------------------ ------------------------------------- -------------------------------- in re -------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------------- --------------------------------------------------- telephone number -------------------- refer reply to cc corp b01 plr-152255-11 date date legend parent date date date x company official tax professional dear ------------- -------------------------------------- ---------------------- -------------------------- -------------------------- --------------------------- -- ------------- ------------------------------ -------------------------------------- ---------------------- ------------------------------- ------------- this letter responds to a letter dated date submitted on behalf of parent requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election in particular parent is requesting an extension of time for the consolidated_group of which parent is the common parent to elect an extended carryback period the election for a consolidated_net_operating_loss cnol additional information was submitted in letters dated date and plr-152255-11 date the material information submitted for consideration is summarized below parent is the common parent of a consolidated_group the parent group parent group incurred a cnol in the taxable_year ending date the year cnol parent seeks to carry back the year cnol x years to its taxable_year ending on date under sec_172 of the internal_revenue_code parent was required to file the election in order to carry back the year cnol to its taxable_year ending on date and to obtain the benefit of sec_56 the election was due on date 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_9100-3 for an extension of time to file the election the period of limitations on assessment under sec_6501 has not expired for the parent group’s consolidated_income_tax_return for the taxable_year in which the year cnol was incurred or any subsequent taxable_year parent has represented that it is not seeking to alter a return position for which an accuracy related penalty has been or could be imposed under sec_6662 at the time parent requested relief taking into account any qualified_amended_return filed within the meaning of sec_1 c and for which the new return position requires or permits a regulatory election for which relief is requested sec_172 generally permits a taxpayer to carry back a net_operating_loss nol to each of the taxable years preceding the taxable_year of the nol sec_172 permits a taxpayer to elect to carry back an applicable net_operating_loss applicable nol to each of the or taxable years preceding the taxable_year of the applicable nol in lieu of the 2-year period provided by sec_172 sec_172 provides that an applicable nol is the taxpayer’s nol for a taxable_year ending after date and beginning before date sec_172 provides that the election under sec_172 shall be made by the due_date including extension of time for filing the return for the taxpayer’s last taxable_year beginning in the election is irrevocable and in general may be made only with respect to one taxable_year sec_1502 provides that the secretary shall prescribe such regulations as he may deem necessary in order that the tax_liability of any affiliated_group_of_corporations making a consolidated_return and of each corporation in the group both during and after the period of affiliation may be returned determined computed assessed collected and adjusted in such manner as clearly to reflect the income_tax_liability and the various factors necessary for the determination of such liability and in order to prevent avoidance of such tax_liability in carrying out the preceding sentence the secretary plr-152255-11 may prescribe rules that are different from the provisions of chapter that would apply if such corporations filed separate returns sec_1_1502-21 of the income_tax regulations provides that losses taken into account in determining a cnol may be carried to other taxable years whether consolidated or separate only under paragraph b of sec_1_1502-21 sec_1_1502-21 provides that nol carryovers and carrybacks to a taxable_year are determined under the principles of sec_172 and sec_1_1502-21 sec_1_1502-21t provides that a consolidated_group can elect an extended carryback period pursuant to sec_172 with regard to a cnol arising in a taxable_year ending after date and beginning before date revproc_2009_52 2009_49_irb_744 provides when and how a taxpayer may make an election under sec_172 sec_4 of revproc_2009_52 provides that the common parent of a consolidated_group makes the election for the group sec_4 and of revproc_2009_52 permit the election to be made for consolidated taxpayers by attaching a statement to the original or amended consolidated_return for the taxable_year of the applicable cnol by attaching a statement to the taxpayer’s amended consolidated_return applying the applicable cnol to the carryback_year or by attaching a statement to a claim for a tentative_carryback_adjustment on form_1139 corporation application_for tentative refund sec_4 b and b of revproc_2009_52 require the election regardless of the manner in which made to be filed no later than the due_date including extensions for filing the return for the taxpayer’s last taxable_year beginning in 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 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides 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 the election by a consolidated_group to extend the carryback period under sec_172 for a cnol is a regulatory election therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent to file the election provided parent establishes to the satisfaction of the commissioner plr-152255-11 that 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 information affidavits and representations submitted by parent 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 a qualified_tax professional who failed to make or advise parent to make the election that after exercising reasonable diligence parent was unaware of the necessity for the election and that the request for relief was filed before the failure to timely make the election was discovered by the internal_revenue_service see sec_301_9100-3 iii and v based on the facts and information submitted including the affidavits submitted and 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 provided the parent group qualifies substantively to file the election we grant an extension of time under sec_301_9100-3 until sixty days from the date on this letter for parent to file the election the time in which parent may file a form_1139 for the year cnol has expired however parent may file the election under sec_172 to carry back the year cnol to its taxable_year ending on date on form 1120x amended u s_corporation income_tax return for the taxable_year ending either date or date according to the procedures set forth in revproc_2009_52 a copy of this letter must be attached to the form 1120x if parent files form 1120x electronically parent may satisfy the requirement of attaching a copy of this letter by attaching a statement to the parent group’s amended_return that provides the date and control number plr-152255-11 of this letter_ruling the above extension of time is conditioned on the parent group’s tax_liability if any not being 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 we express no opinion as to the parent group’s tax_liability for the years involved a determination thereof will be made by the director’s office upon audit of the income_tax returns involved except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any item discussed or referenced in this letter in particular we express no opinion with respect to whether parent qualifies substantively to make the election in addition we express no opinion as to the tax effects or consequences of filing the election late under the provisions of any other section of the internal_revenue_code or regulations or as to the tax treatment of any conditions plr-152255-11 existing at the time of or resulting from filing the election late that are not specifically set forth in this letter for purposes of granting relief under sec_301_9100-3 we relied on certain statements and representations made under penalty of perjury by parent company official and tax professional the director however should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-3 to file the election any penalties and interest that would otherwise be applicable continue to apply this letter_ruling is directed only to the taxpayer 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 representatives sincerely ________________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate cc


internal_revenue_service number release date index number ------------------- ---------------------------- ------------------------------------------ -------------- -------------------------------- in re ------------------------------------------ ------------------------------------------- ----------------------------- department of the treasury washington dc person to contact ------------------ id no ------------- telephone number --------------------- refer reply to cc fip b04 - plr-148434-04 date date ----- -------------------------- ------------------------------------------ ------------------------ taxpayer date y number x number a1------ number a2 ---- number a3 -- state b place c date d dear -------------- this is in reply to your letter dated date y in which you requested on behalf of taxpayer a waiver under sec_101 and sec_7702 of the internal_revenue_code for number x life_insurance contracts the contracts that inadvertently failed to meet the requirements of sec_101 or sec_7702 as applicable this letter ---------------------------------------------------- --------------------------- -------------------- the contracts that are the subject of the request are flexible premium life the death_benefits provided under the contracts may be either aoption or substitutes for and replaces a letter previously issued to taxpayer with case number plr-100280-03 previously released as plr published date the contracts are identified on exhibit a1 a2 and a3 attached to this letter taxpayer is a stock_life_insurance_company as defined in sec_816 and is subject_to taxation under part i of subchapter_l of the code taxpayer is organized and operated under the laws of state b and is licensed to engage in the insurance_business in place c although taxpayer is a wholly owned subsidiary taxpayer does not join in the filing of a consolidated_return description of contracts insurance contracts the contracts permit but do not require the payment of both scheduled planned and unscheduled premiums aoption if option is elected the death_benefit equals the greater of the face_amount specified in the contract or the amount required to satisfy the cash_value corridor requirements of sec_7702 and d an option contract provides a death_benefit equal to the greater of the face_amount of the contract plus its cash_value or the amount required by the cash_value corridor in addition subject_to certain restrictions the policyholder may make changes under the contracts that constitute adjustment events within the meaning of sec_101 and sec_7702 eg increases and decreases in the face_amount changes in death_benefit options and additions or deletions of certain qualified_additional_benefits within the meaning of sec_101 and sec_7702 qabs contracts is equal to the premiums_paid increased by interest credits and decreased by various contract charges and withdrawals the contracts also permit loans against their cash values additionally certain of the contracts permit policyholders to apply policy values as a net_single_premium to purchase paid-up whole_life_insurance and cash_value corridors of sec_101 or sec_7702 as applicable the contracts were intended to comply with the guideline_premium_limitation tests as is typical of universal_life_insurance policies the cash_value of each of the taxpayer was one of the first insurance_companies to develop a universal life however in number a1 instances clerical staff failed to make timely corrections compliance program and errors insurance_policy and has worked with a series of combinations or manual systems and computerized compliance programs those systems should have been sufficient if followed accurately to ensure compliance of the contracts with the applicable provisions of the code within the 60-day period described by sec_7702 as they were under the erroneous impression that refunds of excess premiums were not permitted if the funds were received as part of a tax-free_exchange under sec_1035 taxpayer’s compliance system expressly provided for excess premiums to be refunded within the 60-day period taxpayer’s procedures did not include any special rules that directed staff not to refund excess premiums with respect to sec_1035 exchanges excess premiums were received under sec_1035 exchanges when the initial calculation of the death_benefit to be applied under the new insurance_contract failed to take into account interest that would be applied to the old contract’s cash_value before the amounts were transferred to taxpayer from the previous issuer as noted when that occurred certain clerical staff were under the erroneous belief that they could neither increase the death_benefit nor refund the excess premiums received accordingly upon failure of the staff to undertake either of these corrections these contracts failed sec_101 or sec_7702 as applicable premiums during the 60-day period despite having received directions to do so incorrectly input in the process of manually transferring from one compliance system to another these errors were not discovered in time to correct subsequent overpayments of premiums timely cures and correction excess premiums with interest at a rate at least equal to the contract crediting rate further taxpayer has implemented a compliance system that requires far less clerical or manual input and represents that these errors should not recur contracts without regard to whether those amounts exceeded the then applicable as of date d taxpayer has corrected the failed number x contracts by refunding in an additional number a2 instances clerical staff simply failed to refund excess taxpayer’s past practice was to immediately apply all premiums received to the finally in number a3 cases data with respect to certain contracts was in general for flexible premium life_insurance contracts entered into before guideline_premium_limitation taxpayer then relied upon the 60-day rule as its primary method of avoiding retention of these excess premiums early application of premiums to taxpayer contracts should no longer occur under taxpayer’s principal administration system taxpayer has adjusted its procedures to address the issue of premature receipt of scheduled premiums that would exceed the contract’s guideline_premium_limitation if applied to the contract upon receipt to the extent permitted under sec rules where applicable_taxpayer under this system now either returns the excess premiums or holds it outside the policy at interest until the anniversary date for certain contracts taxpayer has adopted other procedures to timely remedy the error law analysis date sec_101 requires the contract to satisfy either of two tests in order for the death_benefit to be excludable as the proceeds of a life_insurance_contract under sec_101 a guideline_premium_limitation set forth in sec_101 or a cash_value test set forth in sec_101 these requirements differ slightly from those applicable to contracts issued after that date but not in a manner material to this letter in general for contracts issued after date sec_7702 provides a definition of the term life_insurance_contract for all purposes of the code to satisfy this definition a life_insurance or endowment_contract must be treated as such under the applicable law pursuant to sec_7702 contract must also either meet the cash_value_accumulation_test of sub sec_7702 or satisfy the guideline premiums requirements of sub sec_7702 and fall within the cash_value_corridor_test of sec_7702 sec_7702 provides that a contract meets the cash_value_accumulation_test if by the terms of the contract the cash_surrender_value of the contract may not at any time exceed the net_single_premium which would have to be paid at such time to fund future_benefits under the contract premiums received must be compared to the then applicable guideline premium limitation not the guideline_premium_limitation as of the upcoming policy anniversary even if the premium is received only a few days before that anniversary if the premiums are in excess of the guideline_premium_limitation when applied to the contract that excess is not voided simply through the passage of time and its concurrent increase in the guideline_premium_limitation if the error is not corrected through the return of excess premiums with interest within the 60-day period an error caused by a procedure that routinely applies premium when they exceed the guideline_premium_limitation is not waivable and can be cured only through execution of a closing_agreement with the service this error can be avoided through establishing a procedure of either refunding the excess premium or retaining the excess premium in a separate fund with interest outside of the insurance_policy until the guideline_premium_limitation increases sec_7702 provides that a contract meets the guideline premium the guideline_single_premium is the single premium at issue that is needed to sec_7702 provides that the term guideline_premium_limitation means requirements if the sum of the premiums_paid under such contract does not at any time exceed the guideline_premium_limitation as of such time as of any date the greater of a the guideline_single_premium or b the sum of the guideline level premiums to such date fund the future_benefits under the contract using the mortality and other charges specified in sec_7702 sec_7702 specifically provides the guideline_single_premium is based on i reasonable mortality charges which meet the requirements if any prescribed in regulations and which except as provided in the regulations do not exceed the mortality charges specified in the prevailing commissioners' standard tables as defined in sec_807 as of the time the contract is issued ii any reasonable charges other than mortality charges which on the basis of the company's experience if any with respect to similar contracts are reasonably expected to actually be paid and iii interest at the greater of an annual effective rate of percent or the rate or rates guaranteed on issuance of the contract the guideline_level_premium is the level annual equivalent of the guideline_single_premium payable until a deemed_maturity_date between the insured's attained ages and with interest at the greater of an annual effective rate of percent or the rate or rates guaranteed on issuance of the contract sec_7702 the computational rules of sec_7702 and the definitions of sec_7702 apply for purposes of determining both the guideline single and guideline_level_premium if premiums_paid exceed the guideline_premium_limitation sec_101 and sec_7702 allows the issuer days after the end of the policy year in which to refund the excess premiums as may be necessary to cure a failure waive a failure to satisfy the requirements of sec_101 or sec_7702 as applicable these waivers are granted if a taxpayer establishes that the statutory requirements were not satisfied due to reasonable error and that reasonable steps are being taken to remedy the error failure of the contracts to satisfy the requirements of sec_101 or sec_7702 as applicable is due to reasonable error taxpayer s compliance system and procedures would if properly followed have prevented the errors described upon discovery of possible errors taxpayer timely reviewed its procedures discovered failures and requested a waiver of its errors further taxpayer has instituted additional methods by pursuant to sec_101 and sec_7702 the secretary of treasury may based on all of the facts law and arguments presented we conclude that the the rulings contained in this letter are based upon information and we express no opinion as to the tax treatment of the contracts under the this ruling is directed only to the taxpayer s requesting it sec_6110 of which to avoid future errors finally taxpayer s proposed method of correcting the errors is reasonable provisions of any other sections of the code and income_tax regulations that may also be applicable thereto 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 the code provides that it may not be used or cited as precedent in this ruling have not yet been adopted therefore this ruling will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in the letter_ruling see section dollar_figure of revproc_2003_1 i r b however when the criteria in section dollar_figure of revproc_2003_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances relevant letter is being sent to taxpayer temporary or final regulations pertaining to one or more of the issues addressed in accordance with the power_of_attorney on file with this office a copy of this a copy of this letter must be attached to any income_tax return to which it is sincerely s donald j drees jr acting branch chief branch office of associate chief_counsel financial institutions products --------------------------------------------------


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 1-plr-118584-00 date date legend x d1 this responds to a letter dated date together with subsequent correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated on d1 x intended to be treated as an s_corporation for federal_income_tax purposes effective on d1 but the s election was not timely filed law and analysis 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 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 if the election is made after the first two and one-half months of a corporation’s taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no election is made pursuant to sec_1362 or if made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such an election as timely made for such taxable plr-118584-00 year and effective as of the first day of that tax_year x did not file a timely election to be treated as an s_corporation under sec_1362 effective on d1 x has however established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 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 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d1 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent s dianna k miosi sincerely chief branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes