internal_revenue_service index number number release date department of the treasury p o box ben franklin station washington dc contact person telephone number refer reply to cc dom p si - plr-120222-98 date date legend partnership agency project state city a b c d plr-120222-98 e f g h i j k l m dear this letter responds to your letter dated date that was submitted on behalf of agency and partnership requesting a letter_ruling under sec_42 of the internal_revenue_code and sec_1_42-13 of the income_tax regulations to correct an administrative error in an allocation of the low-income_housing_credit dollar amounts agency and partnership represent that the facts are as follows facts partnership is a state limited_partnership that was formed on a partnership is engaged principally in the business of developing land and constructing and operating the project consisting of b units located in city partnership expects that all of the units in the project will qualify for low-income_housing credits pursuant to sec_42 on c partnership submitted an application to agency for a reservation of d low- income housing credits in the amount of dollar_figuree the application reflected a site plan calling for b units in f buildings on g the project received a reservation letter from agency tentatively reserving low-income_housing credits in the amount of dollar_figuree to f buildings in the project on h the project received dollar_figuree in carryover allocation credits from agency for f buildings subsequent to the date of the i carryover allocation and following construction of the project the certified_public_accountant retained by partnership to cost certify the cost of the project noted that j of the buildings in the project served as community plr-120222-98 buildings and contained no residential units therefore the number of buildings with low-income units for which building identification numbers bins should have been given was k instead of f buildings as a result of this mistake the number of buildings that are to be used on the certificates of occupancy will no longer match the number assigned by agency for purposes of providing a carryover allocation thus the forms low-income_housing_credit allocation certification to be issued to the project will not reflect the correct number of buildings agency and partnership at the time of the i carryover allocation intended for b units to be constructed in the project the existing building-by-building allocation pursuant to the carryover allocation does not allow partnership to maximize the credits allocated to the project and seriously affects the project’s financial feasibility thus the i carryover allocation inaccurately reflects the intent of agency and partnership at the time the carryover allocation document was prepared the mistake with respect to the number of qualified low-income buildings was not discovered until l when partnership’s accountant was preparing documentation for the audit of the project’s costs as of the placed_in_service_date in order to receive forms for each building upon discovery of the problem partnership’s accountant immediately contacted partnership to prepare a letter_ruling request to correct the error or omission the project manager provided a narrative to agency of the project reconfiguration on m the correction of the administrative error or omission will have no affect on the low-income_housing credits allocated to the entire project the correction however will affect the credits allocated to each building furthermore the correction of the administrative error or omission will have no effect on the housing_credit ceiling under sec_42 or on agency’s unused housing_credit carryover that is assigned to the secretary under sec_42 in connection with the above statement of facts agency represents that it intended to make a project-based allocation to the project pursuant to sec_42 the number of buildings in the project was not material to the carryover allocation for the project and the fact that the project had k residential buildings rather than f would not have affected a the amount of low-income_housing tax_credit allocated to the project b the ranking of the project in agency’s i allocation round or c any other aspect of the carryover allocation for the project ruling requested plr-120222-98 agency and partnership request the internal_revenue_service to rule that agency can amend the i carryover allocation to allocate the appropriate amount of low- income housing_credit to each of the k buildings in the project not exceeding dollar_figuree for the entire project as required under sec_1_42-13 agency and partnership hereby agree to such conditions as the secretary considers appropriate if the above ruling_request is granted law and analysis under sec_42 state and local housing_credit agencies may correct administrative errors and omissions concerning allocations and recordkeeping within a reasonable period of time after their discovery sec_1_42-13 defines an administrative error or omission as a mistake that results in a document that inaccurately reflects the intent of the agency at the time the document is originally completed or if the mistake affects a taxpayer a document that inaccurately reflects the intent of the agency and the affected taxpayer at the time the document is originally completed sec_1_42-13 however provides that an administrative error or omission does not include a misinterpretation of the applicable rules and regulations under sec_42 in the present case partnership committed an administrative error when the d credit application referenced f buildings when the actual number of residential buildings was k this error was not a misinterpretation of the applicable rules and regulations under sec_42 however this error did result in a document ie i carryover allocation that did not accurately reflect the intent of agency and partnership at the time the document was executed the intent of agency was to allocate the same amount of credit to the project notwithstanding the number of the buildings in the project further the change does not affect the amount of housing_credit_dollar_amount allocated to the project the ranking of the project in agency’s i allocation round nor any other aspect of the carryover allocation for the project thus a correctable administrative error occurred in this situation under the represented facts the i carryover allocation is the credit allocating document under sec_1_42-13 the secretary must pre-approve a correction of an administrative error or omission if the correction is not made before the close of the calendar_year of the error or omission and the correction requires a numerical change to the credit_amount allocated for the building or project in the present case the correction would involve a numerical change to the credit_amount allocated to the k buildings that properly received bins based solely on the representations and the relevant law and regulations set forth above we conclude as follows plr-120222-98 partnership committed an administrative error when it failed to correctly identify the actual number of residential buildings in the project in its d credit application to agency because of that administrative error the i carryover allocation inaccurately reflects the intent of agency and partnership when the i carryover allocation was executed agency will correct the administrative error within a reasonable period of time after agency became aware of the administrative error agency will remove the j bins that were assigned in error to accurately reflect that there are k residential buildings in the project and agency will allocate low-income_housing tax_credit to each of the k residential buildings in the project not exceeding dollar_figuree for the entire project to correct this administrative error agency must do the following amend the i carryover allocation to remove the j bins erroneously assigned to the community buildings in the project and to allocate the appropriate amount of low-income_housing tax_credit to each of the k residential buildings in the project not exceeding dollar_figuree for the entire project on the amended i carryover allocation agency should indicate that it is making the correction under sec_1_42-13 and attach a copy of the amended i carryover allocation to an amended form_8610 annual low-income_housing_credit agencies report for i and file the amended form_8610 with the service when completing the amended form_8610 agency should follow the specific instructions on the form_8610 under the heading amended reports no opinion is expressed or implied regarding the application of any other provisions of the code or regulations specifically we express no opinion on whether the project qualifies for the low-income_housing tax_credit under sec_42 nor the validity of the project’s costs included in eligible_basis in accordance with the power_of_attorney filed with this request we are sending a copy of this letter_ruling to agency’s authorized representative plr-120222-98 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours kathleen reed kathleen reed senior technician reviewer branch office of assistant chief_counsel passthroughs and special industries enclosure copy


qwhuqdo cid 5hyhqxh cid 6huylfh department of the treasury number release date index no cid washington dc person to contact g channing horton id no telephone number refer reply to cc it a - plr-122605-98 date date legend a b c d trust date date date date date date date date date date date p plr-122605-98 q r s t u v w x 19xx dear mr and mrs this is in reply to your request for rulings that you are not required to include in your income under the anticipatory_assignment_of_income doctrine a dollar_figuret punitive_damages award paid from a judgment that you transferred to the trust you also request that we rule that you are not required to include the punitive_damages income even though dollar_figurew of the damages were used to pay attorneys fees pursuant to the contingency fee agreement you entered into with your attorney facts your son was one of two teenagers killed and three teenagers injured on date when the car they were riding in collided with a vehicle operated by c on date you entered into the contingency fee agreement with an attorney to prosecute claims for damages arising out of the accident the agreement states in part the undersigned accepts said employment and the attorney’s fee shall be a contingency fee qual sic to one-third percent of any amounts recovered by compromise settlement verdict or otherwise if no recovery is obtained no legal fees will be payable to the undersigned attorney plr-122605-98 the contingency fee agreement also provided that the attorney would be reimbursed for all costs and expenses related to prosecution of the claims and could deduct his fee and unpaid expenses from any award trial of the case began on date pursuant to law there were two distinct phases to the trial - a liability phase and a damages phase on date the parties entered into a binding stipulation of settlement hi-lo agreement on the record that was journalized by the court as follows the parties have agreed that they would agree to a binding high-low limit the low in the case would be p dollars for the b family and a in the total for the two the injury and the death claims each of those the low would be q dollars for b the maximum amount including punitive_damages from all the claims would not exceed r dollars as of date the hi-lo agreement did not explicitly or implicitly waive the parties right to appeal that same date the jury determined that you had established by clear_and_convincing evidence that the conduct of c was a conscious disregard for the rights and safety of other persons that had a great probability of causing substantial harm on date the parties modified the hi-lo agreement to provide that the parties would waive any rights of appeal also on date the parties entered into a written stipulation stipulation in court that any punitive damage award less taxes would be deposited into a charitable_trust trust whose sole purpose would be to fund the improvement of certain facilities in as of date trust was not in existence that same date the jury awarded you both compensatory and punitive_damages the judgment entry on verdict states pursuant to the verdict of the jury the plaintiff a as administrator of the estate of d is awarded damages in the amount of dollar_figure p against defendant c plaintiff a individually is awarded damages in the amount of dollar_figure s for property damage to his automobile and punitive_damages in the amount of dollar_figure t against defendant c on date c appealed the verdict in motions filed after that date c asserted inter alia that the hi-lo agreement did not waive its appeal rights but if so its counsel did not have authority to waive those rights c further asserted that i the jury in effect awarded punitive_damages on account of d’s wrongful death in violation of law ii substantial punitive_damages cannot be predicated on a negligible property damage claim in a wrongful_death_action and iii a substantial punitive damage award for damage to a car with a low fair_market_value is an unconstitutional taking of property plr-122605-98 on date during the pendency of c’s appeal you established the trust of which you are trustees the trust agreement states in part that the trust’s purposes include supporting and promoting the safety of highway and street vehicular traffic and pedestrians around certain facilities and supporting programs designed to provide public education and to increase awareness of certain facilities safety and or to improve public safety at certain facilities providing funding for the improvement of specified facilities safety by means of cooperation with the and federal agencies providing funding for the improvement of specified facilities safety by means other than as described in paragraph supporting and promoting public_charities if and to the extent that the purposes of any said public charity is consistent with the purposes set forth at paragraph sec_1 through herein above taking such actions as it may deem necessary incidental or ancillary to the accomplishment of any other charitable religious educational or scientific purposes the trust agreement also states the trustees have established this trust in part to receive the proceeds of a jury verdict awarded to this trust the jury award was made directly to this trust and the grantors believe without tax consequence to them if however there is determined for tax purposes that any portion of the trust estate is attributable to the grantors then in that event the trustees shall pay to or on behalf of the grantors all funds necessary for payment of any federal state local or other taxes for which the grantors may be liable from the inclusion of any portion of the trust estate as taxable_income to them in addition to all sums reasonably necessary for the determination of the same on date the internal_revenue_service informed you that the trust is exempt from federal_income_tax under sec_501 of the internal_revenue_code as an organization described in sec_501 although the trust agreement states that the award was made directly to the trust the judgment entry on verdict states that the award was made directly to you plr-122605-98 on date court_of_appeals dismissed c’s appeal stating that a binding hi-lo agreement between the parties terminated the entire litigation including appeals once the jury returned its verdict on damages the litigation ended on date when supreme court declined to hear c’s appeal due to lack of a constitutional question on date c issued a check in the amount of dollar_figureu to you and your attorney as co- endorsers representing the dollar_figuret punitive damage award plus statutory interest dollar_figurev on the punitive damage award your attorney retained one-third of the amount dollar_figurew as his fee and issued the balance dollar_figurex to the trust you represent that under law judgments are assignable and that an assignment transfers the same right title and interest of the assignor to the assignee you also state that law recognizes and enforces gratuitous assignments and generally will enforce assignments to charities you also represent that under law the dollar_figuret punitive_damages judgment was considered transferred by you to the trust on or after date the date the trust was created and before date the date the supreme court dismissed c’s appeal notwithstanding that on or after date and before date you did not take any actions to transfer the judgment to the trust and the trust did not take any actions to accept the judgment statutes do not address liens for payment of attorney fees courts however recognize the existence of an attorney’s lien in certain cases the lien arises where an attorney obtains a judgment or collects funds for a client the lien attaches to the fruits of the judgment or funds collected for the client and is limited to attorney fees in collecting the fund courts have recognized the attorney’s lien on a judgment in cases in which i the party against whom the judgment was rendered filed a set-off motion and ii a prevailing client’s creditor filed an intervening petition in addition court permitted an attorney to enforce the attorney’s charging lien to intervene as a party to the suit after final judgment was rendered in favor of his client and his efforts had helped secure the judgment there is however no statutory or common_law rule in that gives an attorney a lien on the client’s cause of action the supreme court has adopted certain disciplinary rules under these rules a lawyer shall not acquire a proprietary interest in the cause of action or subject matter the dollar_figurep of compensatory_damages and interest thereon was previously paid to your attorney about months earlier your attorney deducted one-third of such amount as a fee and an additional_amount for expenses from that payment you have not requested and we are not issuing a ruling regarding the income_tax treatment of the dollar_figurep of compensatory_damages and interest on such amount plr-122605-98 he is conducting for a client except that he may acquire a lien granted to secure his fee or expenses or contract with a client for a reasonable contingent_fee in a civil case law and analysis this letter addresses two issues the first issue addressed in transfer of judgment to the trust below is whether you must include in income the dollar_figurex portion of the dollar_figuret punitive_damages award that was received by the trust the second issue addressed in attorneys fees below is whether you must include in income the dollar_figurew portion of the dollar_figuret punitive_damages that was retained by your attorneys pursuant to the contingency fee agreement general principles sec_61 of the internal_revenue_code provides that except as otherwise provided in subtitle a relating to income taxes gross_income means all income from whatever source derived punitive_damages are includible in income including damages received in a case in which a taxpayer has also received compensatory_damages for personal injuries 348_us_426 519_us_79 in general under the anticipatory_assignment_of_income doctrine a taxpayer who earns or otherwise creates a right to receive income will be taxed on any gain realized from it if the taxpayer has the right to receive the income or if based on the realities and substance of the events the receipt of the income is practically certain to occur ie whether the right basically had become a fixed_right even if the taxpayer transfers the right before receiving the income 174_f3d_997 9th cir l999 531_f2d_1343 6th cir kinsey v commissioner 447_f2d_1058 2d cir 471_f2d_275 8th cir est of applestein v commissioner 80_tc_331 l983 281_us_111 in contrast a mere anticipation or expectation of the receipt of income is insufficient to conclude that a fixed_right to income exists johnson son inc v commis63_tc_778 l975 transfer of judgment to the trust with respect to the assignment of claims in litigation a review of the case law shows that anticipatory_assignment_of_income principles require the transferee to include the proceeds of the claim in gross_income where recovery on the transferred claim is certain at the time of transfer but not where recovery on such claim is doubtful or contingent at the time of transfer in 147_f2d_769 4th cir a taxpayer assigned percent of a claim that he owned to his wife and children plr-122605-98 after the court of claims denied application_for a new trial and the supreme court of the united_states denied taxpayer’s petition for a writ of certiorari the government argued that after the denial of certiorari and before the transfer to the wife and children the gain that the taxpayer expected to receive was practically assured and thus its transfer resulted in an anticipatory_assignment_of_income doyle f 2d pincite the court agreeing with the government’s argument held that the taxpayer was in receipt of the profits on his purchase of the interest in the lawsuit because at the time he made the gifts of his interest in the lawsuit such profits had already been rendered certain by the judgment of the court of claims and denial of certiorari by the supreme court doyle f 2d pincite emphasis added like doyle the case of 247_f2d_864 6th cir rev’g 25_tc_1333 follows the view that a taxpayer’s right to income on a judgment is not earned or does not ripen until all appeals with respect to the judgment have been exhausted cold metal had instituted patent infringement suits for damages against several large producing companies in the federal government started a suit in a united_states district_court seeking cancellation of patents held by cold metal the cancellation suit in the district_court enjoined cold metal from receiving damages or royalties under the patents until final judgment was rendered in the suit and ordered such monies to be impounded with the court clerk the district_court rendered final judgment for cold metal in the cancellation suit in however the impounding order was restored pending the government’s appeal to the court_of_appeals several defendants settled with taxpayer and paid money into the impound fund in taxpayer was liquidated and its assets including its patents and any rights to the impound fund were transferred to a_trust the charitable_trust in the court_of_appeals affirmed the district court’s judgment dismissing the government’s complaint on date the supreme court of the united_states denied certiorari the district_court ordered the impounded funds released but no earlier than date however a district_court in a suit brought by the government to have cold metal’s royalties valued at zero under the royalty adjustment act raa suit entered an order preventing the distribution of the monies impounded in the cancellation suit subsequently the appellate court in the raa suit ordered such monies paid to the charitable_trust on condition that it deposit them in a federal reserve bank pending appeals in after an opinion adverse to the government the court_of_appeals permitted the trustee to withdraw the funds from the bank it appearing that the government no longer wished to pursue litigation the commissioner determined that the entire proceeds were taxable to cold metal when the trustee received them in applying assignment_of_income principles the tax_court concluded that cold metal was taxable on the portion of funds deposited in the impound fund representing damages received prior to the transfer of its assets to the trust reversing the court_of_appeals for the sixth circuit reasoned that the legal plr-122605-98 right of cold metal to the amounts deposited in the impound fund could not be established while the government was strenuously contesting such right and thus cold metal assigned a chose_in_action and not a right to income to the trustee the court stated if the decision in the cancellation suit had gone against cold metal in when the supreme court denied certiorari it would not have acquired the income or at any time been entitled to it we do not think it can be rightfully classified as having been earned in cold metal f 2d pincite thus cold metal demonstrates the doubtful and contingent nature of a lower court judgment during the time an opposing party is prosecuting appeals for the court’s decision turned on the government’s continuing opposition in the appellate courts and not on the fact that the judgment funds were impounded citing to 312_us_579 the court stated that the rule applicable to an assignment_of_income applies when the assignor is entitled at the time of the assignment to receive the income at a future date and is vested with such a right cold metal f 2d pincite in cold metal the court held that notwithstanding the district court’s opinion for the taxpayer in the cancellation suit as of the end of that year it had only a continent right to income payable if at all at some indefinite time in the future in an indeterminate amount with respect to which the assignor had no voice or control whatsoever cold metal f 2d pincite thus cold metal’s assignment did not result in an assignment_of_income in 197_fsupp_739 s d fla the court found that the transferor was not taxable on the interest portion of a note because there were doubts whether there ever would be payment by the debtor and because the creditor divested himself of all rights to the note in the year prior to the year of payment in reaching this conclusion the court placed considerable emphasis on the fact that there were certain legal defenses available to the estate of the debtor even though it was doubtful whether these defenses could ever be raised because of the possibility of waiver on the part of the debtor’s estate in this regard the court stated the point is however that there were real legal doubts concerning the time and extent of collectibility of the note at the time of the assignment wellhouse f_supp pincite emphasis added neither 306_f2d_292 5th cir nor schulze v commissioner t c memo is to the contrary in jones an insolvent taxpayer-subcontractor made a claim in through the general contractor against the united_states for additional compensation_for work done in date the taxpayer assigned the claim to a related corporation for dollar_figure and the corporation’s agreement to pay the taxpayer’s tax deficiencies thereafter the corporation assumed the costs of the action in date the court of claims decided the claim favorably to jones which decision became final in date in date the taxpayer received an award of dollar_figure net of attorneys’ fees of dollar_figure which he endorsed over to the corporation pursuant to the assignment the court concluded that the taxpayer was not taxable on the award in so holding the court plr-122605-98 noted that the claim was contingent and doubtful when it was assigned no gift was involved the assignment was made prior to the year the income was received and the assignment arose out of the exercise of a legitimate business_purpose with respect to the first enumerated factor the court stated that the district_court opinion settled all of those contingencies ie jones’ right to the income but until so settled they were real vital and active jones f 2d pincite the court also stated that the tax_court was clearly in error in its finding that the assignment was executed on date which would have been subsequent to judgment of the court of claims rendered on date jones f 2d pincite while these statements could be viewed as setting a standard that a judgment of a lower court results in the taxpayer having earned_income under the assignment_of_income_doctrine we believe that such a reading is not required since the assignment in jones occurred prior to the court of claims decision the court’s reference can be regarded as being responsive to the specific facts of the case rather than establishing a principle of law in schulze v commissioner tcmemo_1983_263 a taxpayer sued his former law partnership for damages subsequently taxpayer and his wife divorced and agreed to divide their assets equally including taxpayer’s claim against the partnership the value of the claim was indeterminate at the time of the property division subsequently taxpayer recovered on his claim as a result of an arbitrator’s decision and paid a portion to his former spouse following jones supra the tax_court held that taxpayer was not required to include in his gross_income the portion of the award paid to his former spouse because at the time of the assignment recovery on the claim was uncertain the recovery did not occur for more than a year after the assignment of the claim the assignment did not involve a gift or gratuity and the assignment was made for a legitimate non-tax purpose the court noted also that the outcome of a lawsuit is rarely if ever certain or free of doubt since the assignment was made before the arbitrator’s decision and the arbitrator’s decision appears to have been final this opinion is not inconsistent with the principle that income arising from a judgment is contingent until the final_decision in a suit is rendered the above-cited line of cases support the proposition that in general a transferor who makes an effective transfer of a claim in litigation to a third person prior to the time of the expiration of appeals in the case is not required to include the proceeds of the judgment in income under the assignment_of_income_doctrine because such claims are contingent and doubtful in nature accordingly we conclude that your gratuitou sec_3 if however the assignment is not effective then the taxpayer must include the proceeds of the judgment in income see the discussion of attorney fees further in the case of an effective assignment of a transfer of claim in litigation the transferor generally must include in income any cash and the fair_market_value of property or services received for the transfer plr-122605-98 transfer of the punitive_damages judgment to the trust while the case was on appeal by c does not result in inclusion of dollar_figurex of the punitive damage award in your gross_income attorneys fees the remaining issue is whether you must include in income that portion of the punitive damage award plus statutory interest that was used to pay your attorneys fees pursuant to the contingent_fee agreement you believe that your situation is controlled by 263_f2d_119 5th cir aff’g in part and rev’g in part 28_tc_947 in cotnam the taxpayer paid to her attorneys under a contingent_fee arrangement percent of the amount they recovered on a claim they litigated on her behalf the court noted that alabama courts had given full effect to ala code sec_64 which provides that attorneys shall have the same right and power over suits judgments and decrees as their clients the court concluded that since in alabama attorneys have the same rights as their clients the taxpayer could not have received the amount_paid to her attorneys even if she settled the case directly with the other party the court stated that the alabama statute creates a charge in the nature of an equitable assignment or equitable lien in the cause of action the court said that an attorney holding such an interest has an equity in and the recovery under the cause of action prior to that of a defendant in the judgment to exercise a right of set-off accruing to him after the attorney’s interest had attached in addition the court stated that the taxpayer was not obligated to pay the attorneys’ fee instead she fully paid the fee by the assignment of a doubtful claim see also 220_f3d_353 5th cir rev’g tcmemo_1998_362 and 210_f3d_1346 11th cir aff’g tcmemo_1998_248 following cotnam under the golsen_rule in 202_f3d_854 6th cir the court found that an attorney’s lien under michigan law operates similar to an attorney’s lien under alabama law thus the court held that a taxpayer was not 106_fsupp2d_1234 n d ala appears inconsistent with these authorities in that it holds that the assignment of a claim in litigation after a jury verdict but during the pendency of the opposing party’s appeals sufficiently fixes the value of the judgment so as to make assignment_of_income principles applicable foster concerned the arms-length assignment of an additional percent of only the post-judgment interest portion of a claim by a plaintiff to her attorney in exchange for legal services rendered here however you gratuitously transferred to the trust pursuant to the stipulation your entire_interest in the punitive damage award subject_to your attorney’s lien under the contingency fee arrangement based on these factual differences foster does not appear to be inconsistent with our conclusion that you are not required to include in income the dollar_figurex of the judgment received by the trust plr-122605-98 required to include in income that portion of an award paid to the attorney under a contingent_fee contract in so holding the court analogized the taxpayer’s contingent_fee arrangement to a partnership_agreement or joint_venture under which the taxpayer assigned his lawyer a one-third interest in the venture in order to have a chance to recover the remaining two-thirds in baylin v united_states 43_f3d_145 fed cir the court required a partnership to include in income that portion of a settlement that was paid directly to its attorneys under a contingent_fee agreement in so holding the court stated that the partnership received the benefits of those funds in that the funds served to discharge the obligation of the partnership owing to the attorney for his efforts to increase the settlement amount in 105_tc_396 aff’d on other grounds 121_f3d_393 8th cir the court rejected the taxpayers’ argument that their contingent_fee arrangement created a joint_venture between them and the law firm the court distinguished a situation in which a person receives contingent_compensation from one in which each party is a principal and coproprietor sharing a mutual proprietary interest in the net profits and having an obligation to share the net losses based on the record including the testimony of the attorney the court found nothing to indicate that the parties intended a joint_venture in 219_f3d_941 9th cir the court found that under california law an attorney’s lien does not confer any ownership_interest upon attorneys or grant attorneys any right and power over their suits judgments or decrees of their clients the court cited isrin v superior court p 2d cal which states that t o hold that a contingent_fee contract or any ‘assignment’ or ‘lien’ created thereby gives the attorney the beneficial rights of a real party in interest with the concomitant responsibility of financing the litigation would be to distort the purpose of the various acceptable methods of securing his fee thus the court distinguished estate of clarks and cotnam and required the taxpayers to include in income the portion of a judgment they paid to their attorneys the contingency fee agreement that you entered into with your attorney on date did not transfer any interest in the judgment or the cause of action to your attorney instead you used the proceeds of that portion of the judgment you had not previously transferred to the trust to pay your attorney both the contingent_fee agreement itself and the law of support this conclusion first the contingency fee agreement states the attorney has undertaken a contract of employment with you thus like bagley and unlike estate of clarks there is no indication of a joint_venture between you and your attorney plr-122605-98 in addition it appears that in a contingent_fee arrangement merely creates a lien upon the proceeds of a client’s award the disciplinary rules provide that an attorney may acquire a lien to secure his fee or expenses or contract with a client for a reasonable contingent_fee in a civil case this lien attaches to the fruits of the judgment see cohen supra in addition law does not give an attorney a lien on a client’s cause of action see supra although and alabama attorneys have a claim on a judgment that is superior to that of a defendant’s right to set-off that common factor does not mean that your attorney could exercise dominion and control_over your cause of action or your judgment while it was on appeal instead under your contingent_fee agreement your attorney merely provided services to you and agreed to be paid out of any settlement that you received thus your situation is more like that presented in benci-woodward than cotnam finally as in baylin the dollar_figurew your attorney retained under the contingent_fee agreement discharged your obligation to your attorney for his efforts to obtain a damage award accordingly the dollar_figurew retained by your attorney from the judgment is included in your income in the year 19xx holdings we conclude that the dollar_figurex portion of the punitive_damages award dollar_figuret that was transferred to the trust is not includible in your income specifically this ruling is based on the accuracy of all representations made including the representation that under law the dollar_figuret punitive_damages judgment was considered transferred by you to the trust on or after date and before date we conclude that you must include in income in 19xx the dollar_figurew portion of the punitive_damages award that your attorney retained under the contingency fee agreement caveats a copy of this letter must be attached to any income_tax return to which it is relevant we enclose a copy of the letter for this purpose also enclosed is a copy of the letter our view is consistent with the longstanding principle that when the liability of a taxpayer is paid_by a third party the taxpayer has an accession to wealth in the amount of the liability that has been paid 279_us_716 l929 your personal liability for the attorneys fees was paid_by c out of the punitive_damages plus statutory interest awarded to you our view is supported by several other cases which hold that that taxpayers must include in income the portions of damage awards that are paid to their attorneys pursuant to contingency fee arrangements 72_f3d_938 1st cir 50_tc_975 peterson v commissioner 38_tc_137 coady v commissioner 231_f3d_1187 9th cir 114_tc_399 sinyard v commissioner tcmemo_1998_364 fredrickson v commissioner tcmemo_1997_125 plr-122605-98 ruling showing the deletions proposed to be made in the letter when it is disclosed under sec_6110 of the internal_revenue_code except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent sincerely heather c maloy associate chief_counsel income_tax accounting by michael j montemurro senior technician reviewer branch cc


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 xx date org address date date address address person to contact identification_number contact telephone number in reply refer to te_ge review staff ein certified mail - return receipt requested dear a final adverse determination_letter as this is to your exempt status under sec_501 of the internal_revenue_code your exemption from federal_income_tax under sec_501 of the code 1s hereby revoked effective january 20xx our adverse determination was made for the following reasons you have not demonstrated that you are operated exclusively for charitable educational or other exempt purposes within the meaning of sec_501 you have failed to produce documents or otherwise establish that you are operated exclusively for exempt purposes and that no part of your net_earnings inures to the benefit of private shareholders or individuals you failed to respond to repeated reasonable requests to allow the internal_revenue_service to examine your records regarding your reccipts expenditures or activities as required by sec_6001 sec_6033 and revrul_59_95 1959_1_cb_627 contributions to your organization are no longer deductible under section internal_revenue_code of the you are cequired to file federal_income_tax returns on form_1120 hese returns should be filed with the appropriate service_center for the vear ending december 20xx and for all years thereafter processing of income_tax returns and assessment of any taxes due will not be delayed should a pention for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by calling tel or write taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_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 we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours douglas h shulman commissioner by nanette m downing director eo examinations enclosures publication publication notice ce tax exempr ano government entities division org address department of the treasury internal_revenue_service te_ge examination sec_801 tom martin drive room birmingham al date 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 exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice if we issue a determination_letter to you based on technical_advice no letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code 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 the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation enclosures publication publication report of examination sincerely sunita b lough director eo examinations letter catalog number 34809f form - - schedule number or exhibit ueto enn explanations of items name of taxpayer tax identification_number year period ended org 20xx 20xx 20xx 20xx legend org organization name xx date founder founder issue whether org qualifies for exemption under sec_501 of the internal_revenue_code facts on july 20xx org applied for exemption by completing the form_1023 application on the application it states that the activities of org includes providing supervised dafe constructive positive environment that seeks to dispel the latch-key scenario while giving parents a sense of comfort when they are at work and managing family affairs the org also promote the child’s physical development fine motor and gosss motor skills help the child to become socially competent to relate both to adults and his hers peers encourage emotional growth and control and provide opportunity for learning and development of the child’s skills and provide basic support and encouragement the applications stated that org will be community based by staying aware of and responsive to the needs of the community and utilizing resources within the community to help provide meaningful services on february 20xx org was granted exemption under sec_501 of the code as a public charity org was issued a determination_letter and the letter stated that org was considered a public charity and the advance_ruling period ends december 20xx the letter also stated if the org do not meet the public support requirements during the advance_ruling period we will classify them as a private_foundation for future periods the determination_letter also states that if we classify org as a private_foundation we will treat them as a private_foundation from the beginning date for purposes of sec_507 and sec_4940 this information was also discussed with founder the founder of the organization during the examination and additional correspondence was issued to founder requesting the delinquent form 990pf’s the organization did not respond to our request law form 886-a catalog number 20810w page publish no irs gow department of the treasury-internal revenue service form 886-a rev date explanations of items schedule number or exhibit name of taxpayer org tax identification_number year period ended 20xx 20xx 20xx 20kx sec_6001 provides that every person liable for any_tax imposed by the irc or for the collection thereof shall keep adequate_records as the secretary_of_the_treasury or_his_delegate may from time to time prescribe sec_6033 provides except as provided in sec_6033 every organization exempt from tax under sec_501 shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe sec_1_6001-1 in conjunction with sec_1_6001-1 provides that every organization exempt from tax under sec_501 and subject_to the tax imposed by sec_511 on its unrelated_business_income must keep such permanent books or accounts or records including inventories as are sufficient to establish the amount of gross_income deduction credits or other matters required to be shown by such person in any return of such tax such organization shall also keep such books_and_records as are required to substantiate the information required by sec_6033 sec_1_6001-1 states that the books_or_records required by this section shall be kept at ail times available for inspection by authorized internal revenue officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law sec_1_6033-1 provides that every organization which has established its right to exemption from tax whether or not it is required to file an annual return of information shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 revrul_59_95 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service form 886-a la name of taxpayer schedule number or exhibit explanations of items tax identification_number year period ended org 20kx 20xx 20kx 20xx established that it is observing the conditions required for the continuation of exempt status in accordance with the above cited provisions of the code and regulations under sec_6001 and sec_6033 organizations recognized as exempt from federal_income_tax must meet certain reporting requirements these requirements relate to the filing of a complete and accurate annual information and other required federal tax forms and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated_business_income_tax sec_1_6033-3 states that in general the foundation managers as defined in sec_4946 of every organization including a_trust described in sec_4947 which is or is treated as a private_foundation as defined in sec_509 the assets of which are at least dollar_figure at any time during a taxable_year shall include the following information on its annual return in addition to that information required under sec_1 a an itemized statement of its securities and all other assets at the close of the year showing both book and market_value an itemized list of all grants and contributions made or approved for future payment during the year showing the amount of each such grant or contribution the name and address of the recipient other than a recipient who is not a disqualified_person and who receives from the foundation grants to indigent or needy persons that in the aggregate do not exceed dollar_figure during the year any relationship between any individual recipient and the foundation's managers or substantial contributors and a concise statement of the purpose of each such grant or contribution the address of the principal office of the foundation and if different of the place where its books_and_records are maintained the names and addresses of its foundation managers within the meaning of sec_4946 that are substantial contributors within the meaning of sec_507 or that own percent or more of the stock of any corporation of which the foundation owns percent or more of the stock or corresponding interests in partnerships or other entities in which the foundation has a percent or greater interest form 886-a catalog number 10w page publish no irs gov department of the treasury-internal revenue service form 886-a ee explanations of items schedule number or exhibit name of taxpayer tax identification_number year period ended org 20kx 20xx 20xx ia t20nn for purposes of subparagraph of this paragraph the business address of an individual grant recipient or foundation_manager may be used by the foundation in its annual return in lieu of the home address of such recipient or manager and the term relationship shall include but is not limited to any case in which an individual recipient of a grant or contribution by a private_foundation is defined in sec_4946 of a substantial_contributor or foundation_manager of such foundation ii a partner of such substantial_contributor or foundation_manager or iil an employee of such substantial_contributor or foundation_manager or of an organization which is effectively controlled within the meaning of sec_4946 and the regulations thereunder directly or indirectly by one or more such substantial contributors or foundation managers i a member_of_the_family as tres reg a i states that except as otherwise provided in this paragraph and paragraph g of this section every organization_exempt_from_taxation under sec_501 and required to file a return under sec_6033 and this section including for taxable years ending before date private_foundations as defined in sec_509 other than an organization described in sec_401 or sec_501 shall file its annual return on form_990 for taxable years ending on or after date every private_foundation shall file form_990-pf as its annual information_return for taxable years beginning after date every sec_501 black lung trust shall file an annual information_return on form 990-bl or any other form prescribed by the internal_revenue_service for that purpose taxpayer’s position taxpayer was contacted to explain the out come of the exam and to offer a managerial conference but there was no response from the taxpayer conclusion it is the irs's position that the organization failed to meet the reporting requirements under sec_6001 and sec_6033 to be recognized as exempt from federal_income_tax under sec_501 accordingly the organization's exempt status is revoked effective the tax period beginning january 20xx the first year after the advance_ruling period ends form_1120 returns should be filed for the tax periods ending on or after12 20xx 20xx 20xx and 20xx form 886-a catalog number 1uw page publish no irs gov department of the treasury-internal revenue service


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division uniform issue list jun ter atl kkk legend taxpayer a financial_institution a financial_institution b ira x financial advisor g amount account y date date dear kak kak kkk ee wee ak ke wae wee this letter is in response to your request dated date in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the aa page internal_revenue_code the code correspondence on date and date supplemented the request the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a age ___ represents that he received a distribution from ira x totaling amount taxpayer a asserts that his failure to accomplish a rollover of amount within the 60-day period prescribed by sec_408 was due to an error made by financial advisor g on date taxpayer a also represents that amount has not been used for any other purpose taxpayer a represents that upon closing ira x at financial_institution a on date he received a distribution check totaling amount and decided to rollover the funds from ira x into another ira with financial_institution b on date taxpayer a provided financial advisor g an employee of financial_institution b with information showing that amount was held in ira x and relied on financial advisor g to roll over amount into another ira at financial_institution b however instead of establishing an ira financial advisor g incorrectly deposited amount into account y a non-ira account maintained at financial_institution b taxpayer a represents that he believed that amount was in an ira taxpayer a was unaware of the incorrect deposit error until date when taxpayer a contacted financial_institution b regarding his required_minimum_distribution from account y documentation provided shows that financial advisor g incorrectly deposited amount into account y financial advisor g has provided a statement admitting that he made a mistake in depositing the distribution into account y even though taxpayer a had informed him that he intended to establish an ira for the purpose of rolling over the distribution from ira x based on the facts and representations you request a ruling that the internal_revenue_service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distribution of amount from ira x 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-- week page i 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 ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira 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 rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty 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 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 of the code 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 the information presented and documentation submitted by taxpayer a is consistent with his assertion that his failure to accomplish a timely rollover was caused by an error made by financial advisor g which resulted in amount being deposited into account y a non-ira account therefore pursuant to sec_408 d i of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount from kek page ira x taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount into an ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contribution amount will be considered a rollover_contribution within the meaning of sec_408 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 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 letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent if you wish to inquire about this ruling contact at - please address all correspondence to se t ep ra t2 sincerely yours daze latlithe donzell littlejohn manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose


internal_revenue_service department of the treasury washington dc index number person to contact number release date telephone number refer reply to cc dom p si - plr-119411-99 date date x a d1 year dear this letter responds to a letter dated date and subsequent correspondence written on behalf of x by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 of year a the president and a shareholder of x represents that it was intended for x to be an s_corporation beginning in year its first taxable_year a relied on x’s attorney to prepare and file a form_2553 election by a small_business_corporation on behalf of x however the service has no record of receiving a form_2553 timely filed for x for year for year and all subsequent years x filed form_1120s u s income_tax return for an s_corporation and x’s shareholders filed form_1040 u s individual_income_tax_return consistent with x being an s_corporation sec_1362 of the code provides that if -- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may mr matthew welsh treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x’s first taxable_year accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x’s year taxable_year a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely yours branch h grace kim assistant to the chief office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


tcmemo_2011_123 united_states tax_court frederick d todd ii and linda d todd petitioners v commissioner of internal revenue respondent docket no filed date david b shiner and sanjay shivpuri for petitioners angela b friedman jason w anderson and david s weiner for respondent memorandum findings_of_fact and opinion haines judge after concessions the issues for decision are whether petitioner frederick d todd ii petitioner received a taxable_distribution of dollar_figure from united employee benefit fund uebf in alternatively if petitioner did not receive a taxable_distribution from uebf in whether petitioner received dollar_figure of discharge_of_indebtedness income in whether petitioners are liable for an addition_to_tax under sec_6651 for and whether petitioners are liable for a sec_6662 penalty for or some of the facts have been stipulated and are so found the stipulations of facts and the exhibits attached thereto are incorporated herein by this reference at the time they filed their petition petitioners resided in texas findings_of_fact petitioner was a practicing neurosurgeon employed by frederick d todd ii m d p a corporation a texas corporation of which petitioner was the sole shareholder director and president the corporation also employed a few individuals who worked with petitioner on date petitioner signed an application on behalf of the corporation to become a member of the american workers master_contract group awmcg authorizing awmcg to represent the corporation in negotiations with the national production workers union local local the union representing the corporation’s employees the corporation agreed 1unless otherwise indicated section references are to the internal_revenue_code code as amended and in effect for the years in issue rule references are to the tax_court rules_of_practice and procedure amounts are rounded down to the nearest dollar to provide eligible employees with a death_benefit only dbo plan organized through the american workers benefit fund awbf a welfare_benefit_fund established between awmcg and local the agreement provided that upon a covered employee’s death awbf would provide the employee’s designated_beneficiary with an amount equal to eight times the employee’s annual income up to dollar_figure million however awbf’s obligation to pay a death_benefit ceased if the corporation’s covered_employee was voluntarily or involuntarily terminated or retired if the corporation ceased making contributions or if the master_contract between the union and the master_contract group was not renewed as an eligible_employee of the corporation petitioner enrolled in the dbo plan designating petitioner linda d todd as the beneficiary of the dollar_figure million death_benefit a few of petitioner’s fellow eligible employees also participated in the dbo plan on date petitioner submitted an application_for life_insurance to southland life_insurance co southland on behalf of awbf on date southland issued a dollar_figure million universal_life_insurance policy policy no on petitioner’s life to awbf the annual premium on policy no was approximately dollar_figure the policy was owned solely by awbf to provide insurance to fund the death_benefit owed by awbf to petitioner’s wife if petitioner died the corporation made yearly contributions to awbf on behalf of petitioner and his fellow covered employees and deducted those payments under sec_419a upon receipt of the corporation’s yearly contribution awbf paid the premium on policy no on date petitioner submitted another application_for life_insurance to southland on date southland issued a dollar_figure million indexed universal_life_insurance policy policy no on petitioner’s life that required an annual premium of approximately dollar_figure on date petitioner transferred ownership of policy no to awbf on date awbf rolled policy no which had an accumulation value of dollar_figure into policy no pursuant to sec_1035 resulting in a single dollar_figure million policy on petitioner’s life on date awbf merged into united employees benefit fund uebf uebf was a welfare_benefit_fund established between professional workers master_contract group and the union of needletrades industrial and textile employees local local to provide a dbo plan to eligible employees of participating employers before date petitioner’s corporation made yearly contributions to awbf on behalf of petitioner and his fellow covered employees and deducted those payments as contributions to awbf after receiving notice of the transfer of the insurance policies on the lives of the corporation’s employees from awbf to uebf on date the corporation made contributions to uebf which paid the premiums on the southland life_insurance policies held on the lives of petitioner and his covered employees under article of the uebf trust agreement trust agreement the employer and employee trustees had discretionary authority to make loans to a plan participant on a nondiscriminatory basis upon an application and written evidence of an emergency or serious financial hardship from the eligible_employee the trustees could make a loan up to the amount of the present_value of the death_benefit david fensler was a certified employee benefit specialist and was the employer trustee and administrator of both uebf and awbf james skonicki was the employee trustee of uebf from before through on date southland notified petitioner’s insurance agent that the maximum available distribution from policy no was dollar_figure and that any greater distribution would cause the policy to lapse on date petitioner submitted to uebf an application_for a loan of dollar_figure for unexpected housing costs 2the loan requirements of awbf and uebf were the same 3the present_value of the death_benefit was to be actuarially computed using an assumed interest rate of percent and an assumed mortality of age upon receipt of petitioner’s loan application mr fensler recommended to mr skonicki that the loan4 to petitioner be approved neither mr fensler nor mr skonicki made further inquiries into the hardship claimed by petitioner on date mr fensler submitted a policy loan request to southland requesting a loan of dollar_figure on policy no however after receiving the loan check mr fensler decided that the percent interest rate charged by southland on the loan made the choice of a partial surrender from policy no a better prospect on date petitioner agreed to a distribution which would reduce the face value of policy no to dollar_figure on date southland reissued a check for dollar_figure to uebf representing the distribution from policy no upon receipt of the funds from southland uebf issued a check for dollar_figure to petitioner on date on date the corporation made its annual contribution to uebf for petitioner’s dbo plan and on date uebf 4our reference to the transaction as a loan is made for ease of discussion this reference is not dispositive of the status of the transaction and the determination of whether the transaction between petitioner and uebf is a valid debt for tax purposes is the subject of discussion below 5the midterm applicable_federal_rate applicable to loans with terms of to years was dollar_figure percent for loans originating in date see sec_1274 revrul_2002_53 2002_2_cb_427 the long-term applicable_federal_rate for loans originating in date was dollar_figure percent revrul_2002_53 c b pincite made a premium payment to southland on policy no after however petitioner’s corporation stopped making its annual contributions to uebf on behalf of petitioner’s dbo plan and uebf ceased premium payments on policy no the trust agreement provided that a loan from uebf had to be secured_by a pledge of the actuarially determined present_value of the eligible employee’s death_benefit and evidenced by an executed promissory note that provided for payments at least quarterly the trust agreement also required that the loan bear a reasonable rate of interest taking into account the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances six months after the dollar_figure check was delivered to petitioner and after mr fensler provided an amortization schedule on date petitioner signed a promissory note to uebf in the amount of dollar_figure the stated_interest on the note wa sec_1 percent and the note provided that petitioner make quarterly installment payments of dollar_figure beginning on date and continuing until the note was paid the note and the trust agreement also included an alternative means of repayment referred to by petitioners as a dual repayment mechanism in the absence of quarterly payments by petitioner the dual repayment mechanism allowed uebf to deduct the outstanding loan balance from any payment or distribution due from uebf to the participant or his beneficiary according to uebf the dual repayment mechanism prevented a participant from defaulting on his obligation to repay the loan while any payments or distributions were due to the participant under the terms of the agreement at the end of and petitioner owed a principal balance of dollar_figure as of the date of trial petitioner had not made any payments on the note and uebf had taken no action to collect on the note the trust agreement required that uebf hire an auditor to conduct a certified audit and issue an opinion as to the uebf financial statements an accounting firm conducted a certified audit and despite the dual repayment mechanism and its purported protection against default determined that the purported loan to petitioner was in default because of the nonreceipt of payments for the taxable_year sec_2002 and the auditor required uebf to report the loan as uncollectible or in default in and on schedules g of forms annual return report of employee_benefit_plan uebf and its trustees issued a statement expressing disagreement with the auditor explaining that the dual repayment mechanism prevented the loan from entering default under the terms of the trust agreement and uebf’s policies and procedures the statement likewise explained that the loan was not in default or uncollectible because petitioner’s death_benefit owed by uebf under the dbo plan would provide the necessary collateral for the payment of the promissory note on date petitioners filed delinquent and federal_income_tax returns on date respondent issued a notice determining deficiencies for and of dollar_figure and dollar_figure respectively together with sec_6662 penalties of dollar_figure and dollar_figure respectively the deficiencies were based primarily on unreported dividends from life_insurance contributions made on petitioner’s behalf by the corporation and denial of petitioners’ claimed charitable_contribution deductions petitioners filed a petition with the tax_court for and on date in preparation for trial respondent discovered petitioner had received a dollar_figure distribution from uebf in arguing that the distribution was taxable upon receipt respondent filed an amendment to answer and asserted an increased deficiency for of dollar_figure and an increased penalty under sec_6662 of dollar_figure respondent alternatively argued that if the dollar_figure distribution was a valid loan the indebtedness was discharged in and resulted in a deficiency for of dollar_figure and a penalty under sec_6662 of dollar_figure respondent also asserted an addition_to_tax under sec_6651 of dollar_figure for but none for opinion i burden_of_proof as a general_rule the taxpayer bears the burden of proving that the commissioner’s determinations set forth in a notice_of_deficiency are erroneous rule a 290_us_111 however the commissioner has the burden_of_proof as to any new issue or increased deficiency rule a respondent concedes that he bears the burden_of_proof because the only issues to be decided were raised in the amendment to answer ii loan or plan distribution the parties agree that petitioner received dollar_figure from uebf on date petitioners maintain that the distribution was a loan which petitioner intended to repay respondent argues that the distribution from uebf to petitioner was taxable_income the parties agree that uebf did not distribute the funds in satisfaction of its obligation to petitioner’s beneficiaries under the dbo plan sec_61 provides the following broad definition of the term gross_income except as otherwise provided in this subtitle gross_income means all income from whatever source derived exclusions from gross_income must be narrowly construed 515_us_323 one such exclusion excepts the receipt of loan proceeds from gross_income because the temporary economic benefit of income is offset by a corresponding obligation to repay 384_f2d_748 5th cir dennis v commissioner tcmemo_1997_275 however for genuine indebtedness to be present there must be both good-faith intent on the part of the borrower to repay the debt and good-faith intent by the lender to enforce payment of the debt 322_f2d_956 9th cir affg chism ice cream co v commissioner tcmemo_1962_6 wright v commissioner tcmemo_1992_60 the u s court_of_appeals for the fifth circuit to which an appeal in this case would lie absent a stipulation otherwise has held that whether a transaction constitutes a loan for income_tax purposes is a factual question involving several considerations and a distinguishing characteristic of a loan is the intention of the parties that the money advanced be repaid 412_f2d_974 5th cir important factors considered by courts in finding a bona_fide debt are whether the promise to repay was evidenced by a note or other instrument interest was charged a fixed schedule for repayments was established collateral was given to secure payment repayments were made the borrower had a reasonable prospect of repaying the loan and whether the lender had sufficient funds to advance the loan and the parties conducted themselves as if the transaction was a loan see goldstein v commissioner tcmemo_1980_273 and cases cited therein we address each factor in turn a whether the promise to repay was evidenced by a note or other instrument a note or other instrument is indicative of a debtor- creditor relationship teymourian v commissioner tcmemo_2005_232 however an instrument will be given little weight when the form of the instrument fails to correspond with the substance of the transaction provost v commissioner tcmemo_2000_177 on date uebf issued a dollar_figure check to petitioner six months later on date petitioner signed a promissory note to uebf for a loan of dollar_figure despite the requirements within the trust agreement the parties failed to contemporaneously memorialize the indebtedness when the money was distributed to petitioner moreover the record further reflects that neither petitioner nor uebf adhered to the terms of the promissory note or the trust agreement that governed the transaction uebf failed to charge a market rate of interest petitioner did not make quarterly payments as required under the promissory note and uebf did not attempt to collect the amount owed or any portion thereof after petitioner defaulted for the foregoing reasons the court finds that neither petitioner nor uebf strictly complied with the terms of the loan agreement or the promissory note thus the court gives the promissory note little weight this factor indicates the parties did not intend to establish a debtor-creditor relationship at the time the funds were advanced b whether interest was charged the payment of interest indicates the existence of a bona_fide loan 204_f3d_1228 9th cir affg tcmemo_1998_121 teymourian v commissioner supra morrison v commissioner tcmemo_2005_53 the trust agreement provided that a reasonable rate of interest should be charged taking into account the interest rates charged by persons in the business of lending money under similar circumstances southland charged a rate of dollar_figure percent on a similar loan and petitioner acknowledges that the 1-percent interest rate charged on the promissory note was lower than the market rate the failure of uebf and petitioner to agree to a reasonable market rate of interest as dictated by the trust agreement indicates the parties did not intend to establish a debtor-creditor relationship at the time the funds were advanced c whether a fixed schedule for repayment was established a fixed schedule for repayment is indicative of a bona_fide loan welch v commissioner supra pincite teymourian v commissioner supra evidence that a creditor did not intend to enforce payment or was indifferent to the exact time an advance was repaid indicates a bona_fide loan did not exist 23_tc_408 affd 236_f2d_159 6th cir provost v commissioner supra according to the promissory note petitioner was to make quarterly installment payments of dollar_figure beginning on date and continuing until the note was fully paid three months after the first payment was due uebf provided petitioner with an amortization schedule reflecting quarterly payments that should have been paid beginning on date almost months after the first payment was due the parties finally executed the promissory note petitioner did not make any payments to uebf and uebf never attempted to collect the amount owed after each default this factor indicates the parties did not intend to establish a debtor-creditor relationship at the time the funds were advanced d whether collateral was given to secure payment respondent argues that petitioner provided no collateral because he did not own or have any rights in the southland insurance policies purchased on his life awbf secured the potential death_benefit obligation by purchasing policy no from southland on date petitioner purchased his own policy from southland policy no however on date petitioner transferred ownership of policy no to awbf which rolled the balance of policy no into policy no after the merger of awbf and uebf in policy no became the property of uebf at the time of the purported loan petitioner did not own the policy had no access to the cash_value of the policy and had no rights to the proceeds from the policy thus respondent correctly states that the policy cannot be treated as collateral for petitioner’s purported loan in response petitioners claim that the death_benefit owed to them by uebf under the dbo plan and not the southland insurance policies provided the necessary collateral for the payment of the promissory note petitioners argue that when combined with the death_benefit owed by uebf the dual repayment mechanism served as collateral since any balance remaining on the loan at the time of petitioner’s death would reduce the death_benefit payable by uebf to his beneficiaries thus petitioner claims he provided the necessary collateral despite making no payments or relinquishing control_over any property in favor of uebf in our analysis below we find the dual repayment mechanism does not serve as a valid repayment method for purposes of classifying the distribution to petitioners as a bona_fide loan however the mechanism could serve as security between the parties for the promissory note for example if petitioner died having met all conditions precedent entitling him to death_benefits uebf would receive dollar_figure from southland and would be obligated to pay dollar_figure million to petitioner’s beneficiary the dual repayment mechanism agreed to by petitioners provides security and allows uebf to deduct the dollar_figure distribution from the death_benefit obligation this factor indicates the parties possible intent to establish a debtor-creditor relationship at the time the funds were advanced e whether repayments were made repayment is an indication that a loan is bona_fide 52_tc_255 affd 422_f2d_198 5th cir although petitioner signed a promissory note obligating him to make quarterly payments beginning in date as of the date of trial petitioner had not made any payments toward the purported loan petitioners argue that the dual repayment mechanism serves as a valid method of repayment for a valid debt to exist for tax purposes there must exist an unconditional obligation to repay midkiff v commissioner 96_tc_724 indebtedness is ‘an existing unconditional and legally enforceable obligation for the payment of a principal sum ’ affd sub nom 992_f2d_226 9th cir quoting 56_tc_951 if a repayment mechanism is too contingent and indefinite the alternative payment method is not recognized 81_tc_77 despite petitioners’ characterization of the transaction and the dual repayment mechanism there are significant conditions precedent to petitioners’ receipt of a death_benefit under the dbo plan from uebf if the corporation ceased participation in the uebf plan if the covered_employee was voluntarily or involuntarily terminated or retired or if the master_contract group and local failed to renew their agreement then uebf was not required to pay any benefits thus even if petitioner had rights to a death_benefit the rights were contingent because if any of the foregoing conditions were present at the time of his death his beneficiaries would not receive benefits from uebf because the purported benefits were contingent upon multiple future events petitioner cannot reasonably rely on the death_benefit as an alternative payment method to show that the loan would be unconditionally repaid this factor indicates the parties did not intend to establish a debtor-creditor relationship at the time the funds were advanced f whether the borrower had a reasonable prospect of repaying the loan and whether the lender had sufficient funds to advance the loan this factor is best determined by looking to whether there was a reasonable expectation of repayment in light of the economic realities of the situation at the time the funds were advanced 54_tc_905 a reasonable prospect of repayment at the time the funds were advanced indicates the existence of a bona_fide loan welch v commissioner f 3d pincite petitioner earned a substantial living as a neurosurgeon and there was a reasonable prospect of petitioner’s repaying the purported loan this factor favors the existence of a debtor- creditor relationship between the parties g whether the parties conducted themselves as if the transaction were a loan the conduct of the parties may be sufficient to indicate the existence of a loan 25_tc_387 teymourian v commissioner tcmemo_2005_232 morrison v commissioner tcmemo_2005_53 petitioners produced little evidence showing uebf and petitioner conducted themselves in a manner indicating that uebf’s distribution of dollar_figure to petitioner was a loan although petitioner executed a loan application and a promissory note neither party strictly abided by their terms first petitioner failed to provide any written evidence of the unexpected housing costs that necessitated the loan application and uebf made no further inquiry into the hardship second the interest rate was below market petitioner failed to make any quarterly payments as required under the promissory note and uebf never attempted collection third the promissory note was not executed for almost months after the funds were advanced lastly petitioner’s corporation ceased making contributions to uebf to fund petitioner’s death_benefit shortly after petitioner received the dollar_figure distribution from uebf this factor indicates the parties did not intend to establish a debtor-creditor relationship at the time the funds were advanced h conclusion in accordance with our analysis above respondent has met his burden of proving that the distribution of dollar_figure did not constitute a bona_fide loan on this record the court holds that petitioners improperly failed to report as income the dollar_figure uebf distributed to petitioner in because of our findings herein it is unnecessary to address the parties’ arguments regarding a discharge_of_indebtedness by uebf or the year in which it occurred iii penalties and additions to tax a addition_to_tax under sec_6651 sec_6651 imposes an addition_to_tax in the case of any failure to timely file a federal_income_tax return unless it is shown that such failure is due to reasonable_cause and not willful neglect a showing of reasonable_cause requires petitioners to demonstrate they exercised ordinary business care and prudence and nevertheless were unable to file the return by the due_date sec_301_6651-1 proced admin regs petitioners filed their returns for and on date respondent did not assert a sec_6651 addition_to_tax for the amount of the sec_6651 addition_to_tax is a computational matter based on the amount of tax due to the extent respondent bears the burden of proving an increased sec_6651 addition_to_tax respondent has met this burden if petitioners’ concessions result in an increased deficiency for see sec_7491 116_tc_438 howard v commissioner tcmemo_2005_144 petitioners admit that they did not have reasonable_cause for their failure to timely file and failed to argue that the addition should not apply accordingly we conclude that petitioners are liable for an addition_to_tax under sec_6651 for in an amount to be determined in the rule computation b accuracy-related_penalty under sec_6662 petitioners contest the imposition of an accuracy-related_penalty for sec_6662 and b and imposes a 20-percent accuracy-related_penalty upon any underpayment of federal_income_tax attributable to a taxpayer’s negligence or disregard of rules or regulations or substantial_understatement 6because of the parties’ concessions and our holding that petitioners improperly failed to report the dollar_figure distribution as income in we find it unnecessary to address respondent’s alternative position regarding the imposition of the accuracy- related penalty for or petitioners’ response thereto of income_tax sec_6662 defines negligence as including any failure to make a reasonable attempt to comply with the provisions of the code and defines disregard as any careless reckless or intentional disregard disregard of rules or regulations is careless if the taxpayer does not exercise reasonable diligence to determine the correctness of a tax_return position that is contrary to the rule_or_regulation sec_1_6662-3 income_tax regs disregard of rules or regulations is reckless if the taxpayer makes little or no effort to determine whether a rule_or_regulation exists id an understatement is substantial if it exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 under sec_7491 the commissioner bears the burden of production with respect to penalties and must come forward with sufficient evidence indicating that it is appropriate to impose penalties higbee v commissioner supra pincite once respondent meets his burden of production petitioners bear the burden_of_proof as to substantial_authority reasonable_cause or similar provisions id in an amendment to answer respondent asserted an increased penalty based on the asserted increased deficiency for each year at issue to the extent respondent bears the burden_of_proof for the increased penalty we find that respondent has met that burden see bhattacharyya v commissioner tcmemo_2007_19 howard v commissioner supra respondent has proved that petitioners improperly excluded from income in the dollar_figure distribution from uebf which exceeds both percent of the tax required to be shown on the return and dollar_figure respondent has also shown that petitioners negligently disregarded rules and regulations by failing to make a reasonable attempt to ascertain the correctness of the treatment of the distribution petitioners arranged for a distribution from the policy accepted funds and made no attempt to make payments on the purported loan thus defaulting moreover petitioner provided no evidence that he discussed his failure to meet the terms of his purported loan with his tax_return_preparer or made any attempt to determine the correct treatment of his failure to report any income associated with the distribution on his income_tax return this evidence is sufficient to indicate that it is appropriate to impose a penalty under sec_6662 for except to any portion of the underpayment as to which petitioners acted with reasonable_cause and in good_faith see sec_6664 higbee v commissioner supra pincite the decision as to whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all of the pertinent facts and circumstances sec_1_6664-4 income_tax regs reliance on professional advice may constitute reasonable_cause and good_faith if under all the circumstances such reliance was reasonable and the taxpayer acted in good_faith 89_tc_849 affd 904_f2d_1011 5th cir affd 501_us_868 sec_1 b income_tax regs however the taxpayer cannot avoid the penalty merely by having a professional adviser read a summary of the transaction and offer advice that assumes the facts presented are true see novinger v commissioner tcmemo_1991_289 moreover the professional’s advice must be based on all pertinent facts and circumstances and if the adviser is not versed in the nontax factors mere reliance on the tax adviser may not suffice see 205_f3d_54 2d cir 857_f2d_1383 9th cir affg dister v commissioner tcmemo_1987_217 freytag v commissioner supra pincite for a taxpayer’s reliance on advice to be sufficiently reasonable so as to negate possible liability for the accuracy- related penalty the court has stated that a taxpayer must satisfy a three-prong test by showing the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided the adviser with the necessary and accurate information and the taxpayer actually relied in good_faith on the adviser’s judgment 115_tc_43 affd 299_f3d_221 3d cir petitioners claim that they relied on the tax_advice of jeffrey oerke c p a who prepared their return and thus reasonable_cause exists however there is no evidence that mr oerke had any particular expertise in employee benefit plans or that petitioners thought he had such expertise furthermore petitioners failed to show that they provided mr oerke with all the necessary and accurate information to properly prepare their returns or evaluate the purported loan petitioner testified that although he provided mr oerke with a copy of the promissory note he was unsure whether mr oerke received any documents related to the dbo benefit plan finally the record indicates that petitioner did not seek or receive an opinion from mr oerke regarding the validity of the purported loan transaction instead mr oerke merely prepared petitioners’ income_tax return for from the documents petitioners provided as we have stated reliance on the mere fact that a certified_public_accountant has prepared a tax_return does not mean that he or she opined on any or all of the items reported herein id pincite for all of the foregoing reasons petitioners are precluded from now arguing that they relied on the tax_advice of mr oerke we conclude that petitioners’ underpayment for was the result of their substantial_understatement_of_income_tax and their negligence and disregard of rules or regulations under sec_6662 we also conclude that petitioners are not entitled to the reasonable_cause and good_faith defense under sec_6664 because they did not rely on their accountant thus we find that petitioners are liable for the accuracy-related_penalty for pursuant to sec_6662 in an amount to be determined in the rule computation we do not impose a sec_6662 penalty for the court in reaching its holdings has considered all arguments made and to the extent not mentioned concludes that they are moot irrelevant or without merit to reflect the foregoing decision will be entered under rule