t c memo united_states tax_court shizuo george kurata petitioner v commissioner of internal revenue respondent docket no filed date held gain recognized because p failed to prove sec_1033 i r c involuntary_conversion of property held further deductions denied for miscellaneous employee business_expenses and for moving_expenses because p failed to substantiate such expenditures held further sec_6651 i r c addition_to_tax for failure_to_file timely return sustained held further sec_6662 i r c accuracy related penalty imposed for negligence or disregard of rules or regulations shizuo george kurata pro_se shari c mauney j robert cuatto and rick v hosler for respondent memorandum opinion halpern judge by notice_of_deficiency dated date respondent determined a deficiency in an addition to and a penalty on petitioner's federal_income_tax as follows year deficiency dollar_figure addition_to_tax penalty under sec_6651 sec_6662 dollar_figure dollar_figure unless otherwise noted all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure the issues for decision are the amount of gain realized by petitioner upon the sale of certain rental properties and whether petitioner is entitled to nonrecognition of that gain under sec_1033 whether petitioner is entitled to certain disallowed schedule a deductions and whether petitioner is liable for the addition_to_tax and penalty the parties have stipulated various facts which we so find the stipulations of facts filed by the parties and accompanying exhibits are incorporated herein by this reference although the issues for decision are principally factual we need find few facts in addition to those stipulated by the parties accordingly we shall not separately set forth our findings_of_fact and opinion and the additional findings_of_fact that we must make are contained in the discussion that follows after setting forth certain background information we shall address the adjustments made by respondent that are in dispute and the addition_to_tax and penalty that are in dispute petitioner bears the burden_of_proof on all questions of fact rule a i background petitioner maintained his legal residence in phoenix arizona at the time the petition in this case was filed during petitioner was a consulting engineer and a general_partner with tqa associates a texas based consulting firm petitioner is a calendar_year taxpayer petitioner filed an application_for automatic_extension of time to file u s individual_income_tax_return for requesting an extension of time to date petitioner also filed an application_for additional extension of time to file u s individual_income_tax_return for requesting an extension of time to date petitioner filed a u s individual_income_tax_return form_1040 for the tax_return which was received by the internal_revenue_service ogden service_center on date the envelope used by petitioner to mail the tax_return is postmarked date ii disputed adjustments a sale of mukilteo condominiums on or about date petitioner purchased five condominium units located in mukilteo washington the five units petitioner owned those units as rental properties on or about date petitioner transferred the five units to great american first savings bank great bank in conjunction with the settlement of potential litigation regarding purported soil erosion affecting those properties attached to the tax_return is a statement of involuntary_conversion which relates to the five units that statement shows a gain in the amount of dollar_figure on the disposition of the five units and provides that the taxpayer intends to acquire replacement_property and to defer the gain realized by the involuntary_conversion of the five units in the notice_of_deficiency respondent adjusted the amount_realized on the sale of the five units by increasing the amount of the settlement proceeds from dollar_figure to dollar_figure and adjusted petitioner's adjusted_basis in the five units by decreasing petitioner's initial cost_basis from dollar_figure to dollar_figure respondent determined that after taking into account depreciation and other items petitioner realized gain on the for simplicity figures have been rounded to the nearest dollar and thus in some of the calculations to follow there are some minor discrepancies sale of the five units in the amount of dollar_figure and respondent adjusted petitioner's gross_income accordingly because petitioner had failed to establish that he was entitled to gain deferral on the basis of an involuntary_conversion of the five units after making a negative adjustment for an operating loss carryover respondent increased petitioner's taxable_income by dollar_figure as a threshold matter we must determine the amount of gain realized on the sale of the five units and in turn the adjustments to petitioner's gross and taxable_income that are in issue sec_1001 provides in part that gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis although initially the parties may have disputed the cost of the five units it appears that the parties are now in agreement that petitioner paid a total of dollar_figure for the five units which amount constitutes petitioner's cost_basis in the units the parties also agree on the adjustments to petitioner's basis in the five units capital expenditures of dollar_figure and depreciation on buildings and personal properties of dollar_figure therefore the parties agree that petitioner's adjusted_basis in the five units is dollar_figure dollar_figure dollar_figure dollar_figure - dollar_figure the parties however disagree on the amount_realized by petitioner from the sale of the five units petitioner reports the sale as follows gross settlement proceeds of dollar_figure settlement charges of dollar_figure legal costs of dollar_figure and operating loss carryover of dollar_figure from those figures petitioner calculates an amount_realized of dollar_figure dollar_figure dollar_figure - dollar_figure - dollar_figure - dollar_figure in calculating an amount_realized of dollar_figure from the sale of the five units respondent argues that dollar_figure is the correct figure for settlement proceeds subtracts legal costs of dollar_figure dollar_figure dollar_figure - dollar_figure and does not consider the dollar_figure in settlement charges claimed by petitioner only after calculations for the amount_realized and gain realized are complete and the gain is included as an item_of_gross_income see sec_61 does respondent subtract the operating loss carryover of dollar_figure in arriving at taxable_income see sec_161 sec_172 the difference between the parties' figures for the amount_realized thus results from a disagreement over the correct amount of settlement proceeds and charges to be considered in calculating the amount_realized as well as the placement of the operating loss carryover in the computations first we agree with respondent that the operating loss carryover should properly be considered if at all only in determining taxable_income and not in the separate and preceding operation of determining gain realized compare sec_61 and sec_1001 with sec_161 and sec_172 since the parties agree with regard to the dollar_figure in legal costs we shall focus on the proper amount to be considered as settlement proceeds and settlement charges the settlement statements hud-1s indicate a total sales_price for the five units in the amount of dollar_figure we agree with respondent that that figure is the proper starting point for calculating amount_realized the hud-1s also indicate that petitioner incurred total settlement charges of dollar_figure of that amount dollar_figure represents additional attorney's_fees dollar_figure represents amounts paid for title insurance and the remainder apparently represents unspecified amounts petitioner owed to great bank we believe that the only settlement charges that can reduce the amount_realized from the sale of the five units are the payments for additional attorney's_fees and title insurance petitioner has failed to persuade us expenses_incurred in selling property generally reduce the gain realized see eg 388_f2d_184 8th cir selling_expenses incurred in the sale of a capital_asset are treated as capital in nature and chargeable only against the capital proceeds we are satisfied that the payments for additional attorney's_fees and title insurance are expenses_incurred in selling the five units because those charges appear on the settlement statements however the presence on the settlement statements alone of unspecified amounts petitioner owed to great american first savings bank does not persuade us that those amounts constitute expenses_incurred in selling the five units in addition it should be noted that appeal in this case would lie to the court_of_appeals for the ninth circuit and that circuit may account for the selling_expenses incurred on the sale of the five units by increasing petitioner's adjusted_basis as opposed to reducing the amount_realized see kirschenmann v continued that unspecified amounts owed to great bank constitute settlement charges that properly reduce the amount_realized from the sale of the five units indeed petitioner has not produced any evidence on that issue in sum we find that the sale of the five units produced settlement proceeds of dollar_figure and settlement charges of dollar_figure therefore the amount_realized by petitioner on the sale of the five units is dollar_figure and the gain realized is dollar_figure the adjustment to petitioner's gross_income that is in issue is dollar_figure and after making a negative adjustment for the undisputed operating loss carryover dollar_figure is the adjustment to petitioner's taxable_income that is in issue those calculations are as follows purchase_price dollar_figure capital expenditures big_number depreciation big_number adjusted_basis big_number settlement proceeds dollar_figure legal costs big_number settlement charges big_number amount_realized big_number amount_realized less adjusted_basis big_number equals gain realized big_number adjustment_to_gross_income in issue big_number operating loss carryover big_number dollar_figure continued commissioner 488_f2d_270 9th cir revg 57_tc_524 we believe however that we need not address whether selling_expenses properly reduce amount_realized or increase adjusted_basis because under either approach the gain realized by petitioner in the present case would be the same amount since the parties agree on the figure for petitioner's adjusted_basis in the five units we shall purely for convenience not disturb that figure and adjust the amount_realized for the expenses_incurred on the sale of the five units adjustment to taxable_income in issue big_number now that we have determined the adjustments to petitioner's gross and taxable_income that are in issue as a result of the sale of the five units we must decide whether those adjustments are correct petitioner asserts that the five units along with other similar properties which were part of a 300-unit condominium complex located in mukilteo washington the mukilteo complex were damaged beyond repair as a result of soil erosion caused by drainage diffusion and saturated soil a homeowner's association representing the interests of the condominium_owners including petitioner retained a law firm that initiated legal proceedings against great bank which according to petitioner acquired the bank that had sold the properties to the condominium_owners after negotiations the homeowner's association entered into a group settlement agreement with great bank on date pursuant to that agreement petitioner transferred the five units to great bank in exchange for cash and debt forgiveness petitioner claims that the five units were destroyed beyond repair and as a result of the interlocking ownership structure of the mukilteo condominium properties the group settlement was the only practical recourse available to the individual owners on that basis petitioner claims that the five units were involuntarily converted petitioner contends that he applied the proceeds received from the sale of the five units towards the purchase of qualifying replacement_property located in glendale arizona on date and therefore is entitled to nonrecognition of gain on the sale of the five units sec_1033 among other things allows nonrecognition of gain to the extent that proceeds received from the compulsory or involuntary_conversion of property are used to purchase other_property similar_or_related_in_service_or_use to the property so converted qualifying replacement_property involuntary_conversions resulting from the destruction of property in whole or in part are specifically enumerated as a type of disposition that qualifies under the statute sec_1033 c onversions or sales of property where the owner had a choice of keeping the property or converting or selling it do not qualify for nonrecognition treatment c g willis inc v 41_tc_468 affd 342_f2d_996 3d cir therefore petitioner must prove that as a result of the destruction of the five units in whole or in part the five units were involuntarily converted and that the purchase of property located in glendale arizona on date constituted the purchase of qualifying replacement_property in this case petitioner has failed to prove that the five units were destroyed in whole or in part as that phrase is used in sec_1033 at trial petitioner offered only his uncorroborated testimony that the five units were damaged beyond repair petitioner did not support that assertion with any pictures documentary_evidence or the testimony of any third party we need not and decline to accept petitioner's assertion at face value given his failure to corroborate see eg 975_f2d_534 8th cir affg in part revg in part tcmemo_1991_140 808_f2d_312 4th cir affg tcmemo_1985_107 respondent however presented the testimony of james bennett the building official for the city of mukilteo washington since date to the time of trial mr bennett directed building inspection functions for the city of mukilteo including structural nuisance inspections abatement actions and condemnations mr bennett stated that no order of condemnation was ever issued to any of the properties in the mukilteo complex in addition mr bennett stated that in when he visited the mukilteo complex he observed that the buildings that housed the individual condominium units were occupied and performing petitioner did not attempt to refute any of mr bennett's statements indeed petitioner has not been back to mukilteo washington since the sale of the five units to great bank mr bennett's testimony coupled with petitioner's failure to rebut that testimony is inconsistent with petitioner's assertion that the five units were destroyed in whole or in part we are not persuaded by petitioner's unsupported assertions and we find that the five units were not destroyed in whole or in part our finding that the five units were not destroyed in whole or in part precludes nonrecognition treatment under sec_1033 we also note however that petitioner has failed to submit any evidence other than his uncorroborated assertions at trial that he was compelled to enter into the group settlement agreement with great bank or that petitioner acquired property similar_or_related_in_service_or_use to the five units petitioner's attempt to introduce evidence in his brief filed date to support his claim under sec_1033 is rejected see rule b thus respondent's adjustment increasing petitioner's gross_income for the gain realized on the sale of the five units is sustained to the extent of dollar_figure and accordingly respondent's adjustment increasing petitioner's taxable_income is sustained to the extent of dollar_figure b employee business_expenses petitioner claimed on the tax_return a miscellaneous deduction in the amount of dollar_figure for unreimbursed employee business_expenses in the notice_of_deficiency respondent disallowed dollar_figure of that deduction and increased petitioner's taxable_income accordingly respondent explained that petitioner was not entitled to the disallowed deduction because he failed to establish that the deduction was for an ordinary and necessary business_expense or was expended for the purpose designated on the tax_return the tax_return indicates that petitioner claimed the deduction for vehicle expenses travel_expenses and meal and or entertainment_expenses sec_162 permits a deduction for traveling expenses including amounts expended for meals_and_lodging incurred by a taxpayer while away from home in the pursuit of a trade_or_business the taxpayer must demonstrate that the expenses were reasonable and necessary traveling expenses incurred while away from home and incurred in the pursuit of business see eg 326_us_465 in addition sec_274 imposes strict substantiation requirements sec_274 provides that with certain inapplicable exceptions no deduction for traveling expenses or similar items shall be allowed unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer's own statement a the amount of such expense or other item b the time and place of the travel entertainment amusement recreation or use of the facility or property or the date and description of the gift c the business_purpose of the expense or other item and d the business relationship to the taxpayer of persons entertained using the facility or property or receiving the gift at trial petitioner stated that in he maintained tax homes in arlington texas and everett washington while working as a contract engineer in california petitioner claims that he is entitled to deduct travel and travel related expenses_incurred in california in the pursuit of his business as a contract engineer respondent asserts that petitioner did not maintain a tax_home during in addition respondent contends that petitioner's claimed expenses are not ordinary and necessary business_expenses under sec_162 and that petitioner has failed to meet the substantiation requirements of sec_274 petitioner testified that he incurred the claimed business_expenses and that he provided the required substantiation to the internal_revenue_service petitioner however has failed to corroborate his testimony the record is barren of the type of substantiation required by sec_274 petitioner did not provide the court with any records or other evidence setting forth the amount time place and business_purpose of the expenditures claimed see sec_1_274-5 income_tax regs so even if the court were to assume arguendo that petitioner's travel and travel related expenditures are deductible under sec_162 petitioner's failure to substantiate any of those expenses pursuant to sec_274 requires disallowance of the claimed deduction thus respondent's adjustment increasing petitioner's taxable_income as a result of the disallowed employee_business_expense deduction is sustained c moving_expenses petitioner claimed on the tax_return a moving_expense_deduction in the amount of dollar_figure in the notice_of_deficiency respondent disallowed that deduction in full and increased petitioner's taxable_income accordingly respondent explained that petitioner was not entitled to the deduction because he was not a full-time_employee in the general location of his new principal_place_of_work for at least weeks during the 12-month_period immediately following his arrival in such location see sec_217 in his brief petitioner concedes that he erred in reporting the claimed expenses as moving_expenses under sec_217 he argues instead that the claimed expenses should be deductible as employee business_expenses under sec_162 petitioner's assertion is not supported by the type of substantiation required under sec_274 see supra sec ii b thus respondent's adjustment increasing petitioner's taxable_income for the disallowed moving_expense_deduction is sustained iii additions to tax a sec_6651 sec_6651 imposes an addition_to_tax for failure_to_file a timely return determined with regard to any extension of time for filing unless it is shown that such failure is due to reasonable_cause and not due to willful neglect petitioner bears the burden_of_proof as to reasonable_cause and the absence of willful neglect see rule a in the notice_of_deficiency respondent determined that the tax_return was due on date and that petitioner filed that return on date petitioner does not dispute those facts petitioner did not present any testimony or other evidence to explain his failure_to_file the tax_return in a timely manner petitioner's attempt to introduce evidence in his brief is rejected see rule b petitioner has not carried his burden_of_proof respondent's determination of an addition_to_tax under sec_6651 is sustained except to the extent that it relates to the difference between our calculation of the adjustments to income arising from the sale of the five units and respondent's calculation the section ii a difference supra b sec_6662 sec_6662 provides for an accuracy related penalty in the amount equal to percent of the portion of an underpayment_of_tax attributable to among other things negligence or disregard of rules or regulations sec_6662 and b the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws and the term disregard includes any careless reckless or intentional disregard sec_6662 in the notice_of_deficiency respondent determined that the entire underpayment_of_tax for the taxable_year was due to petitioner's negligence or intentional_disregard_of_rules_and_regulations petitioner bears the burden of proving that respondent's determination is erroneous see rule a on the record before us we find that respondent's determination of a penalty under sec_6662 is correct except to the extent that it relates to the section ii a difference supra iv conclusion respondent's determinations of a deficiency in an addition to and a penalty on petitioner's federal_income_tax for the taxable_year are sustained to the extent set forth in this report decision will be entered under rule


internal_revenue_service number release date index number --------------------------- ----------------------------------------------- --------------------------------------------------------- ------------------------------ ------------------ ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------ telephone number -------------------- refer reply to cc corp b06 plr-137179-13 date march legend distributing controlled -------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------ ----------------------- -------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------- ----------------------------------------------------------- foreign parent fsub1 fsub2 fsub3 fsub4 fsub5 fsub6 ----------------------------------------------- ----------------------------------------- ------------------------------------------------------------------------------- ---------------------------------------------------------------- --------------------------------------------------------------------------------- ---------------------------------------------------------------------- --------------------------------------------------- plr-137179-13 fsub7 fsub8 fsub9 fsub10 fsub11 fsub12 fsub13 fsub14 fsub15 fsub16 fsub17 fsub18 fsub19 sub20 fsub21 fsub22 fsub23 fsub24 llc1 llc2 llc3 llc4 ---------------------------------------------------------- ---------------------------------------------------- ------------------------------------------------------- ----------------------------------------- --------------------------------------------------------- -------------------------------------------------------------------- ------------------------------------------------------ ------------------------------------------------------------ ----------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ---------- -------------- --------------------------------------------------------------------------------- -------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- plr-137179-13 llc5 branch1 branch2 branch3 business x business y business z country a country b country c country d state a date date date date date date date date date -------------------------------------------------------------------- ------------------------------------------------------------------------------- ----------- ------------------------------------------------------------------------------- ----------------- ------------------------------ ---------------------------------------------------- ----------------------- ------------------------------------- --------------------- -------- ---------------- ---------------- ------------ ---------------- ------------------------ ------------------------ -------------------------- ------------------------ ----------------- -------------------------- --------------------------- --------------------------- plr-137179-13 date date date date date date date date date date date date date date date dollar_figurea dollar_figureb dollar_figurec dollar_figured dollar_figuree dollar_figuref g -------------------------- ----------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- ------------------------ -------------------------- ------------------------ ------------------------ -------------------------- -------------------------- ----------------------- --------------------- --------------- --------------- ------------- ----------------- --------------- ----------------- ----------------- plr-137179-13 dollar_figureh dollar_figurei dollar_figurej a b c d e f w x y z ----------------- ----------------- ------------- -------- -------- ----------- ----------- ------ ------ -- -- -- -- dear ------------------- this letter responds to a letter dated date from your authorized representatives requesting rulings on certain u s federal_income_tax consequences of the proposed transaction defined below the information provided in that letter and in later correspondence is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process in particular this office has not reviewed any information pertaining to and has made no determination regarding whether the distribution defined below i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled plr-137179-13 corporation or both see sec_355 of the internal_revenue_code and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 summary of facts foreign parent a country a publicly traded corporation is the parent of a group of multinational affiliated corporations the foreign parent group foreign parent is indirectly engaged in three principal businesses business x business y and business z foreign parent wholly owns fsub1 a country a corporation fsub1 wholly owns fsub2 and fsub3 each a country a corporation and llc1 a state a limited_liability_company treated as a disregarded_entity for u s federal tax purposes fsub1 also indirectly wholly owns fsub4 a country a corporation fsub2 wholly owns fsub5 a country a corporation and fsub6 a country b corporation treated as a disregarded_entity for u s federal tax purposes fsub6 wholly owns fsub7 a country a corporation treated as a disregarded_entity for u s federal tax purposes fsub7 wholly owns fsub8 a country a corporation treated as a disregarded_entity for u s federal tax purposes fsub8 wholly owns fsub9 a country c_corporation treated as a disregarded_entity for u s federal tax purposes fsub8 also owns the y and z shares of fsub10 a country c_corporation fsub9 owns the w and x shares of fsub10 fsub10 through wholly-owned branch1 wholly owns fsub11 a country d corporation treated as a disregarded_entity for u s federal tax purposes fsub11 wholly owns fsub12 a country a corporation treated as a disregarded_entity for u s federal tax purposes fsub11 also owns a of the shares of fsub13 a country d corporation fsub5 owns the remaining b of the shares of fsub13 fsub13 wholly owns fsub14 a country a corporation fsub14 wholly owns fsub15 a country a corporation treated as a disregarded_entity for u s federal tax purposes fsub15 through wholly-owned branch2 wholly owns fsub16 a country d corporation plr-137179-13 fsub16 wholly owns fsub17 a country d corporation treated as a disregarded_entity for u s federal tax purposes and fsub18 a country a corporation fsub17 wholly owns fsub19 a country a corporation fsub16 and fsub17 respectively own c and d of distributing a state a partnership that elected to be treated as an association_taxable_as_a_corporation for u s federal tax purposes distributing is the common parent of a consolidated u s federal_income_tax group distributing actively conducts business x and business y through wholly-owned llc2 a state a limited_liability_company treated as a disregarded_entity for u s federal tax purposes llc2 wholly owns llc3 which in turn wholly owns llc4 each of which is a state a limited_liability_company treated as a disregarded_entity for u s federal tax purposes llc2 also wholly owns controlled a state a limited_liability_company formed on date that made an initial entity classification election to be treated as an association_taxable_as_a_corporation for u s federal tax purposes prior to date llc4 owned e of sub20 a state a corporation engaged in business z llc1 owned the remaining f of sub20 on date in a transaction independent from the proposed transaction defined below distributing separated business z in a series of transactions intended to qualify as a tax-free distribution pursuant to sec_368 sec_355 and related provisions the business z distribution distributing did not request a ruling with respect to the business z distribution as of date distributing did not have any non-trade indebtedness to unrelated parties distributing directly and through llc2 had approximately dollar_figurea of debt due to various foreign parent group entities of the dollar_figurea distributing owed approximately dollar_figureb to fsub16 and dollar_figurec to fsub17 approximately dollar_figured of the debt owed to fsub16 the fsub16 debt was issued on date approximately dollar_figuree of the debt owed to fsub17 the fsub17 debt was issued on date the remaining dollar_figuref of the total dollar_figurea debt was owed by llc2 to fsub4 the fsub4 debt the fsub4 debt was issued on date date sec_5 and are more than two years prior to the date of the proposed transaction defined below financial information has been received indicating that business x and business y each has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years proposed transaction plr-137179-13 for what are represented to be valid corporate business purposes distributing desires to separate business x and business y the separation is intended to be accomplished by the following partially completed series of steps collectively the proposed transaction preliminary steps on date fsub1 formed fsub21 a country a corporation fsub21 made an initial entity classification election to be treated as a disregarded_entity for u s federal tax purposes on date fsub21 formed fsub22 a country a corporation on date fsub2 made an entity classification election to be treated as a disregarded_entity for u s federal tax purposes effective date on date fsub8 contributed its shares in fsub9 to fsub10 in exchange for y and z shares in fsub10 on date fsub10’s y and z shares were converted to ordinary shares on date fsub9 merged with and into fsub10 through a simplified country c merger procedure fsub5 made an entity classification election to be treated as a disregarded_entity for u s federal tax purposes effective date fsub16 made an entity classification election to be treated as a disregarded_entity for u s federal tax purposes effective date on date fsub14 made an entity classification election to be treated as a disregarded_entity for u s federal tax purposes effective date on date fsub11 transferred it’s a interest in fsub13 to fsub2 for a note loan note a on date fsub11 contributed loan note a to fsub12 on date distributing formed llc5 a state a limited_liability_company that is a tax resident of country a llc5 made an initial entity classification election to be treated as a disregarded_entity for u s federal tax purposes on date fsub13 made an entity classification election to be treated as a disregarded_entity for u s federal tax purposes effective date plr-137179-13 on date distributing transferred all of the membership interests in llc2 to llc5 in exchange for membership interests in llc5 and a note loan note b on date fsub18 made an entity classification election to be treated as a disregarded_entity for u s federal tax purposes effective date on date fsub1 borrowed g country a currency from fsub3 on date fsub1 contributed the g country a currency borrowed in step to fsub21 on date fsub21 contributed the g country a currency received in step to fsub22 on date fsub22 deposited the g country a currency received in step with fsub3 in exchange for a note loan note c spin-off steps on date llc2 contributed to controlled all of the assets related to business y in exchange for i additional controlled shares the controlled shares ii securities the controlled securities and iii the assumption by controlled of the liabilities associated with business y as of date including liabilities that are deductible for u s federal_income_tax purposes the deductible liabilities collectively the contribution upon the receipt of a favorable private_letter_ruling llc2 will incorporate fsub23 a new country d finance corporation fsub23 will make an initial entity classification election to be treated as a disregarded_entity for u s federal tax purposes llc2 will contribute the controlled securities to fsub23 llc2 will distribute the controlled shares and all of the shares of fsub23 to llc5 llc5 will distribute the controlled shares and all of the shares of fsub23 to distributing distributing will distribute i all of the controlled shares to fsub16 and fsub17 pro-rata with respect to their shares of distributing the share distribution ii fsub23 shares with a fair_market_value of approximately dollar_figureh to fsub16 in satisfaction of a portion of the fsub16 debt the fsub16 securities exchange and iii the remaining fsub23 shares with a fair_market_value of approximately dollar_figurei to fsub17 in satisfaction of a portion of the fsub17 debt the plr-137179-13 fsub17 securities exchange the fsub16 securities exchange and fsub17 securities exchange the securities exchanges collectively the distribution post-spin-off steps fsub12 will distribute loan note a to fsub2 through fsub11 branch1 fsub10 fsub8 fsub7 and fsub6 and loan note a will self-cancel fsub21 will incorporate fsub24 a new country a corporation with wholly- owned country d branch branch3 fsub24 will make an initial entity classification election to be treated as a disregarded_entity for u s federal tax purposes fsub15 will refinance its existing dollar_figurej debt owed by branch2 fsub1 will acquire the controlled shares from fsub16 and fsub17 in exchange for notes loan note d and loan note e respectively fsub1 will acquire all of the shares of fsub23 from fsub16 and fsub17 in exchange for notes loan note f and loan note g respectively fsub1 will contribute the controlled shares and all of the shares of fsub23 to fsub21 fsub21 will contribute all of the shares of fsub23 to fsub24 fsub24 will contribute all of the shares of fsub23 to branch3 in exchange for a note loan note h fsub16 will contribute loan notes d and f to fsub18 fsub19 will make an entity classification election to be treated as a disregarded_entity for u s federal tax purposes after the effective date of step fsub17 will contribute loan notes e and g to fsub19 fsub1 will contribute all of the shares of fsub21 to fsub2 fsub18 will distribute loan notes d and f to fsub16 fsub19 will distribute loan notes e and g to fsub17 fsub17 will distribute loan notes e and g to fsub16 plr-137179-13 fsub16 will distribute loan notes d e f and g to fsub1 through branch2 fsub15 fsub14 fsub13 fsub5 and fsub2 and loan notes d e f and g will self-cancel it is anticipated that after the proposed transaction distributing’s employees will provide certain administrative tax and finance services to controlled distributing and controlled will enter into a contract pursuant to which controlled will pay distributing for providing such services at rates consistent with parties bargaining at arm’s-length the continuing relationships representations the following representations have been made in connection with the proposed transaction a there will be no indebtedness between controlled and distributing after the distribution b no part of the controlled shares to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing c no part of the controlled securities to be distributed by distributing in the securities exchanges will be received by a security holder as an employee shareholder or in any capacity other than that of a security holder of distributing d the five years of financial information submitted on behalf of business x is representative of the present operations of business x and with regard to business x there have been no substantial operational changes since the date of the last financial statements submitted e the five years of financial information submitted on behalf of business y is representative of the present operations of business y and with regard to business y there have been no substantial operational changes since the date of the last financial statements submitted f each of distributing and controlled is directly engaged in an active business g following the distribution distributing and controlled will each continue the active_conduct of its business independently and with its separate employees h the distribution is being carried out for the following corporate business purposes i to improve the fit and focus of both business x management and business y management ii to facilitate expansion and growth strategies for business y iii to increase transparency of the financial results and other plr-137179-13 aspects of the current and expected future performance of business y and iv to facilitate and increase the options for increasing the value of business y through partnerships and other arrangements with third parties the distribution is motivated in whole or substantial part by one or more of these corporate business purposes i the distribution is not used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both j the distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation k the total fair_market_value of the assets distributing transferred to controlled in the contribution exceeded the sum of i the amount of any liabilities assumed within the meaning of sec_357 by controlled in the contribution ii the amount of any liabilities owed to controlled by distributing that were discharged or extinguished in connection with the contribution and iii the amount of any money and the fair_market_value of any other_property other than stock and securities permitted to be received under sec_361 without the recognition of gain received by distributing from controlled in the contribution the fair_market_value of the assets of controlled exceeded the amount of its liabilities immediately after the contribution l the total adjusted_basis of the assets distributing transferred to controlled in the contribution equaled or exceeded the sum of i the amount of any liabilities assumed within the meaning of sec_357 by controlled in the contribution other than the deductible liabilities and ii the sum of any money and the fair_market_value of any other_property within the meaning of sec_361 received by distributing from controlled in the contribution and transferred by distributing to its creditors in connection with the reorganization m the liabilities assumed by controlled in the contribution and the liabilities to which the transferred assets are subject were incurred in the ordinary course of business and were associated with the assets being transferred by distributing to controlled n the income_tax_liability for the taxable_year in which investment_credit_property including any building to which sec_47 applies is transferred will be adjusted pursuant to sec_50 or a or sec_47 as in effect before amendment by public law title 104_stat_1388 if applicable to reflect an early disposition of the property plr-137179-13 o no intercorporate debt will exist between distributing or any of its subsidiaries and controlled at the time of the distribution and no intercorporate debt will exist between distributing or any of its subsidiaries and controlled subsequent to the distribution except as may exist or arise i in the ordinary course of business such as trade receivables and payables or ii with respect to payments pursuant to any continuing relationships between distributing or any of its subsidiaries and controlled p immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_32_irb_6 and as currently in effect sec_1_1502-13 as published by t d further distributing’s excess_loss_account with respect to the controlled stock if any will be included in income immediately before the distribution see sec_1_1502-19 q payments made in connection with all continuing relationships will be for fair_market_value based on terms and conditions consistent with parties bargaining at arm’s-length r neither distributing nor controlled is an investment_company as defined in sec_368 and iv s immediately after the transaction within the meaning of sec_355 either i any person that holds a 50-percent_or_greater_interest within the meaning of sec_355 in any disqualified_investment_corporation within the meaning of sec_355 will have held such an interest in such corporation immediately before the transaction or ii neither distributing nor controlled is or will be a disqualified_investment_corporation for purposes of sec_355 t distributing controlled and their respective shareholders will each pay their own expenses if any incurred in connection with the distribution u for purposes of sec_355 immediately after the distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution v neither business x nor control of an entity conducting this business will have been acquired during the five-year period ending on the date of the distribution in a transaction in which gain_or_loss was recognized or treated as recognized in whole or in part plr-137179-13 w for purposes of sec_355 immediately after the distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution or ii attributable to distributions on distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution x neither business y nor control of an entity conducting this business will have been acquired during the five-year period ending on the date of the distribution in a transaction in which gain_or_loss was recognized or treated as recognized in whole or in part y the controlled securities will constitute securities for purposes of sec_355 and sec_361 z all of distributing’s debt to be repaid with controlled securities was incurred prior to the date on which the foreign parent group first began taking steps to consider the proposed transaction aa the incurrence of the liabilities of distributing to be assumed by controlled in the contribution will not have resulted in the creation of or increase in basis of any assets of distributing or controlled or the stock of distributing or controlled bb the deductible liabilities will be accrued liabilities of distributing for financial_accounting purposes but will not meet the timing requirements for a deduction by distributing before the contribution under distributing’s method of tax_accounting the deductible liabilities will meet the timing requirements for a deduction by controlled after the contribution under controlled’s method of tax_accounting cc neither distributing nor controlled will have been a united_states_real_property_holding_corporation as defined in sec_897 at any time during the five-year period ending on the date of the distribution rulings based solely on the information submitted and the representations provided we rule as follows in connection with the spin-off steps plr-137179-13 the contribution followed by the distribution will qualify as a reorganization within the meaning of sec_368 distributing and controlled each will be a_party_to_a_reorganization under sec_368 distributing will recognize no gain_or_loss on the contribution sec_361 sec_357 controlled will recognize no gain_or_loss on the contribution sec_1032 controlled’s basis in each asset received in the contribution will be the same as the basis of that asset in the hands of distributing immediately before its transfer sec_362 controlled’s holding_period in each asset received from distributing in the contribution will include the period during which distributing held that asset sec_1223 distributing will recognize no gain_or_loss on the share distribution sec_361 distributing will recognize no gain_or_loss on the securities exchanges sec_361 to the extent permitted or required under general tax principles distributing will recognize any i deductions attributable to the fact that distributing’s debt may be redeemed at a premium ii income attributable to the fact that distributing’s debt may be redeemed at a discount and iii interest_expense accrued with respect to distributing’s debt no gain_or_loss will be recognized by and no amount will be included in the income of fsub1 on the receipt of the controlled shares in the share distribution sec_355 the basis of the distributing and controlled stock in the hands of fsub1 immediately after the distribution will equal the basis of the distributing stock held by fsub1 immediately before the distribution allocated between the stock of distributing and controlled in proportion to the fair_market_value of each immediately following the distribution in accordance with sec_1_358-2 sec_358 sec_358 the holding_period of the controlled stock received by fsub1 will include the holding_period of the distributing stock with respect to which the distribution is made provided that the distributing stock is held as a capital_asset on the date of the distribution sec_1223 the deductible liabilities assumed by controlled in the contribution will be excluded in determining the amount of liabilities of distributing assumed by controlled or to which property transferred to controlled is subject for purposes of sec_357 plr-137179-13 as provided in sec_312 proper allocation of the earnings_and_profits of distributing and controlled will be made under sec_1_312-10 caveats we express no opinion about the tax treatment of the proposed transaction under other provisions of the code and regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings in particular we express no opinion regarding i whether the distribution satisfies the business_purpose requirement of sec_1_355-2 ii whether the distribution is used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both see sec_355 and sec_1_355-2 and iii whether the distribution is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in distributing or controlled see sec_355 and sec_1_355-7 in addition we express no opinion regarding the federal_income_tax consequences of any of the preliminary steps or post-spin-off steps or as to whether the deductible liabilities are in fact deductible for u s federal_income_tax purposes procedural statements this ruling letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of this ruling letter in accordance with the power_of_attorney on file in this office a copy of this ruling letter is being sent to your authorized representatives sincerely _isaac w zimbalist__________ isaac w zimbalist senior technician reviewer branch office of associate chief_counsel corporate cc


department of the treasury int ernal revenue service washington d c o f f i c e o f c h i e f c o u n s e l date number release date cc intl br2 tl-n-1019-01 uilc internal_revenue_service national_office field_service_advice memorandum for ronald d pinsky associate area_counsel small_business self-employed from subject phyllis marcus chief cc intl br2 this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be used or cited as precedent legend x state a amount b year year year year year issue whether x’s winnings from the state a lottery are exempt from withholding under sec_871 and sec_1441 because of article of the income_tax convention between the united_states and israel treaty conclusion sec_871 and sec_1441 of the internal_revenue_code impose a withholding_tax on lottery winnings from a u s source the treaty does not exempt or reduce the taxation of u s source lottery winnings under sec_871 and sec_1441 tl-n-1019-01 facts state a operates a biweekly lottery drawing pursuant to state a regulations governing the lottery’s operation lottery winners receive their prizes in annual installments and are not entitled to elect payment in the form of a lump sum distribution state a lottery officials have indicated that the state purchases zero- coupon bonds for each year that lottery proceeds are to be distributed to a winner state a is named as owner of the bonds and all payments made thereunder are remitted to state a no specific prizewinner is a party to or a named beneficiary of the bond further prizewinners cannot assign or pledge the funds held by state a in year x a citizen of israel won the lottery at that time x was residing in the united_states after winning the lottery x returned to israel where he still resides pursuant to the lottery regulations x receives his winnings annually from state a state a withhold sec_28 from x’s winnings and sends x a form w-2g for the annual payment on his year form 1040nr u s nonresident_alien income_tax return x claimed a refund for all amounts withheld x attached a statement to that form stating that the income was excludable under article of the income_tax treaty with israel article of the treaty provides an exemption from withholding for certain annuity payments x also filed a tax_court petition for tax_year sec_2 through therein x claimed to be a resident and citizen of israel for year sec_3 and and as such entitled to the same treaty benefits discussed above subsequent to filing the petition x settled year sec_2 and with the i r s appeals_office the i r s did not enter into a closing_agreement in connection with future taxable years x relies on estate of shackleford and a letter from the appeal’s officer with a tentative conclusion to support his current refund claim law and analysis x’s assertion that the lottery winnings received from state a are not subject_to_withholding by way of the annuity article in the treaty fails for two reasons first regardless of payment structure lottery winnings retain their classification as gambling income and as such are subject_to a percent withholding_tax under sec_871 and sec_1441 second to qualify as an annuity under the treaty x must have paid adequate_and_full_consideration for the periodic_payments received the sum of one dollar is not adequate_and_full_consideration for a large lottery payout thus even if the lottery winnings did not retain their classification as gambling winnings the annuity provision of the treaty does not apply the lottery winnings are properly classified as gambling winnings subject_to the statutory rate of withholding tl-n-1019-01 sec_871 of the internal_revenue_code code imposes a percent tax on u s source interest dividends rents salaries wages premiums annuities compensations remunerations emoluments and other fixed or determinable annual or periodical income fdap to the extent the income is not effectively connected with the conduct_of_a_trade_or_business in the united_states sec_1441 requires all persons having the control receipt custody disposal or payment of fdap to nonresident_aliens to deduct and withhold a tax equal to percent sec_3402 provides that any person making a payment of gambling winnings must deduct and withhold a tax equal to percent sec_3402 provides that where the payment is made to a nonresident_alien and subject_to_withholding under sec_1441 the percent withholding under sec_3402 does not apply for purposes of sec_871 and sec_1441 gambling winnings are considered fdap barba v united_states ct_cl in barba a citizen and resident of mexico not engaged in a u s trade_or_business won three separate keno games at two nevada casinos the taxpayer argued that the keno winnings did not fall within the meaning of sec_871 income and therefore were not subject_to u s taxation the court disagreed and held that the winnings were fdap subject_to the statutory percent withholding the tax_court has recognized that annual payments received from a lottery should be classified as gambling winnings see eg rusnak v commissioner 53_tcm_835 accordingly regardless of payment terms the amounts x receives from state a are properly classified as gambling winnings not annuities this conclusion is further confirmed by the facts which indicate that state a and not x is the owner of the bonds it should be noted however that for purposes of sec_871 and sec_1441 this distinction is irrelevant both gambling winnings and annuities fall within the definition of fdap and as such are subject_to the statutory percent rate of withholding because the amount withheld by state a is less than that required under sec_871 and sec_1441 x is required to file a form 1040nr and remit the remaining tax due notwithstanding the above even if the lottery payments do not retain their classification as gambling winnings the payments state a makes to x are not annuities within the meaning of article of the treaty because x did not provide adequate_and_full_consideration as described above sec_871 and sec_1441 impose a percent tax on payments of u s source fdap made to nonresident_aliens in certain circumstances however the statutory rate_of_tax imposed on fdap may be reduced or eliminated entirely by an income_tax treaty tl-n-1019-01 pursuant to article of the treaty annuities paid to an individual who is a resident of one of the contracting states shall be taxable only in that contracting state thus an annuity_payment to an individual who is an israeli resident is taxable only in israel x cites estate of shackleford to support his assertion that the lottery winnings should be treated as annuities for purposes of the treaty in the estate of shackleford the court addressed whether lottery winnings payable in periodic_payments fell within the definition of an annuity for purposes of estate_tax laws specifically the court addressed whether the payments were annuities for purposes of valuation under sec_7520 estate of shackleford v united_states ustc e d cal sec_7520 and the regulations thereunder do not define the term annuity accordingly the court looked to its normal and customary meaning id significantly the normal and customary meaning of an annuity for estate_tax_valuation purposes is materially different than the treaty definition of an annuity in that the latter specifically defines annuity and the definition requires adequate_and_full_consideration because the definition of an annuity is critical to the outcome of this issue and the definition in the treaty is materially different than that used for sec_7520 purposes x’s reliance on estate of shackleford is misplaced article of the treaty defines the term annuity as a stated sum paid periodically at stated times during life or during a specified number of years under an obligation to make the payments in return for adequate_and_full_consideration other than services rendered the treaty the technical explanation to the treaty and the report of the senate foreign relations committee on the treaty are all silent with respect to what constitutes adequate_and_full_consideration article of the treaty general definitions provides that a ny term used in this convention and not defined in this convention shall unless the context otherwise requires have the meaning which it has under the laws of the contracting state whose tax is being determined thus u s law is relevant to determine what is meant by adequate_and_full_consideration significant to this the united_states tax_court has interpreted the meaning of identical or substantially_similar annuity articles in other income_tax treaties see eg 40_tc_330 acq 1964_1_cb_5 united states- italy lamm v commissioner 34_tcm_473 united states-sweden in both cases the court focused on the consideration provided and held it to be insufficient given the adequate and full requirement in the respective treaty definitions of an annuity perkins tc pincite evidence is completely lacking to substantiate petitioner’s failure to contest the will was in any way consideration for the payments she received lamm t c m pincite alimony payments fall well outside the scope of pensions and annuities the payment of which unlike alimony is predicated upon the prior receipt of consideration tl-n-1019-01 in the present case x purchased a lottery ticket for the sum of one dollar in return x is receiving amount b per year for twenty years it is not disputed that the sum of one dollar is adequate_and_full_consideration for a lottery ticket it is not however adequate_and_full_consideration for the right to the periodic_payments of amount b over twenty years because the payments do not fall within the definition of an annuity in article of the treaty and there is no other article in the treaty that would affect x’s lottery winnings they are not within the scope of the treaty therefore the proper rate_of_tax on the annual payments to x i sec_30 percent finally x may not rely on a letter from the appeals_office to assert that no tax is due on the lottery payments in year unless stated otherwise any settlement for years prior to year is not applicable to year the irs has not entered into an agreement with x for year this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views please call laurie hatten-boyd at if you have any further questions s phyllis e marcus chief branch office of associate chief_counsel international


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division beg uniform issue list se tep pa-ty legend taxpayer a taxpayer b company c plan x dear this is in response to the letter submitted on by your authorized representative in which you request letter rulings concerning the application of sec_402 of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in support of your ruling_request taxpayer a whose date of birth was errerekreereee hi a at age kk on arerrer ere eer are rerer taxpayer a is survived by his three daughters and his surviving_spouse taxpayer b taxpayer b’s date of birth is _ in accordance with taxpayer a’s will taxpayer b was named personal representative of taxpayer a’s estate on herkeereerer eere the circuit_court county hrrr eee state of frr kerrier eran eee a court of competent jurisdiction duly appointed taxpayer b to act as the personal representative of the estate prior to his death taxpayer a was retired from company c and was a participant in plan x a plan qualified under sec_401 of the internal_revenue_code taxpayer a named his estate as beneficiary of his interest in plan x and taxpayer b consented to this beneficiary designation pursuant to article of taxpayer a’s will taxpayer b will receive all the residue and remainder of the estate of taxpayer a including the interest held by taxpayer a in plan x no amounts have been distributed to either taxpayer a’s estate or to taxpayer b from plan x article of taxpayer a’s will states that shares of company c’s stock are to be given to each of taxpayer a’s daughters this bequeath was satisfied by transferring stock shares from a taxable account of taxpayer a to his daughters in her capacity as personal representative of the estate of taxpayer a taxpayer b proposes to direct the administrator of plan x to make a single lump sum distribution of of taxpayer a’s shares in plan x to taxpayer a’s estate as personal representative of the estate taxpayer b will then distribute all of these shares to taxpayer b as taxpayer a's surviving_spouse and the recipient of all the residue and remainder of taxpayer a’s estate taxpayer b will then transfer by means of a rollover all shares of the distribution into an individual_retirement_arrangement ira that meets the requirements of sec_408 of the code such rollover will occur within sixty days of the date the distribution is made from plan x based on the above facts and representations you request the following letter rulings that taxpayer b is eligible to roll over the distribution of taxpayer a’s interest in plan x into an ira set up and maintained in her name pursuant to sec_402 of the code as long as the rollover occurs no later than the day from the date said distribution is made from plan x and that taxpayer b will not be required to include in gross_income for federal_income_tax purposes any portion of the plan x distribution that is received by taxpayer b and timely roiled over into taxpayer b’s ira in the year in which the distribution is made from plan x with respect to your ruling_request sec_402 of the internal_revenue_code provides in general that if any portion of an eligible_rollover_distribution from a plan qualified under sec_401 of the code is transferred into an eligible_retirement_plan the portion of the distribution so transferred shall not be includible in gross_income in the taxable_year in which paid sec_402 of the code provides that the maximum amount of an eligible_rollover_distribution to which paragraph applies shall not exceed the portion of such distribution which is includible in gross_income determined without regard to paragraph but states that this maximum limitation does not apply to a distribution transferred to an eligible_retirement_plan described in clause i or ii of sec_402 sec_402 of the code defines eligible_rollover_distribution as any distribution to an employee of all or a portion of the balance_to_the_credit of an employee in a qualified_trust except the following distributions a any distribution which is one of a series of substantially_equal_periodic_payments not less frequently than annually made- i for the life or life expectancy of the employee or the joint lives or joint life expectancies of the employee and the employee’s designated_beneficiary or ii for a period of years or more and b any distribution to the extent the distribution is required under sec_401 and c any distribution which is made upon hardship of the employee sec_402 of the code defines eligible_retirement_plan as i an individual_retirement_account described in sec_408 ii an individual_retirement_annuity described in sec_408 other than an endowment_contract iii a sec_401 of the code qualified_plan iv an annuity plan described in sec_403 v an eligible_deferred_compensation_plan described in sec_457 which is maintained by an eligible_employer described in sec_457 and vi an annuity_contract described in sec_403 sec_402 of the code provides generally that sec_402 shall not apply to any transfer of a distribution made after the day following the day on which the distributee received the property distributed similarly sec_1_402_c_-2 question and answer of the income_tax regulations states that if an eligible_rollover_distribution is paid to an employee and the employee contributes all or any part of the eligible_rollover_distribution to an eligible_retirement_plan no later than the day following the date the employee received the distribution the amount contributed is not currently includible in gross_income sec_1_402_c_-2 q a of the regulations further states that because the amount withheld as income_tax under sec_3405 of the code is considered an amount distributed under sec_402 an amount equal to all or any portion of the amount withheld can be contributed as a rollover to an eligible_retirement_plan within the day period in addition to the net amount of the eligible_rollover_distribution received by the employee sec_402 of the code provides in general that if a distribution attributable to an employee is paid to the spouse of the employee after the employee's death sec_402 of the code will apply to such distribution in the same manner as if the spouse were the employee ‘ u039 sec_1_402_c_-2 of the regulations q a provides generally that if a distribution attributable to an employee is paid to the employee’s surviving_spouse sec_402 applies to the distribution in the same manner as if the spouse were the employee thus a distribution to the surviving_spouse of an employee is an eligible_rollover_distribution if it meets the applicable_requirements of sec_402 and and the associated regulations sec_1_402_c_-2 of the regulations q a b provides that any amount that is paid before january of the year in which the employee attains or would have attained age will not be treated as required under sec_401 and thus is an eligible_rollover_distribution if it otherwise qualifies with respect to your ruling_request generally if a decedent’s qualified_plan assets pass through a third party eg an estate_or_trust and then are distributed to the decedent’s surviving_spouse said spouse will be treated as acquiring them from the third party and not from the decedent thus in general said surviving_spouse will not be eligible to roll over the qualified_plan proceeds into her own ira however in this case taxpayer b as the sole beneficiary and personal representative of taxpayer a’s estate proposes to have plan x issue a check representing the entire_interest of taxpayer a in plan x to taxpayer b as personal representative of taxpayer a’s estate taxpayer b then proposes that taxpayer a’s interest in plan x will then be distributed to her and then contributed to an ira established and maintained in her name this contribution to her own ira will be made within days of the date the distribution is made from plan x thus all actions necessary to accomplish the rollover will be carried out by and at the bequest of taxpayer b under the circumstances presented in this ruling_request the service will treat taxpayer b taxpayer a’s surviving_spouse as having acquired the plan x proceeds directly from taxpayer a and not from taxpayer a’s estate therefore taxpayer b qualifies as a spouse under sec_402 of the code and is eligible to roll over those proceeds to her own ira assuming the distribution otherwise qualifies as provided in sec_1_402_c_-2 q a taxpayer b may rollover an amount equal to the entire amount withheld as income_tax in addition to the amount that will actually be received from plan x furthermore inasmuch as the entire amount received from plan x by taxpayer b including the amount withheld will be timely contributed to an ira no portion of the plan x proceeds will be taxable in the year it will be distributed from plan x thus with respect to your ruling requests we conclude as follows that taxpayer b is eligible to roll over the distribution of taxpayer a’s interest in plan x into an ira set up and maintained in her name pursuant to code sec_402 as long as the rollover occurs no later than the distribution is made from plan x day from the date said 9005iv that taxpayer b will not be required to include in gross_income for federal_income_tax purposes for the year in which the distribution from plan x is made any portion of the distribution from plan x that is timely rolled over into taxpayer b’s ira 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 that may be applicable hereto this ruling assumes that plan x is qualified within the meaning of code sec_401 and its trust tax-exempt under code sec_501 at all times relevant thereto it assumes that the ira set up and maintained in the name of taxpayer b to receive the rollover_contribution of taxpayer a’s benefit from plan x meets the requirements of code sec_408 this ruling is directed solely 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_ruling is being sent to your authorized representative if you have any questions regarding this ruling you may contact kkekekerereekerererrere ree rere eere rereererererer sincerely yours donzell littlejohn manager employee_plans technical group enclosures notice of intention to disclose deleted copy of letter


t c summary opinion united_states tax_court john joe wilson petitioner v commissioner of internal revenue respondent docket no 21585-04s filed date john joe wilson pro_se michael d zima for respondent wells judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority all subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency in federal_income_tax of dollar_figure and a sec_6651 addition_to_tax of dollar_figure for petitioner’s taxable_year the issues we must decide are whether petitioner is entitled to two dependency_exemptions for taxable_year pursuant to sec_151 whether petitioner may file as head_of_household for taxable_year whether petitioner is entitled to an earned_income_credit for taxable_year pursuant to sec_32 and whether petitioner is liable for an addition_to_tax pursuant to sec_6651 for failure to timely file his tax_return background some of the facts and certain exhibits have been stipulated the parties’ stipulations of fact are incorporated in this opinion by reference and are found as facts in the instant case at the time of filing the petition in the instant case petitioner resided in jacksonville florida in this opinion our references to h c are to the biological daughter of petitioner and scherrlyn denise campbell ms campbell our references to d c are to another child of ms campbell who is neither the biological nor adopted son of petitioner petitioner and ms campbell have never been married and did not live together during the year in issue under penalty of perjury ms campbell represented to the jacksonville housing authority and the jacksonville department of children and families that h c and d c lived with her enabling her to receive subsidized housing food stamps medicaid and social_security_benefits totaling approximately dollar_figure per month in addition to those subsidized benefits ms campbell spent approximately dollar_figure per month for utilities rent and food ms campbell and derrick cross mr cross who refers to himself as d c ’s godfather are friends because mr cross occasionally took d c shopping and to the movies ms campbell gave mr cross d c ’s social_security_number so that mr cross could claim a dependency_exemption under sec_151 and an earned_income_credit under sec_32 on his and tax returns mr cross also claimed a dependency_exemption and earned_income_credit using d c ’s social_security_number on his tax_return 1ms campbell’s rent subsidy was dollar_figure per month and she also received approximately dollar_figure per month in food stamps the record shows that ms campbell received on behalf of h c approximately dollar_figure per month in social_security_benefits the record does not disclose the amount of medicaid benefits received each month h c receives social_security_benefits because h c has a speech impairment and the children receive medicaid benefits because h c suffers from asthma and d c suffers from chronic bronchitis petitioner worked as a self-employed truck driver during during the typical workweek petitioner made trips to cities in georgia alabama and south florida to pick up loads and deliver them to the port of jacksonville petitioner generally began his work day pincite in the morning and returned to jacksonville pincite or in the afternoon the same day because of a miscommunication with his tax preparer petitioner untimely filed his tax_return on date reporting dollar_figure of net profit from his truck driving business on his return petitioner claimed head_of_household filing_status two sec_151 dependency_exemptions for h c and d c and a sec_32 earned_income_credit based on h c and d c respondent determined that petitioner was not entitled to file as head_of_household or to claim two dependency_exemptions and the earned_income_credit and that petitioner was liable for an addition_to_tax under sec_6651 for failure to timely file his tax_return and respondent sent petitioner a notice_of_deficiency petitioner timely petitioned this court discussion the commissioner’s determinations in the notice_of_deficiency generally are presumed correct and the burden of 2petitioner has conceded that d c is not a qualifying_child for purposes of the earned_income_credit proving an error is on the taxpayer rule a 290_us_111 generally a taxpayer is allowed an exemption for each dependent sec_151 a dependent includes a son or daughter of the taxpayer who received over half of his or her support during the calendar_year from the taxpayer sec_152 a dependent also includes an individual who received over half of his or her support during the calendar_year from the taxpayer whose principal_place_of_abode was the same as the taxpayer’s and who was a member of the taxpayer’s household sec_152 to prevail the taxpayer must show through competent evidence the total support provided for the child or other individual and that the taxpayer provided half of such support 56_tc_512 in the instant case petitioner has failed to make the requisite showing for d c petitioner’s testimony was vague and unreliable regarding the amount of support he provided the children petitioner testified i pay for their clothes the schools just about everything they need ms campbell testified that petitioner spent between dollar_figure to dollar_figure per month per child we find this highly improbable however because petitioner only had dollar_figure of income from his trucking business during out of sec_7491 does not apply in the instant case to shift the burden_of_proof to respondent because petitioner did not raise the issue and also did not comply with the substantiation and record keeping requirements of sec_7491 which he had to pay for his own living_expenses the record also indicates that h c and d c receive significant support from government agencies and d c received some support from mr cross based on the record in the instant case we conclude that petitioner alone did not provide over one half of d c ’s support during in addition the record shows that d c ’s principal_place_of_abode was with ms campbell and not with petitioner accordingly we hold that petitioner is not entitled to a dependency_exemption for d c pursuant to sec_152 in the case of a child who receives over half of his or her support during the calendar_year from his or her parents who are divorced separated or who live apart during the last months of the calendar_year the child is treated as receiving over half of his or her support from the parent having custody for the greater portion of the calendar_year sec_152 the special support_test in sec_152 applies to parents who were never married 121_tc_245 a noncustodial_parent may be entitled to a dependency_exemption under sec_151 if the noncustodial_parent attaches to his or her tax_return a form_8332 release of claim to exemption for child of divorced or separated parents or similar written declaration signed by the custodial_parent stating that the custodial_parent will not claim the child as a dependent for 4petitioner testified that each month he paid dollar_figure for rent and dollar_figure for cable television the calendar_year sec_152 114_tc_184 petitioner cannot claim a dependency_exemption for d c under sec_152 because d c is not petitioner’s child see sec_152 even if we were to assume in the instant case that over half of h c ’s support came from her parents petitioner would still have to show that he had custody of h c for the greater portion of the year because there is no evidence that petitioner filed a form_8332 or similar written declaration signed by ms campbell stating that she would not claim h c as dependent in the instant case petitioner testified that he had custody of h c on weekends and during the summer but did not provide specific dates however ms campbell represented to the jacksonville housing authority and the jacksonville department of children and families that h c and d c lived with her enabling her to receive subsidized housing food stamps medicaid and social_security_benefits totaling approximately dollar_figure per month ms campbell testified at trial however that h c lived with both her and petitioner but that h c spent most of the summer with petitioner ms campbell further testified that she and petitioner’s mother watched h c during the day while petitioner was working petitioner did not call his mother as a witness given the vague conflicting and improbable evidence in the instant case we hold that petitioner has failed to prove that he had custody of h c for over half of caputi v commissioner tcmemo_2004_283 accordingly we hold that petitioner is not entitled to a dependency_exemption under sec_152 we do not need to discuss whether petitioner may file as head_of_household pursuant to sec_2 or whether petitioner is entitled to a sec_32 earned_income_credit for because those sections require the child to have the same principal_place_of_abode as the taxpayer for more than one half of the taxable_year see sec_2 c sec_6651 imposes an addition_to_tax for a failure_to_file an income_tax return a taxpayer may be relieved of the addition_to_tax however if he can demonstrate that the failure is due to reasonable_cause and not due to willful neglect id willful neglect means intentional failure or reckless indifference 469_us_241 sec_301_6651-1 proced admin regs provides that if a taxpayer exercises ordinary business care and prudence and is nevertheless unable to file on time then the delay is due to reasonable_cause relying on an accountant or tax preparer to simply file a return on time is not reasonable_cause united_states v boyle supra pincite the commissioner has the burden 5petitioner has conceded that d c is not a qualifying_child for purposes of the earned_income_credit to produce evidence that it is appropriate to impose a relevant penalty addition_to_tax or additional_amount sec_7491 116_tc_438 the commissioner however does not have the obligation to introduce evidence regarding reasonable_cause id pincite in the instant case it is not disputed that petitioner did not file his tax_return until date petitioner simply failed to follow up with his return preparer to verify that his return had been timely filed petitioner’s mere reliance on his return preparer to timely file his return is not reasonable_cause united_states v boyle supra pincite accordingly we hold petitioner is liable for the addition_to_tax pursuant to sec_6651 to reflect the foregoing decision will be entered for respondent


internal_revenue_service number release date index number ----------------------------------------- ------------------------------------------ ------------------------- department of the treasury washington dc person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 - plr-107815-03 date december ------------------------------------------------------------------------------------------ ---------------------- ------------------------------------------------------------------------------------------ -------------------------- ------------------------------------------------------------------------------------------ -------------------------- ------------------------------------------------------------------------------------------ -------------------------- ------------------------------------------------------------------------------------------ -------------------------- -------------------------------------------------------------------- -------------------------- ----------------- ------------------------------------------------------------------------------------------ ------------------------ ----------------------- - - estate x y a b c d1 d2 charitable_trust charity dear ----------------- this letter responds to your letter dated date and subsequent correspondence submitted on behalf of the estate as its authorized representative requesting rulings under and of the internal_revenue_code the information submitted states that x executed charitable_trust on d1 x died on d2 article two paragraph a of the charitable_trust provides that in each taxable_year of the charitable_trust the trustees shall pay to x during x s lifetime a unitrust_amount equal to eight percent of the net fair_market_value of the charitable_trust valued as of the first day of each taxable_year of the charitable_trust plr-107815-03 article two paragraph b of the charitable_trust provides that upon the death of x if x is survived by y the unitrust_amount shall be divided into two equal shares one such share shall be paid to y during y s lifetime the remaining such share shall be paid in equal shares to a b and c or the survivors of them during the lifetime of y article four paragraph a of the charitable_trust provides that upon the death of the survivor of x and y the trustees shall distribute all of the then principal and income of the charitable_trust to charity provided x has not exercised the power_of_appointment described in article four paragraph b if the charity is not an organization described in c a and a at the time when any principal or income of the charitable_trust is to be distributed to it then the trustees shall distribute such principal or income to such one or more organizations described in c a and a as the trustees shall select in their discretion article four paragraph b provides that x reserves the power to appoint the remainder of the charitable_trust to one or more charitable organizations who shall be described in c a and a at the time when any principal or income of the trust is to be distributed to them x shall exercise this power to appoint the remainder_interest in the charitable_trust by specific reference to article four in x s will submitted for probate within ninety days of x s death article seven of the charitable_trust provides that the charitable_trust is irrevocable the trustees however shall have the power in their sole discretion to amend the charitable_trust in any manner required for the sole purpose of insuring that the charitable_trust qualifies and continues to qualify as a charitable_remainder_unitrust crut within the meaning of ' d remainder_interest in the charitable_trust as of d1 was less than ten percent of the net fair_market_value of the property contributed to the charitable_trust the executor of estate represents that under ' f the initial value of the sec_664 defines a crut for the purposes of ' as a_trust a from which a fixed percentage which is not less than percent nor more than percent of the net fair_market_value of its assets valued annually is to be paid not less often than annually to one or more persons at least one of which is not an organization described in ' c and in the case of individuals only to an individual who is living at the time of the creation of the trust for a term of years not in excess of years or for the life or lives of such individual or individuals b from which no amount other than the payments described in ' d a and other than qualified gratuitous transfers described in ' d c may be paid to or for the life or lives of such individual or individuals c following the termination of the payments described in ' d a the remainder_interest in the trust is to be transferred to or for_the_use_of an plr-107815-03 organization described in ' c or is to be retained by the trust for such a use or to the extent the remainder_interest is in qualified_employer_securities as defined in ' g all or part of such securities are to be transferred to an employee_stock_ownership_plan as defined in ' e in a gratuitous transfer as defined by ' g and d with respect to each contribution of property to the trust the value determined under ' of such remainder_interest in such property is at least percent of the net fair_market_value of such property as of the date such property is contributed to the trust sec_664 provides in general that if a_trust would but for a qualified_contingency meet the requirements of d a or d a such trust shall be treated as meeting such requirements for purposes of determining the amount of any charitable_contribution or the actuarial value of any interest a qualified_contingency shall not be taken into account for purposes of ' f the term aqualified contingency means any provision of a_trust which provides that upon the happening of a contingency the payments described in d a or d a as the case may be will terminate not later than such payments would otherwise terminate under the trust sec_2055 provides in general that for purposes of ' the value of the taxable_estate shall be determined by deducting from the value of the gross_estate the amount of all bequests legacies devises or transfers to or for_the_use_of any corporation organized and operated exclusively for religious charitable scientific literary or educational_purposes including the encouragement of art or to foster national or international amateur sports competition but only if no part of its activities involve the provision of athletic_facilities or equipment and the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private stockholder or individual which is not disqualified for tax exemption under ' c by reason of attempting to influence legislation and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of or in opposition to any candidate for public_office sec_2055 provides that where an interest in property other than an interest described in ' f b passes or has passed_from_the_decedent to a person or for a use described in ' a and an interest other than an interest which is extinguished upon the decedent s death in the same property passes or has passed for less than an adequate_and_full_consideration in money or money s worth from the decedent to a person or for a use not described in ' a no deduction shall be allowed under ' for the interest which passes or has passed to the person or for the use described in ' a unless in the case of a remainder_interest such interest is in a_trust which is a charitable_remainder_annuity_trust or plr-107815-03 charitable_remainder_unitrust described in ' or a pooled_income_fund described in ' c sec_2055 provides in general that a deduction shall be allowed under ' a in respect of any qualified_reformation sec_2055 defines the term aqualified reformation as a change_of a governing instrument by reformation amendment construction or otherwise which changes a reformable_interest into a qualified_interest but only if i any difference between i the actuarial value determined as of the date of the decedent s death of the qualified_interest and ii the actuarial value as so determined of the reformable_interest does not exceed percent of the actuarial value as so determined of the reformable_interest ii in the case of i a charitable_remainder interest the nonremainder interest before and after the qualified_reformation terminated at the same time or ii any other interest the reformable_interest and the qualified_interest are for the same period and iii such change is effective as of the date of the decedent s death a nonremainder interest before reformation for a term of years in excess of years shall be treated as satisfying ' e b ii i if such interest after reformation is for a term of years sec_2055 in general defines the term areformable interest as any interest for which a deduction would be allowable under ' a at the time of the decedent s death but for ' e sec_2055 provides that the term areformable interest does not include any interest unless before the remainder vests in possession all payments to persons other than an organization described in ' a are expressed either in specified dollar amounts or a fixed percentage of the fair_market_value of the property for purposes of determining whether all such payments are expressed as a fixed percentage of the fair_market_value of the property ' d shall be taken into account sec_2055 provides that ' e c ii shall not apply to any interest if a judicial proceeding is commenced to change such interest into a qualified_interest not later than the 90th day after i if an estate_tax_return is required to be filed the last date including extensions for filing such returns or ii if no estate_tax_return is required to be filed the last date including extensions for filing the income_tax return for the first taxable_year for which such a return is required to be filed by the trust sec_2055 defines the term aqualified interest as an interest for which a deduction is allowable under ' a plr-107815-03 sec_2055 provides that in the case of a_trust that would qualify or could be reformed to qualify pursuant to ' e b but for failure to satisfy the requirement of d d or d d such trust may be i declared null and void ab initio or ii changed by reformation amendment or otherwise to meet such requirement by reducing the payout rate or the duration or both of any noncharitable beneficiary s interest to the extent necessary to satisfy such requirement pursuant to a proceeding that is commenced within the period required in ' e c iii in a case described in ' e j i no deduction shall be allowed under title_26 for any transfer to the trust and any transactions entered into by the trust prior to being declared void shall be treated as entered into by the transferor based solely on the facts and representations submitted we conclude that the charitable_trust failed to meet the definition of a crut under ' as of d1 the termination of the unitrust payments upon the death of y is a qualified_contingency within the meaning of ' f therefore this provision does not cause the charitable_trust to fail to meet the definition of a crut under ' d a however the value of the charitable_remainder interest must be calculated without regard to the qualified_contingency based on the representations submitted the value of the remainder_interest of the charitable_trust at inception was less than the percent of the initial net fair_market_value of the trust property required by ' d d we further conclude that the charitable_trust is not eligible for qualified_reformation under ' e a because the charitable_trust failed to meet the definition of a crut under ' d d any reformation must commence within the period described in e j and e c iii no such reformation was timely commenced within this period except as specifically set forth above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code in particular we express no opinion as to whether any other provisions of charitable_trust cause it to fail to meet the definition of a crut under ' the code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer requesting it sec_6110 of pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to the estate enclosures copy of this letter copy for ' purposes sincerely j thomas hines chief branch office of the associate chief_counsel passthroughs special industries