internal_revenue_service number release date index number ------------------------------------------------------------ ----- ------------------------- ------------------------ ------------------------------------------------------------ -------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------------ --------------------------------------------------- telephone number -------------------- refer reply to cc psi b03 plr-132385-18 plr-132386-18 plr-132387-18 plr-132388-18 plr-132389-18 plr-132390-18 date date legend x1 ------------------------------------------------- ----------------------------------------------------------------------------------- x2 -------------------------------------------------------------------------------------------------------------- ------------------------------------------------- ----------------------------------------------------------------------------------------- x3 ----------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -- ------------------------------------------------- x4 ------------------------------------------------- ------------------------------------------------------------------------- x5 ------------------------------------------------- -------------------------------------------------------------------------- x6 ----------------------- ------------------------------------------------- y z ------------------------------------------------------------------ ---------------------------------- plr-132385-18 ----------------------------------------------------- ------------------------------------------------------- ------------------------------- -------------------- ------------------ ------------------ ------------------ ------------------ ------------------ --------------------------- -- trust1 trust2 trust3 state date1 date2 date3 date4 date5 date6 n1 dear ------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of y and x1 x2 x3 x4 x5 and x6 requesting that the service grant x1 x2 x3 x4 x5 and x6 an extension of time under sec_301_9100-3 of the procedure and administration regulations to each file an entity classification election to be treated as an association_taxable_as_a_corporation for federal tax purposes the information submitted states that x1 x2 x3 x4 x5 and x6 were each formed under the laws of state on date1 date2 date3 date4 date5 and date6 respectively x1 and x2 are each a series of trust1 x3 x4 and x5 are each a series of trust2 and x6 is a series of trust3 trust1 trust2 and trust3 are business trusts formed under the laws of state and issue transferable units of beneficial_interest in different series of portfolio y is an asset management company which serves as the investment_advisor investment manager and fund administrator for x1 x2 x3 x4 x5 and x6 y is a wholly-owned subsidiary of z according to the submission each of x1 x2 x3 x4 x5 and x6 has issued transferable units of beneficial_interest to at least n1 owners plr-132385-18 the information submitted further states that x1 x2 x3 x4 x5 and x6 each filed an election to be treated as a regulated_investment_company ric in accordance with sec_1_851-2 by computing taxable_income as a ric in its return for the first taxable_year for which the election is applicable and in all subsequent years x1 x2 x3 x4 x5 and x6 have filed all tax returns for each tax_year since their respective dates of formation on form 1120-ric u s income_tax return for regulated_investment_companies x1 x2 x3 x4 x5 and x6 always intended to be treated as corporations for federal tax purposes and have always operated as if they were corporations and more specifically as rics however x1 x2 x3 x4 x5 and x6 each failed to timely file an entity classification election to be treated as an association_taxable_as_a_corporation for federal tax purposes sec_301_7701-2 generally provides that a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-3 provides that an eligible_entity with at least two members may elect to be classified as either an association and thus a corporation under sec_301_7701-2 or as a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 further provides that so long as a business_entity is not classified as a corporation under sec_301_7701-2 or an eligible_entity it may elect its classification for federal tax purposes sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory plr-132385-18 elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x1 x2 x3 x4 x5 and x6 are each granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as an association_taxable_as_a_corporation effective on date1 date2 date3 date4 date5 and date6 respectively a copy of this letter should be attached to each form_8832 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied regarding the eligibility of x1 x2 x3 x4 x5 and x6 to be a ric or the validity of their ric elections the rulings contained in this letter are based upon information and representations submitted by the taxpayers and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for a ruling it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to powers of attorney on file with this office we are sending copies of this letter to the authorized representatives of x1 x2 x3 x4 x5 x6 and y sincerely associate chief_counsel passthroughs special industries by ______________________________ richard t probst senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court thomas s gluckman and roby r gluckman petitioners v commissioner of internal revenue respondent docket no filed date kathleen r barrow and heather c panick for petitioners brian j bilheimer and brian e derdowski jr for respondent memorandum opinion cohen judge respondent determined a deficiency of dollar_figure and a sec_6662 penalty of dollar_figure with respect to petitioners’ joint federal_income_tax return for the issues for decision are whether petitioners were required to include in income the value of two cash_value insurance policies on their lives that were held by a purported sec_419a welfare_benefit_plan from which petitioners’ employer withdrew and whether petitioners are liable for an accuracy-related_penalty under sec_6662 unless otherwise indicated all section references are to the internal_revenue_code code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure background this case was submitted fully stipulated under rule the stipulated facts and accompanying exhibits are incorporated in our findings by this reference at the time the petition was filed petitioners resided in new york petitioners are married to each other and at all relevant times together were the majority stockholders in fownes brothers co inc fownes fownes is a corporation that designs and manufactures apparel accessories including boots and gloves petitioners each owned of the fownes stock the remainder was held by petitioners’ son and daughter each of whom owned of the fownes stock petitioners were the only directors of fownes and during through also were employees of the corporation in addition mr gluckman served as president of fownes the advantage death_benefit plan the advantage death_benefit plan and trust advantage plan purported to be a or more employer welfare_benefit_plan under sec_419a providing preretirement life_insurance to covered employees who were the beneficiaries of the trust the plan was not a tax-exempt_trust an employer that chose to participate in the plan contributed money to the advantage plan trust in exchange the advantage plan would pay death_benefits for covered employees of the participating employer in accordance with an agreed upon level of death_benefits to fund the benefits payable to covered employees the advantage plan used participating employers’ contributions to acquire cash_value life_insurance policies underlying policies on the lives of the employees and the plan withdrew funds from the trust as needed to pay the premiums for the underlying policies the advantage plan trustee was required to be the owner and beneficiary of the underlying policies the marketing brochure for the advantage plan advertised the plan as a tax- advantaged welfare_benefit_plan for professionals entrepreneurs and closely held businesses participating employers were assured that their contributions to the advantage plan were tax deductible that plan assets would grow on a tax-deferred basis and that participation in the plan would allow the employer to provide a select group_of_employees with benefits that could be used to fund buy sell arrangements estate_tax and business continuation programs with pre-tax dollars fownes’ participation in the advantage plan petitioners were introduced to the advantage plan by their insurance agent and financial adviser lance rembar on or about date fownes adopted the advantage plan thomas s gluckman petitioner was initially designated a covered_employee and the next year fownes designated roby r gluckman an additional covered_employee effective date in connection with petitioners’ participation in the advantage plan life_insurance policies insuring petitioners’ lives were selected and the premiums were paid_by the advantage plan trustee at the time fownes adopted the advantage plan it was administered by benistar admin services inc beginning date and continuing through bisys insurance services inc bisys was the plan’s administrator and sponsor under both the original adoption_agreement executed in and the addendum to adoption_agreement executed in covered employees were among other things required to be actively employed by the employer the advantage plan featured a nonreversionary clause that prohibited an employer’s contributions from being recovered by the employer or being used for purposes other than for the exclusive benefit of the covered employees in the advantage plan or in a succeeding welfare_benefit_plan the plan provided that an employer could terminate its participation at any time in that event the plan trustee was to value the portion of the trust attributable to benefits funded by the withdrawing employer and after ensuring that the withdrawing employer’s share of expenses and liabilities was paid the plan was required to allow the covered employees to purchase their underlying policies upon an employer’s withdrawal the plan also was permitted to distribute the underlying policies to the covered employees so long as an actuary retained by the plan determined that sufficient benefits remained in the plan to meet the plan’s benefit requirements finally the plan permitted the underlying policies to be distributed to successor welfare_benefit plans that provided similar benefits termination of the advantage plan in the internal_revenue_service irs issued proposed_regulations relating to or more employer welfare_benefit plans under sec_419a see sec_1_419a_f_6_-1 proposed income_tax regs fed reg date concluding that the advantage plan would not satisfy the proposed_regulations should they become final bisys decided to terminate the advantage plan effective date starting in date and continuing throughout the year bisys sent a series of letters and memoranda to insurance agents brokers and participating employers to advise them of the approaching termination of the advantage plan and the options that participating employers and employees had as a result of the termination in one such letter sent to petitioner on date bisys stated e mployers should consider taking steps to voluntarily terminate their participation in the advantage plan before date and electing one of the alternatives outlined below otherwise after date an employer’s participation in the advantage plan will automatically terminate resulting in the surrender of any policies remaining in the trust a reallocation of the cash surrender values and a distribution of the assets to participants employers that do not voluntarily terminate participation in the advantage plan on or before date will not have the option of electing one of the alternatives outlined below alternative one -- employees retain policies first the employer terminates its participation in the advantage plan second the policies are rolled-out to the employees and the employees are taxed on the reallocated net cash_surrender_value of the policies in accordance with the advantage plan document alternative two -- employer adopts the advantage dbo plan another bisys-sponsored plan that purported to be a or more employer welfare_benefit_plan under sec_419a first the employer terminates its participation in the advantage plan second the policies are rolled-out to the employees and the employees are taxed on the reallocated net cash_surrender_value of the policies third the employer adopts the advantage dbo plan and the rolled- out policies may in some instances be used as a funding vehicle for the advantage dbo plan please note that a trustee-to-trustee transfer ie from the advantage plan to another welfare_benefit_plan such as the dbo plan is not permitted under applicable irs regulations emphasis added in date final regulations for or more employer plans were issued by the irs see t d 2003_2_cb_729 in date rembar sent a memo to fownes titled life_insurance planning and moving forward rembar advised fownes to withdraw from the advantage plan to avoid the less favorable consequences that would result from bisys’ surrender of the policies upon plan termination he stated that after fownes’ withdrawal the underlying policies held by the advantage plan could be distributed to petitioners or to another sec_419a welfare_benefit_plan that met the requirements of the new regulations rembar recommended that fownes consider the millennium multiple employer welfare_benefit_plan millennium plan he explained in the absence of notification by the participating employers bisys intends to start surrendering to the insurance carriers the existing trusted sic policies the resulting pool of net cash surrender funds will after year-end be distributed to the remaining no-longer insured participants this is not a desirable outcome fownes should promptly send plan termination notice to bisys following the effective termination_date fownes would have at the most days to decide on the future structure for the policies termination means that the policies would be distributed intact not surrendered if distributed to a welfare_benefit trust the transfer should be a non-taxable event the non-419 route would be to have the policies distributed to the insureds presumably bisys would issue a form_1099 on the policy’s value alternatively fownes could continue the premium deductible approach by using the millennium plan bisys would transfer the policies to the millennium plan this plan-to-plan transfer should avoid the problem on date having been advised that fownes wished to withdraw from the advantage plan bisys sent a letter to fownes care of petitioner requesting a certified copy of a corporate resolution authorizing fownes’ withdrawal from the plan the letter explained that part of the withdrawal process was for an employer to reallocate the net surrender values of the underlying policies among its participants using a formula that took into account the amount of the participants’ wage income over the course of their participation in the advantage plan the purpose of this reallocation was to determine what amount if any employees who received distribution of the underlying policies would be required to include in taxable_income the letter further advised that t axes may be due please consult with your tax advisor regarding tax consequences of this transaction a sample corporate resolution and a form to be signed by all fownes participants waiving their rights to purchase the insurance policies held by the advantage plan trust were attached to this letter fownes submitted a corporate resolution dated date authorizing fownes’ withdrawal from the advantage plan effective date fownes also submitted the form signed by petitioners and two other fownes participants by which the fownes participants waived their rights to purchase the underlying policies after receiving fownes’ corporate resolution and signed participant waiver form on date bisys sent partially completed change_of_ownership and blank change_of beneficiary designation forms as well as the fownes participants’ underlying policies to fownes care of petitioner the change_of_ownership forms were already endorsed by the advantage plan trustee as the current owner of the policies the letter advised that the forms should be completed for the change_of_ownership form this was by inserting new owner information and obtaining the new owner’s endorsement then sent directly to the insurance carrier the forms and the original insurance policies also were provided to petitioners’ insurance agent on date petitioner signed an adoption_agreement for fownes to participate in the millennium plan on date completed change_of_ownership forms for the underlying policies covering petitioners were sent to the millennium plan trustee for endorsement as the new owner of the policies on date the insurance carrier confirmed to bisys that the owner and beneficiary for petitioners’ underlying policies had been changed from the advantage plan trustee to the millennium plan trustee immediately following that confirmation bisys sent letters to petitioners stating we have completed your employer’s termination from the advantage death_benefit plan you should be receiving tax information from your employer in regards to the termination of the advantage death_benefit plan please make sure to communicate that information to your accountant petitioners’ tax returns and examination petitioners did not include in taxable_income for any amount related to the underlying policies as a result of fownes’ withdrawal from the advantage plan however petitioners did include in taxable_income for and a total of dollar_figure which was the estimated value of current insurance benefits of petitioners’ underlying policies respondent conducted an examination of petitioners’ jointly filed income_tax return and determined that petitioners had unreported income of dollar_figure this amount represented the value of petitioners’ underlying policies at or near the time that fownes withdrew from the advantage plan less the dollar_figure petitioners previously reported in connection with those policies underlying insurance policies discussion generally taxpayers bear the burden of proving that the commissioner’s determinations are erroneous rule a 290_us_111 the burden_of_proof may shift to the commissioner if the taxpayers establish that they complied with the requirements of sec_7491 and b to substantiate items to maintain required records and to cooperate fully with the commissioner’s reasonable requests however we decide this matter on the preponderance_of_the_evidence and therefore the burden_of_proof is not relevant see 133_tc_340 131_tc_185 respondent contends that under sec_402 petitioners received taxable_income in the amount of the value of their underlying policies because their interests in the advantage plan trust were substantially_vested when fownes submitted its resolution authorizing withdrawal from the advantage plan alternatively respondent contends that petitioners received taxable_income under sec_402 when the advantage plan distributed the policy change_of_ownership and change_of beneficiary designation forms to petitioners petitioners argue that they did not receive taxable_income relative to the underlying policies because they never owned the policies they did not control the policies and their interests in the policies were at all times subject_to a substantial_risk_of_forfeiture an employee_trust is a nonexempt trust if it is not exempt from taxation under sec_501 see sec_402 the advantage plan was an employees’ trust that was not exempt from tax and thus was subject_to sec_402 and the regulations thereunder see eg 136_tc_120 sec_402 provides that employer contributions made to a nonexempt employee_trust are included in the gross_income of the employee to the extent that the employee’s interest in such contribution is substantially_vested within the meaning of sec_1_83-3 income_tax regs at the time the contribution is made see sec_1_402_b_-1 income_tax regs if the rights of an employee under a nonexempt employee_trust become substantially_vested during a taxable_year of the employee and the taxable_year of the trust ends with or within such year the value of the employee’s interest in the trust on the date of such change is included in the employee’s gross_income for that taxable_year see sec_1 b - b income_tax regs the value of an employee’s interest in a_trust means the amount of the employee’s beneficial_interest in the trust as of any date on which some or all of the employee’s interest in the trust becomes substantially_vested see sec_1_402_b_-1 income_tax regs the parties do not dispute that the proper measure of the value of the underlying policies is the policies’ accumulation account values the values of the insurance policies before imposition of surrender charges the amounts of the policies’ accumulation account values at or near the time period in issue also are not in dispute an employee’s interest in property is substantially_vested when it is either transferable or is not subject_to a substantial_risk_of_forfeiture sec_1_83-3 income_tax regs whether a risk of forfeiture is substantial depends on the facts and circumstances sec_1_83-3 income_tax regs a substantial_risk_of_forfeiture exists where rights in property that are transferred are conditioned directly or indirectly upon the future performance or refraining from performance of substantial services by any person or the occurrence of a condition related to a purpose of the transfer and the possibility of forfeiture is substantial if such condition is not satisfied id because of the advantage plan’s requirement that covered employees continue to be employed by the participating employer to remain eligible for benefits the parties treat petitioners’ interests in the advantage plan as being subject_to a substantial_risk_of_forfeiture before fownes submitted its corporate resolution authorizing withdrawal from the plan consequently the treatment of fownes’ contributions to the advantage plan from through and the status of petitioners’ interests in the advantage plan trust before fownes’ withdrawal from the plan are not in issue once fownes submitted its resolution in date however the situation was markedly different continued employment was no longer a requirement and under the relevant advantage plan provisions it appears that there were three options for disposition of the underlying policies when an employer withdrew from the plan the plan could offer the policies for purchase by the covered employees the plan could distribute the policies to the covered employees or the plan could transfer the policies to another welfare_benefit_plan for the covered employees as part of the withdrawal process all of the covered employees of fownes including petitioners signed a form waiving the right to purchase the underlying policies additionally the series of letters the advantage plan sent to insurance agents and brokers and participating employers indicated that the plan would not be facilitating direct or trustee-to-trustee transfers of the underlying policies to other welfare_benefit plans under the plan’s stated procedures that appears to have left only one alternative which was distribution to the covered employees in light of the scheduled termination of the plan bisys apparently waived the plan’s requirement that an evaluation of plan assets and liabilities be performed before distributing the policies to covered employees there is no mention of this requirement in any of bisys’ communications in with respect to an employer’s withdrawal from the plan therefore consistent with the advantage plan’s provisions and the plan withdrawal procedures communicated to participating employers at that point it appears that the underlying policies were substantially certain to be distributed to petitioners or placed within their control even if transfers to other welfare_benefit plans were still being permitted by bisys at that time subsequent events demonstrate that the policies were placed within petitioners’ control no later than early date after receiving the resolution bisys sent endorsed partially completed change_of_ownership forms that lacked only the new owner information and sent blank change_of beneficiary designation forms as well as duplicate copies of the policies to petitioner’s attention the forms and the original insurance policies also were provided to petitioners’ insurance agent these actions placed petitioners’ underlying policies squarely within their control because petitioners were then free to name the policies’ new owner and beneficiary which could have been themselves or another welfare_benefit_plan when a taxpayer has dominion and control_over property the value of such property generally will be included in his or her gross_income see 136_tc_38 aff’d without published opinion a f t r 2d ria 4th cir chambers v commissioner tcmemo_2011_114 this case is very similar to cadwell in that case the taxpayer was an employee and the only officer of an s_corporation the taxpayer’s wife was the sole shareholder and director of the s_corporation the s_corporation participated in a 10_or_more_employer_plan under sec_419a and the taxpayer was a covered_employee under that plan which held an underlying insurance_policy covering the taxpayer the plan_sponsor subsequently converted the multiple-employer plan to a single-employer_plan and we held that upon conversion the taxpayer’s interest in the plan became substantially_vested the deciding factor with regard to that issue was one of control after the plan was converted to a single-employer_plan because of the taxpayer’s position in the corporation and his close relationship to the sole shareholder he had the ability to control the assets of the plan and was therefore required to include in his taxable_income the value of his underlying insurance_policy which represented his interest in the plan there are some factual differences between this case and cadwell here we are concerned with the withdrawal of an employer from a purported sec_419a plan rather than the conversion of a welfare_benefit_plan from a multiple-employer plan to a single-employer_plan the holding in cadwell however makes the taxpayer’s ability to control the property in question the key factor to consider in cadwell the taxpayer’s interest was substantially_vested because he gained the ability to control the plan assets when the plan was converted to a single-employer_plan here either at the time fownes submitted its corporate resolution withdrawing from the plan or when the change_of_ownership and beneficiary forms were sent to them petitioners gained the ability to control their underlying policies petitioners contend however that their interests could not have substantially_vested because the underlying policies were at all times owned by a welfare_benefit_plan and subject_to a substantial_risk_of_forfeiture they argue that transfers to other welfare_benefit plans were still being permitted by the advantage plan and that the transfer of the policies from the advantage plan to the millennium plan was a nontaxable trustee-to-trustee transfer in support of this argument petitioners cite revrul_67_213 1967_2_cb_149 and revrul_78_ 1978_2_cb_157 in revrul_67_213 supra the irs concluded that where funds were transferred from one qualified_employee plan to another qualified_employee plan without being made available to the participants the participants did not have taxable_income in revrul_78_406 supra the irs extended this treatment to trustee-to-trustee transfers from one individual_retirement_account to another this court is not bound by interpretations of the law in revenue rulings see 115_tc_210 86_tc_243 furthermore the irs has not extended the reasoning in these two revenue rulings to nonqualified plans such as the advantage plan and the millennium plan most importantly however even if trustee-to-trustee transfers to other plans were still being done by the advantage plan such a transfer simply did not occur here bisys distributed the change_of_ownership and change_of beneficiary designation forms to petitioners the covered employees in care of fownes and to petitioners’ insurance agent not to another plan trustee once the change_of_ownership and change_of beneficiary designation forms were received petitioners had the ability to name themselves or another welfare_benefit_plan as the owner and beneficiary of the underlying policies because the policies were subject_to petitioners’ direct control the transaction was not a trustee-to-trustee transfer see jankelovits v commissioner tcmemo_2008_ a trustee-to-trustee transfer is one in which the beneficiary does not gain control or use of the funds crow v commissioner tcmemo_2002_178 trustee-to-trustee transfer treatment only applies where the funds are not within the direct control or use of the participant petitioners also argue that their interests were not substantially_vested because after fownes submitted its resolution authorizing withdrawal from the advantage plan fownes through its board_of directors had the ability to control the underlying policies they contend that fownes made the decision to adopt the millennium plan and determined who would be covered by that plan sec_1_83-3 income_tax regs is instructive in this situation in instances where an employee of a corporation owns a significant amount of the total combined voting power or value of all classes of stock of the employer_corporation in determining whether an employee’s interest in transferred property is subject_to a substantial_risk_of_forfeiture the following factors are taken into account i the employee’s relationship to other stockholders and the extent of their control potential control and possible loss of control of the corporation ii the position of the employee in the corporation and the extent to which he is subordinate to other employees iii the employee’s relationship to the officers and directors of the corporation iv the person or persons who must approve the employee’s discharge and v past actions of the employer in enforcing the provisions of the restrictions id petitioners are the only directors of fownes and petitioner also serves as president of the corporation petitioners are married and together are the majority stockholders in fownes the remainder of the fownes stock is owned by petitioners’ son and daughter the record does not contain any evidence of strife in the working or personal relationships of the family members petitioners clearly had the ability to control fownes’ decision-making process and thus had the ability to control their underlying policies see eg cadwell v commissioner t c pincite petitioners’ arguments are unpersuasive and we determine that petitioners’ interests in the advantage plan represented by their underlying policies were substantially_vested under sec_402 in therefore we do not consider respondent’s argument that petitioners had taxable_income under sec_402 sec_6662 penalty sec_6662 and b and imposes a accuracy-related_penalty on any underpayment of federal_income_tax attributable to a taxpayer’s negligence or disregard of rules or regulations or substantial_understatement_of_income_tax sec_6662 defines negligence as including any failure to make a reasonable attempt to comply with the provisions of the code and defines disregard as any careless reckless or intentional disregard disregard of rules or regulations is careless if the taxpayer does not exercise reasonable diligence to determine the correctness of a tax_return position that is contrary to the rule_or_regulation sec_1_6662-3 income_tax regs an understatement of income_tax is substantial if it exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 under sec_7491 the commissioner bears the burden of production with regard to penalties and must come forward with sufficient evidence indicating that it is appropriate to impose penalties see 116_tc_438 because the understatement of income_tax is substantial respondent has satisfied the burden of producing evidence that the penalties are appropriate once the commissioner has met the burden of production the taxpayer must come forward with persuasive evidence that the penalty is inappropriate because he or she acted with reasonable_cause and in good_faith see sec_6664 higbee v commissioner t c pincite the decision as to whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all of the pertinent facts and circumstances see sec_1 b income_tax regs petitioners have not addressed the reasonable_cause or good_faith defenses to the sec_6662 penalty see sec_6664 higbee v commissioner t c pincite petitioners simply claim that they did not have unreported income for a claim that we have rejected for the reasons stated above they argue that ownership of the policies did not change until petitioners apparently relied on their insurance agent and financial adviser in determining that they were not required to include the value of their underlying policies in their income for however they produced no evidence indicating that he was competent to give tax_advice petitioners’ income_tax return for was prepared by an accounting firm but they provided no details regarding what information they gave to their accountant or what the accountant’s advice was we therefore sustain the penalty in reaching our conclusions we have considered all arguments made by the parties and to the extent not mentioned above we conclude they are moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent


ae as y w-o ma tl vest department of the treasury internal_revenue_service washington d c - ep ra ti tax ts government entities oivision jul uniform issue list legend taxpayer a plan b financial_institution c court d decedent e individual f amount amount amount amount amount amount amount amount amount - i amount amount dear this letter is in response to a request for a letter_ruling dated date made on behalf of taxpayer a as modified and supplemented by additional correspondence dated january march and date from your authorized representative concerning the proper treatment of the distribution of amount from decedent e’s qualified_retirement_plan under sec_402 of the internal_revenue_code code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a is the daughter of decedent e decedent e who died on date was not married at this time taxpayer a age was named sole beneficiary of decedent e's entire_interest in a qualified_retirement_plan plan b although a minor child taxpayer a was entitled under sec_402 of the code to have a direct trustee-to-trustee transfer made of decedent e's entire account balance in plan b to an individual_retirement_account ira set up in her own name individual f the guardian and mother of taxpayer a made no attempt to make a direct transfer of decedent e’s account balance from plan b to such an ira on taxpayer a’s behalf instead on date individual f filed paperwork with the plan_administrator to receive a lump sum distribution of decedent e’s entire account balance in plan b amount was reported on taxpayer a’s federal_income_tax return and she paid the corresponding tax_liability a conservatorship petition was filed in court d for the estate of taxpayer a on date financial_institution c was appointed conservator of the estate a suit was brought before court d to contest the lump sum distribution received by individual f from plan b on date a statement by individual f and list of expenditures was filed in connection with these proceedings in her statement individual f stated that on date she received the sum of amount from plan b which equaled amount reduced by withholding of amount individual f also stated that out of the original distribution of amount additional federal_income_tax of amount was paid and state_income_tax of amount was paid thereby reducing the net distribution after tax to amount on date court d ordered individual f to reimburse amount to the conservator of taxpayer a because individual f had inappropriately spent the funds court d arrived at amount after accepting certain expenditures made by d a l individual f for personal expenses of taxpayer a amount thereby reducing the net after tax distribution of amount by amount resulting in amount individual f was given days to comply with the date court order it was also ordered that the conservator seek assistance in determining whether taxpayer a could amend her federal and state_income_tax returns to recoup the taxes paid on date court d found that individual f was in contempt for failure to reimburse amount to taxpayer a as specified in the court order dated date individual f was given days from the date hearing date to reimburse amount to the conservator of taxpayer a as of date individual f has reimbursed amount to the conservator of taxpayer a which amount has been deposited in a non-interest bearing account there is a priority judgment claim against individual f outstanding in the amount of amount which is to be paid back at the rate of amount per month based on the above facts and representations you request the following rulings taxpayer a is eligible to have transferred by means of a trustee-to-trustee transfer within the meaning of sec_402 of the code decedent e’s interest in plan b amount into an ira set up and maintained in her own name either with the present custodian or to a different custodian taxpayer a will not be required to include in gross_income for federal_income_tax purposes for the year in which the distribution amount from plan b occurred and for the year in which the subsequent transfer is made pursuant to ruling number above any portion of the amounts transferred from plan b into an ira set up and maintained in her own name sec_402 of the code provides that an eligible_rollover_distribution shall not include any distribution to the extent such distribution is required under sec_401 of the code sec_402 of the code provides if with respect to any portion of a distribution from an eligible_retirement_plan described in paragraph b iii of a deceased employee a direct trustee-to-trustee transfer is made to an individual_retirement_plan described in clause i or ii of paragraph b established for the purposes of receiving the distribution on behalf of an individual who isa designated_beneficiary as defined by sec_401 of the employee and who is not the surviving_spouse of the employee - i the transfer shall be treated as an eligible_rollover_distribution ii the individual_retirement_plan shall be treated as an inherited individual_retirement_account or individual_retirement_annuity within the meaning of sec_408 for purposes of this title and ili sec_401 other than clause iv thereof shall apply to such plan sec_408 of the code provides that an individual_retirement_account or individual_retirement_annuity shall be treated as inherited if - i the individual for whose benefit the account or annuity is maintained acquired such account by reason of the death of another individual and il such individual was not the surviving_spouse of such other individual sec_401 of the code provides the rules for governing direct transfers of eligible rollover distributions sec_1 a of the income_tax regulations question and answer-15 provides in relevant part that an eligible_rollover_distribution that is paid to an eligible_retirement_plan in a direct_rollover is a distribution and rollover and not a transfer of assets and liabilities sec_6903 of the code provides upon notice to the secretary that any person is acting for another person ina fiduciary capacity such fiduciary shall assume the powers rights duties and privileges of such other person in respect of a tax imposed by this title except as otherwise specifically provided and except that the tax shall be collected from the estate of such other person until notice is given that the fiduciary capacity has terminated sec_7701 of the code defines fiduciary as a guardian trustee executor administrator receiver conservator or any person acting ina fiduciary capacity for any person taxpayer a is the daughter of decedent e and the sole designated_beneficiary of his account balance in plan b therefore taxpayer a was entitled to have a direct trustee-to-trustee transfer made of decedent e’s account balance from plan b to an ira set up in her own name but for the decision by individual f acting as taxpayer a’s legal guardian at the time to receive a lump sum distribution of decedent e’s account balance in plan b and her subsequent misuse of the funds she received a tax free transfer of decedent e’s account balance could have been made to an inherited ira for the benefit of taxpayer a in accordance with sec_402 of the code therefore pursuant to sec_402 of the code the service hereby rules taxpayer a is eligible to have transferred by means of a trustee-to-trustee transfer within the meaning of sec_402 of the code the court ordered reimbursement amount and the amount of any refund of federal and state taxes due to amending taxpayer a’s tax returns into an ira set up and maintained in her own name either with the present custodian or to a different custodian which will be treated as an inherited ira within the meaning of sec_408 of the code taxpayer a will not be required to include in gross_income for federal_income_tax purposes for the year in which the distribution amount from plan b a l occurred and for the year in which the subsequent transfer is made pursuant to ruling number above any portion of the amounts transferred from plan b into an ira set up and maintained in her own name please note that the scope of the conservator’s powers is a matter of state law the conservator's ability to direct a trustee-to-trustee transfer of assets maintained on behalf of taxpayer a to an ira set up in the name of taxpayer a is not a question of federal tax law and the service lacks the authority to determine the powers of the conservator assuming the applicable state law allows the conservator to take such action the federal tax law question is whether the deposit into the ira is a rollover_contribution no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_61 k of the code provides that it may not be used or cited as precedent a copy of this letter_ruling has been sent to the taxpayer herself and to your authorized representative pursuant to a power_of_attorney on file in this office if you wish to inquire about this ruling please contact at i d sincerely yours carton al watkin manager employee_plans technical group enclosures deleted copy of this letter notice of intention to disclose notice cc


internal_revenue_service number release date department of the treasury washington dc index number third party communication none date of communication not applicable_person to contact id no telephone number refer reply to cc tege eoeg e03 plr-t-103493-15 date october legend foundation foundation o o dear w o b h w w w h u h this is in response to the letter dated date and additional submissions in which foundation 1’s counsel requested on behalf of foundation rulings under sec_501 sec_507 sec_4941 sec_4942 sec_4944 and sec_4945 of the internal_revenue_code background based on the documents and representations submitted on behalf of foundation the relevant facts on which foundation 1's request for rulings is based are as follows ' the internal_revenue_code_of_1986 as amended to which all subsequent section references are made unless otherwise indicated plr-t-103493-15 foundation was recognized as an exempt_organization described in sec_501 of the code and classified as a private_foundation under sec_509 on date foundation was founded by a who is now deceased foundation 1's directors are b c and d b is a's niece and c is a’s nephew b and c disagree on how to carry out foundation 1’s exempt purposes consequently foundation 1’s directors propose to transfer one-half of foundation 1’s assets to foundation date and the irs recognized it in year as an organization described in sec_501 of the code and classified it as a private_foundation under sec_509 after the proposed transfer foundation 1’s directors will be c d and e and foundation 2’s directors will be b d and e b created foundation on under the proposed transfer foundation will transfer one-half of the fair_market_value of its total assets as of the date of the transfer which consist of cash and publicly held securities to foundation for no consideration the proposed transfer will not be made out of foundation 1’s current income foundation represents that it will exercise expenditure_responsibility over all assets transferred to foundation foundation also represents that it will not seek to terminate its private_foundation_status under sec_507 of the code and will continue to operate with the remaining one-half share of its assets foundation further represents that there have been neither any willfully repeated acts or failures to act nor a willful and flagrant act or failure to act giving rise to tax under chapter of the code finally foundation represents that any legal accounting and other expenditures incurred in connection with the proposed transfer will be reasonable necessary and consistent with ordinary business care rulings requested law and analysis requested ruling sec_1 the proposed transfer will be in furtherance of foundation 1’s sec_501 c purpose sec_501 of the code exempts from federal_income_tax organizations that are described in sec_501 sec_501 describes organizations that are organized and operated exclusively for charitable and other designated exempt purposes organizations described in sec_501 must operate exclusively for an exempt_purpose revrul_64_182 1964_1_cb_186 provides that a corporation organized exclusively for charitable purposes is entitled to exemption under sec_501 where it is shown to be carrying on through contributions and grants a charitable program commensurate in scope with its financial resources under the proposed transfer foundation will transfer an amount equal to percent of the fair_market_value of its assets to foundation foundation will continue to plr-t-103493-15 operate for exempt purposes following the proposed transfer of assets in a manner commensurate in scope with its remaining financial resources accordingly foundation 1’s proposed transfer of assets will be in furtherance of foundation 1’s sec_501 purpose requested ruling sec_2 and the proposed transfer will qualify as a transfer described in sec_507 of the code and foundation will not be treated as a newly created organization for purposes of part il subchapter_f chapter of the code the proposed transfer of foundation 1’s assets will not be described in sec_507 of the code sec_507 says that except as provided in subsection b the status of any organization as a private_foundation shall be terminated only if it notifies the secretary of its intent to accomplish such a termination or with respect to such organization there have been either willful repeated acts or failure to acts or a willful and flagrant act or failure to act giving rise to liability for tax under chapter and the secretary notifies such organization that it is liable for the tax imposed by sec_507 and either such organization pays the tax or any portion not abated under sec_507 or the entire amount of such tax is abated under sec_507 sec_507 says that in the case of a transfer of assets of any private_foundation to another private_foundation pursuant to any liquidation or other adjustment organization or reorganization the transferee foundation shall not be treated as a newly created organization a transfer described in sec_507 is referred to as a sec_507 transfer the exception in sec_507 for what is provided in subsection b excludes sec_507 transfers from imposition of the termination_tax accordingly a transfer of assets described in sec_507 from one private_foundation to another does not trigger the termination_tax on the transferor private_foundation if the transferee private_foundation involved in the transfer is not treated as a newly created organization this is explained in more detail in the applicable regulations sec_1_507-3 of the treasury regulations states that in the case of a transfer of assets described in sec_507 including a significant disposition of assets to one or more private_foundations within the meaning of paragraph c of sec_1_507-3 the transferee organization will not be treated as a newly created organization similarly sec_1_507-1 provides that if a private_foundation transfers ail or part of its assets to one or more other private_foundations pursuant to a transfer described in sec_507 and sec_1_507-3 such transferor foundation will not have terminated its private_foundation_status under sec_507 plr-t-103493-15 sec_1_507-3 of the regulations describes the terms other adjustment organization or reorganization as including any significant distribution of assets to one or more private_foundations other than transfers for full and adequate_consideration or distributions out of current income the term significant disposition of assets to one or more private_foundations is defined by sec_1 c as any disposition or series of dispositions by a private_foundation to one or more private_foundations where the aggregate value transferred i sec_25 percent or more of the fair_market_value of the net assets of the transferor foundation at the beginning of the taxable_year foundation will be transferring percent of its assets to foundation foundation will not receive any consideration for the amounts transferred and none of the amounts will be out of current income accordingly foundation 1’s proposed transfer will constitute a significant disposition of assets that will qualify as a sec_507 transfer sec_1_507-4 provides in part that a private_foundation that makes transfers described in sec_507 is not subject_to the tax imposed under sec_507 with respect to such transfers unless the provisions of sec_507 become applicable foundation has represented that it has not and will not notify the secretary of any intent to terminate its status as a private_foundation within the meaning of sec_507 and that it has not either committed willful repeated acts or failures to act or committed a willful and flagrant act or failure to act which gives rise to tax under chapter within the meaning of sec_507 therefore because the proposed transfer will be described in sec_507 and because foundation will not give the notice described in sec_507 or be described in sec_507 foundation 1's proposed transfer of assets to foundation will not be described in sec_507 and foundation this purpose will not be treated as a newly created organization for the conclusion that foundation will not be treated as a newly created organization is reached herein only for purposes of responding to foundation 1’s request for the ruling that the proposed transfer will be described in sec_507 sec_6110 provides in part that unless the secretary otherwise establishes by regulations a written_determination may not be used or cited as precedent for this purpose sec_6110 provides that a written_determination generally means a ruling determination_letter technical_advice_memorandum or chief_counsel_advice the request for rulings to which this letter is directed was submitted by foundation not by foundation accordingly foundation may not use or cite this letter as precedent see also section dollar_figure of revproc_2015_1 2015_1_irb_1 requested ruling the proposed transfer will not constitute a taxable_expenditure within the meaning of sec_4945 of the code provided foundation exercises the plr-t-103493-15 expenditure_responsibility required by sec_53_4945-5 of the treasury regulations with respect to the transfer sec_4945 imposes a tax on each taxable_expenditure of a private_foundation sec_4945 provides that the term taxable_expenditure includes any amount_paid or incurred by a private_foundation such as in this case foundation as a grant to a private non-operating foundation such as in this case foundation unless the grantor private_foundation exercises expenditure_responsibility with respect to such grant in accordance with sec_4945 sec_53_4945-4 provides that for purposes of sec_4945 the term grants includes such expenditures as payments to exempt_organizations to be used in furtherance of such recipient organizations’ exempt purposes foundation has represented that foundation received recognition as an organization described in sec_501 and as a private non-operating foundation prior to foundation making any transfers of assets to it and that foundation will be responsible for maintaining its tax-exemption thereafter sec_53_4945-6 allows a private_foundation to transfer its assets to exempt_organizations described in sec_501 including private_foundations pursuant to sec_507 without the transfers being taxable_expenditures under sec_4945 however sec_53_4945-6 does not override the requirement under sec_4945 that grants to private non-operating foundations be subject_to the expenditure_responsibility requirements of sec_4945 such an override is available under sec_1_507-3 when the transfer of assets is a sec_507 transfer of all of the transferor's assets but it is not available when the transfer does not constitute a transfer of all of the transferor's assets as is the case here consequently foundation will have to exercise expenditure_responsibility with respect fo all grants to foundation including the proposed transfer of assets described in sec_507 to avoid liability for tax under sec_4945 requested ruling the proposed transfer will not constitute acts of self-dealing prohibited by sec_4941 of the code as to foundation 1’s directors sec_4941 a of the code imposes taxes on each act of self-dealing between a disqualified_person and a private_foundation taxes are imposed on both the self-dealers involved in an act of self-dealing and on any foundation managers who knowingly participate in an act of self-dealing even though sec_4941 does not impose a tax on a private_foundation when an act of self-dealing occurs a foundation with respect to which there has been an act of self-dealing is required to report it to the irs on its annual information_return which is the form_990-pf in this case plr-t-103493-15 sec_4941 of the code provides that the term self-dealing includes any direct or indirect transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_4946 defines the term disqualified_person sec_53_4946-1 provides that the term disqualified_person does not include organizations that are exempt under sec_501 thus foundation by definition will not be a disqualified_person with respect to foundation in revrul_2002_28 supra p is recognized as exempt from federal tax in situation under sec_501 and is classified as a private_foundation under sec_509 pursuant to a plan of dissolution after satisfying all of its outstanding liabilities p distributes all of its remaining assets in equal shares to x y and z revrul_2002_28 states in part that the transfers in question are to sec_501 organizations which are not treated as disqualified persons for purposes of sec_4941 revrul_2002_28 concludes that the transfers do not constitute self-dealing transactions and are not subject_to tax under sec_4941 foundation 1’s proposed transfer of assets to foundation will not constitute an act of self-dealing assuming that foundation was recognized by the irs as an organization described in sec_501 and exempt from tax under sec_501 a this letter is directed to foundation not to foundation b c d e or any other disqualified_person with respect to foundation as previously stated sec_6110 provides in part that unless the secretary otherwise establishes by regulations a written_determination may not be used or cited as precedent accordingly neither foundation b c d e nor any other disqualified persons with respect to foundation may use or cite this letter as precedent see section dollar_figure of revproc_2015_1 supra pincite requested ruling the legal accounting and other expenditures incurred by foundation to effectuate the proposed transfer will not be treated as taxable_expenditures under sec_4945 of the code and to the extent that they are reasonable they will be treated as qualifying distributions under sec_4942 of the code sec_4942 of the code generally imposes a tax on the undistributed_income_of_a_private_foundation other than an operating_foundation under sec_4942 for any taxable_year that has not been distributed before the first day of the second or any succeeding taxable_year following such taxable_year sec_4942 defines undistributed_income for any taxable_year as the amount by which the distributable_amount for such taxable_year exceeds the qualifying distributions made out of such distributable_amount for such taxable_year sec_4942 and sec_53_4942_a_-3 provide in part that the term qualifying_distribution means any amount including reasonable and necessary plr-t-103493-15 administrative expenses paid to accomplish one or more purposes described in sec_170 or b sec_170 lists the following purposes religious charitable scientific literary or educational_purposes 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 or for the prevention of cruelty to children or animals these purposes are the same as the purposes listed in sec_501 thus a grant by a private_foundation to another organization described in sec_501 ordinarily is an amount_paid to accomplish a purpose described in sec_170 and may be considered to be a qualifying_distribution assuming that foundation1’s legal accounting and other expenses_incurred in connection with the proposed transfer will be reasonable and consistent with ordinary business care and prudence and paid to accomplish one or more purposes described in sec_170 such expenses will be considered qualifying distributions under sec_4942 sec_4945 imposes a tax on each expenditure’ of a private_foundation sec_4945 provides that the term taxable_expenditure includes any amount_paid or incurred by a private_foundation for any purpose other than one specified in sec_170 sec_53_4945-6 provides that legal administrative and other expenses_incurred by a private_foundation are not taxable_expenditures if the foundation can demonstrate that such expenses were paid_or_incurred in the good_faith belief that they were reasonable and that the payment or incurrence of such expenses in such amounts was consistent with ordinary business care and prudence the determination whether an expenditure is reasonable depends upon the facts and circumstances of the particular case thus foundation 1’s payment of reasonable legal accounting and other expenses relating to the proposed transfer assuming that foundation can demonstrate ordinary business care and prudence will not constitute taxable_expenditures under sec_4945 requested ruling the assets that will be transferred by foundation to foundation in the proposed transfer could be treated as a qualifying_distribution for foundation 1's distribution_requirements under sec_4942 of the code sec_1_507-3 provides that except as provided in sec_1_507-3 relating to sec_507 transfers in which all of the transferor's assets are transferred to one or more effectively controlled transferee private_foundations a private_foundation is required to meet the distribution_requirements of sec_4942 for any taxable_year in which it makes a transfer described in sec_507 to another private_foundation such a transfer itself will be counted plr-t-103493-15 toward satisfaction of those requirement to the extent the amount transferred meets the requirements of sec_4942 including the recordkeeping requirements of sec_4942 sec_4942 states in part that a qualifying_distribution includes any amount including that portion of reasonable and necessary administrative expenses paid to accomplish one or more purposes described in sec_170 other than any contribution to i an organization controlled directly or indirectly by the foundation or disqualified persons with respect to the foundation or ii any private_foundation that is not an operating_foundation under sec_4942 except as provided in sec_4942 foundation will not be an operating_foundation sec_4942 provides that the term qualifying_distribution includes a contribution to i another charitable_organization controlled directly or indirectly by the transferor foundation or one or more disqualified persons with respect to the transferor or ii a private non-operating foundation if two requirements are satisfied the first such requirement is that the transferee organization satisfy certain pass-through requirements see sec_4942 the second requirement is that the transferor obtains adequate_records or other_sufficient_evidence from the transferee organization s showing that the required pass-through distributions were made see sec_4942 accordingly if foundation makes qualifying distributions in the manner required by the pass-through rules of sec_4942 and if foundation obtains sufficient records to satisfy the recordkeeping requirements of sec_4942 then foundation may count as qualifying distributions those portions of the amounts distributed to foundation that satisfy the requirements of sec_4942 and b conclusion based on the foregoing and assuming the accuracy of the facts and representations set forth herein we rule as follows the proposed transfer of percent of foundation 1’s assets to foundation will be in furtherance of foundation 1’s sec_501 purpose as described above the proposed transfer of assets will qualify as a transfer of assets described in sec_507 of the code given this decision for purposes of applying sec_507 and chapter to foundation only foundation will not be treated as a newly created organization as a result of the proposed transfer of assets plr-t-103493-15 the proposed transfer of foundation 1’s assets will not be described in sec_507 the proposed transfer of assets to foundation will not constitute a taxable_expenditure under sec_4945 of the code provided foundation exercises expenditure_responsibility with respect to the transfers in accordance with section a945 h foundation will not be deemed to have engaged in any acts of self-dealing under sec_4941 by effectuating the proposed transfer of assets including the formation of foundation and the payment by foundation of reasonable expenses necessary to effect such transactions the reasonable legal accounting and other expenditures incurred by foundation to effectuate the proposed transfer will not constitute taxable_expenditures under sec_4945 and all such reasonable expenses will be qualifying distributions under sec_4942 foundation may count the assets distributed in the proposed transfer toward the satisfaction of its minimum distribution requirement under sec_4942 to the extent that foundation makes qualifying distributions described in sec_4942 and foundation obtains sufficient records to satisfy the requirements of sec_4942 this letter does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections specifically described neither does this letter constitute a determination that foundation is exempt from tax under sec_501 or is a private_foundation under sec_509 because it could help resolve questions concerning your federal_income_tax status this ruling should be kept in your permanent records this letter will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see the enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to the notice if you disagree with our proposed deletions you should follow the instructions in the notice the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an individual with authority to bind the taxpayer and upon the understanding that there will be no material changes in the facts this office has not verified any of the materials submitted in support of the request for rulings and such material is subject_to verification on examination plr-t-103493-15 no ruling is granted as to whether foundation qualifies as an organization described in sec_501 and sec_509 and except as expressly provided above no opinion is expressed or implied concerning the federal_income_tax consequences of any other aspects of any transaction or item_of_income set forth in the ruling this letter is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited by others as precedent a copy of this letter must be attached to any_tax return to which it is relevant alternatively if foundation files its returns electronically it may satisfy this requirement by attaching a statement to its return that provides the date and control number of this letter in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative if you have any questions about this ruling please contact the person whose name and phone number are shown in the heading of this letter sincerely kenneth m griffin chief exempt_organization branch tax exempt government entities enclosure notice notice of intention to disclose redacted copy of this letter ce


internal_revenue_service number release date index numbers --------------------------------------------------- ------------------------ ------------------------------------------------------- --------------------------------------------- --------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ----------------- telephone number ------------------- refer reply to cc psi b03 plr-124299-09 date date x --------------------------------------------------------------------------------------------------- ----------------------- legend country ---------------- date -------------------------- dear ---------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting that x be granted an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as a disregarded_entity under sec_301_7701-3 facts x was formed under the laws of country on date x represents that it is a foreign_entity eligible to elect to be classified as a disregarded_entity for federal tax purposes x intended to be classified as a disregarded_entity effective date however due to inadvertence form_8832 entity classification election was not timely filed law sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in plr-124299-09 sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301 b unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides in part that for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides in part that except as provided in sec_301_7701-3 and v an eligible_entity may elect to be classified other than as provided in sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides in part that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 plr-124299-09 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as a disregarded_entity effective date a copy of this letter should be attached to the form_8832 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely s curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service national_office technical_advice_memorandum date tam-116464-98 index uil number control no number release date district_director taxpayer’s name taxpayer’s address taxpayer’s identification no years involved date of conference legend decedent tin spouse child child son-in-law family_trust friend state issues under the terms of decedent’s will and revocable_trust are estate_taxes to be equitably apportioned under state law or are the estate_taxes to be paid from the residuary probate_estate without apportionment does sec_2206 of the internal_revenue_code require that decedent’s irrevocable insurance_trust reimburse the probate_estate for any federal_estate_taxes paid that are attributable to insurance proceeds included in the gross_estate tam-116464-98 does sec_2207b prior to amendment by the taxpayer_relief_act_of_1997 require that decedent’s revocable family_trust reimburse the probate_estate for any federal_estate_taxes paid that are attributable to the inclusion of the value of the trust corpus in the gross_estate conclusions decedent’s will directs that estate_taxes are to be paid from the residue of the estate and further directs that in no event shall estate_taxes be apportioned to any person holding any interest in the taxable_estate accordingly under decedent’s will and revocable_trust the federal_estate_taxes are payable from the probate_estate without apportionment and before distribution from the estate to the revocable_trust the terms of decedent’s will waive the right of reimbursement under sec_2206 accordingly decedent’s probate_estate is not entitled to reimbursement from the insurance_trust the value of the corpus of the revocable family_trust is includible in decedent’s gross_estate under sec_2036 and his will does not waive the right of reimbursement by specific reference to sec_2207b accordingly the estate is entitled to be reimbursed from the trust property for the proportionate share of the estate_tax attributable to the inclusion of the value of the trust corpus in the gross_estate facts decedent died on date survived by spouse and seven children on date decedent executed his will and also established a revocable_trust family_trust article of the will provides that the personal representative of the estate shall pay out of the residue of the estate decedent’s debts medical_expenses funeral and burial expenses and the expenses relating to the administration the estate both probate and nonprobate article is entitled payment of death taxes and states as follows i also direct the personal representative to pay out of the residue of my estate all inheritance estate succession and transfer_taxes imposed by any domestic or foreign law on account of my death or because of the transfer disposition or distribution of any property deemed a part of my taxable_estate at my death whether or not the property with respect to tam-116464-98 which a particular tax is due is part of my probate_estate article is entitled direction against apportionment of death taxes and states as follows in no event shall any inheritance estate succession or transfer_taxes except generation- skipping taxes imposed by chapter and any additional estate_tax imposed by sec_2032a of the internal_revenue_code imposed by any domestic or foreign law by reason of my death or because of the transfer disposition or distribution of any property deemed a part of my taxable_estate at my death be apportioned to or among any person or persons holding any interest in or entitled to receive any item or items included in my taxable_estate provided however it is my desire that if a right of contribution is provided for with respect to any terminal interest property included in my gross_estate in accordance with the provisions of sec_2044 of the internal_revenue_code or to the extent that the assets of my probate_estate are sufficient or the trustees under the trust agreement of even date herewith by and between decedent as the grantor and spouse child child and son- in-law as the trustees which trust is in full force and effect on the date hereof pay such taxes or reimburse the personal representative therefor from the trust estate of such trust that the personal representative not recover the amount of any estate_taxes attributable to terminable_interest property included in my gross_estate in accordance with the provisions of sec_2207a of the internal_revenue_code or its counterpart under any state’s estate_tax law that permits an estate_tax_marital_deduction for qualified_terminable_interest_property article provides that the personal representative or the trustees under the trust agreement effective date family_trust are authorized to make an election under sec_2056 of the internal_revenue_code to have the assets of spouse’s marital trust discussed below treated as qualified_terminable_interest_property article provides that the residue of decedent’s estate is to be paid to the trustees of family_trust and is to be held managed administered and distributed according to the terms conditions and provisions of the trust agreement including any amendments made before decedent’s death regardless of whether made before or after the execution of the will tam-116464-98 decedent also executed family_trust on date paragraph of family_trust provides decedent with the power to amend or revoke the family_trust paragraph directs the trustee to pay the trust’s net_income to decedent during his life paragraph provides that upon his death the trust shall be administered under the terms provided in article sec_3 and of the trust agreement paragraph of the trust provides that the trustees may pay out of the trust estate or reimburse the personal representative of decedent’s estate for decedent’s debts the expenses of decedent’s last illness funeral and burial and the expenses of administration of decedent’s estate both probate and nonprobate and the expenses of any ancillary administration as the trustees in their discretion may deem necessary or advisable taking into consideration any other assets available for such purposes and the liquidity of such other assets paragraph is entitled payment of death taxes and states as follows the trustees may pay out of the trust estate or reimburse the personal representative of the decedent’s estate for such of the inheritance estate succession and transfer_taxes including any interest and penalties concerning any such tax but excluding any generation-skipping taxes imposed by chapter and any additional estate_tax imposed by sec_2032a of the internal_revenue_code imposed by any domestic or foreign law on account of the decedent’s death or because of the transfer disposition or distribution of any property deemed a part of the decedent’s taxable_estate at the decedent’s death as the trustees in the trustees’ discretion may deem necessary or advisable taking into consideration any other assets available for such purposes and the liquidity of such other assets follows paragraph is entitled source of payments and states as no payments made pursuant to paragraph sec_3_1 or sec_3_2 shall be borne by or paid out of either the income from or the principal of that portion of the trust estate allocated to and distributed pursuant to paragraph sec_4 or to the greatest extent possible of this trust agreement such payments including taxes shall not be apportioned to or among any person or persons holding any interest in or entitled to receive any item or items included in the decedent’s taxable_estate provided however that tam-116464-98 the trustees shall recover from the decedent’s estate the amount of any estate_taxes attributable to terminable_interest property includible in the decedent’s gross_estate in accordance with the provisions of sec_2207a of the internal_revenue_code or its counterpart under any state’s estate_tax law that permits an estate_tax_marital_deduction for qualified_terminable_interest_property notwithstanding any provision herein to the contrary no assets received by the trustees which unless expended in making any payment authorized or directed by paragraph or would be exempt from federal estate_tax shall be expended in making any such payment paragraph provides that the trustees shall distribute dollar_figure to each brother and sister of decedent and to decedent’s friend friend paragraph provides that if spouse survives decedent the balance of the trust estate shall be distributed as follows the trustees are to set_aside an amount that when added to the value of all interests in property included in the decedent’s taxable_estate will equal the largest taxable_estate on which no federal estate_tax is payable after taking into account the unified_credit allowable under sec_2010 and the credit for the state death_tax under sec_2011 the amount set_aside is to be distributed to the decedent’s children and issue in accordance with the provisions of paragraph of the trust an amount equal to the decedent’s remaining generation skipping tax exemption gst_exemption is to be held in the spouse qualified_terminable_interest_property marital trust qualified_property marital trust to be administered under the provisions of paragraph of the trust the balance of the trust estate is to be held in the spouse right of withdrawal marital trust right of withdrawal marital trust to be administered under the provisions of paragraph of the trust under paragraph with respect to the qualified_property marital trust spouse is to receive all the trust income payable in annual or more frequent installments in addition the trustees may pay to or expend for the benefit of spouse such sum or sums from the principal of the trust as the trustees in the trustees' discretion may deem advisable upon the death of spouse the trust corpus is to be distributed to trusts for the benefit of decedent’s children and issue tam-116464-98 under paragraph a the executor is authorized to make an election under sec_2056 with respect to the qualified_property marital trust sec_4 further provides that it is decedent’s purpose and intention to obtain the federal estate_tax_marital_deduction allowable under the provisions of the internal_revenue_code with respect to the qualified_property marital trust created under article and all questions relating thereto shall be resolved accordingly under paragraph the right of withdrawal marital trust is to be administered as follows under paragraph any interest in the trust that is disclaimed by spouse shall be distributed to decedent's issue made under the terms of paragraph and administered and distributed as a separate share thereunder as though it had originally constituted a part thereof under during spouse’s life the trustees is to pay to spouse all of trust's net_income from the date of decedent’s death in annual or more frequent installments the trustee is to pay to or expend for the benefit of spouse from the principal of the trust as spouse may direct in writing from time to time spouse need not account to any person or court for any sum or sums so distributed on spouse’s death the corpus of the trust is to be distributed pursuant to spouse’s exercise of a general_power_of_appointment in addition to the property held in decedent’s probate_estate and revocable_trust decedent had also created a_trust on date that was funded with an existing insurance_policy on his life because decedent transferred the policy to the trust within three years of his death the proceeds of the policy were included in his gross_estate under sec_2035 on the form_706 filed by the estate an election was made to treat the qualified_property marital trust as qualified_terminable_interest_property under sec_2056 law and analysis issue sec_2001imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2056 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate except as limited by sec_2056 is to be determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property which passes or has passed_from_the_decedent_to_his_surviving_spouse tam-116464-98 sec_2056 provides that in determining for purposes of sec_2056 the value of any interest in property passing to the surviving_spouse for which a deduction is allowed under sec_2056 there is to be taken into account the effect which the tax imposed by sec_2001 or any estate succession legacy or inheritance_tax has on the net value of the interest passing to surviving_spouse in 317_us_95 the united_states supreme court held that the applicable state law as to the devolution of property at death should govern the ultimate impact of the federal tax on the respective beneficiaries the applicable rules of the state apply if the will or other governing instrument has no tax payment directions but directions in the governing instrument may provide for the burden of tax_payments to be apportioned otherwise in estate of lewis v commissioner tcmemo_1995_168 the decedent’s will provided for specific devises of real_property to her children and further provided that the residue of her estate was to be paid to a revocable_trust created during her lifetime the will also provided that any inheritance legacy succession or estate_taxes and duties shall be paid out of the residue of my estate without apportionment and with no right of reimbursement from any recipient of any such property the revocable_trust provided that at decedent’s death the trustee was to establish a marital trust that was to be funded with the minimum amount necessary to reduce the estate_tax to zero taking into account all available credits the balance passed to a family_trust the revocable_trust also provided the trustee with the discretionary authority to pay or advance to the executor of the estate amounts for expenses including death taxes resulting from the decedent’s death however any amount_paid or advanced was to be paid from the income or principal of the family_trust even if the tax was attributable to the marital trust or to any other_property qualifying for the marital_deduction the issue before the court was whether the estate_tax should be paid from the residue of the probate_estate or apportioned to the family_trust as provided in the revocable_trust the estate argued that the decedent’s testamentary documents were ambiguous because the provisions in the will directing that all estate_taxes are to be paid from the residuary_estate conflicted with the revocable_trust provisions relating to the marital trust and the provisions directing that only the family_trust could be used to pay estate_taxes the court concluded that the tax payment clause in the will unambiguously directed that the estate_taxes are to be paid from the residue of the estate without apportionment the court noted that the trust provisions that tam-116464-98 referred to the maximum marital_deduction and gave the trustee the discretion to pay estate_taxes did not override the clear language of the will in estate of miller v commissioner tcmemo_1998_416 the court reached a similar conclusion but see 151_f3d_1201 th cir under applicable state law unless the will or other governing instrument provide otherwise the estate_tax shall be apportioned among all persons interested in the estate the apportionment is to be made in the proportion that the value of the interest of each person’s interest in the estate bears to the total value of the interests of all persons interested in the estate however assets passing to the surviving_spouse or charity that do not generate any estate_tax are relieved from payment of a portion of the tax if the decedent’s will or other written instrument directs a different method for apportioning the estate_tax burden the method described in the will or other written instrument controls however under state law the statutory equitable_apportionment rules can only be waived by clear and unambiguous direction in the instrument the estate argues that the estate_taxes should be equitably apportioned under the terms of the instruments and state law in this case decedent executed his will and revocable_trust approximately two months before his death as in estate of lewis decedent’s will explicitly provides in article and that all estate_taxes imposed on any property deemed a part of decedent’s taxable_estate are to be paid from the estate residue without apportionment paragraph sec_3_2 of the revocable_trust grants the trustee of the revocable_trust the discretion to pay estate_taxes out of the revocable_trust estate if this discretion is exercised then under paragraph the taxes cannot be paid from the marital trust however as the court found in the estate of lewis and estate of miller this discretionary authority granted to the trustee does not override the mandatory provision in the will that estate_taxes be paid from the residuary_estate without apportionment further if the trustee has the discretion to contribute or not contribute to the payment of taxes the marital_deduction would be reduced even if the trustee does not so contribute see revrul_79_14 1979_1_cb_309 the estate argues that the directive in article of the will that the estate_taxes be paid from the residue and not be apportioned applies only to estate_tax attributable to items of personalty that is the estate reads the clause as providing that estate_taxes may not be apportioned to persons holding any interest in or entitled to receive any item or items included in my taxable_estate emphasis added thus the directive against apportionment applies only to taxes generated tam-116464-98 by items ie personalty the estate argues that at the least the provision is ambiguous and is not an unambiguous direction against apportionment therefore the estate_taxes should be equitably apportioned under state law however we believe that the direction against apportionment applies to all taxes generated by the taxable_estate and exonerates from apportionment all persons holding any interest in or entitled to receive any items included in the taxable_estate indeed the remaining part of the sentence at issue continues on to discuss the payment of estate_taxes if sec_2044 property is included in the gross_estate thus the article clear direction against apportionment_of_taxes cannot be viewed as referencing only taxes generated by personalty items rather article clearly directs that all estate_taxes on any property included in the taxable_estate are to be paid out of the estate residue and the direction against apportionment contained in article clearly applies to those taxes referenced in article article is a clear directive and the estate’s strained reading of the provision should not be viewed as creating an ambiguity where none exists issue sec_2206 provides that unless the decedent directs otherwise in his will if any part of the gross_estate on which tax has been paid consists of proceeds of policies on the life of the decedent receivable by a beneficiary other than the executor the executor shall be entitled to recover from such beneficiary the portion of the total_tax paid as the proceeds of the policies bear to the taxable_estate in this case the proceeds of an insurance_policy on decedent’s life were included in the gross_estate for federal estate_tax purposes generally under sec_2206 the executor of decedent’s estate has the right to recover from the insurance beneficiary that portion of the estate_tax attributable to the proceeds in the gross_estate the amount that may be collected is the amount that bears the same relation to the total_tax paid as the proceeds included in the gross_estate and received by the beneficiary bear to the taxable_estate stephens maxfield lind and calfe federal estate_and_gift_taxation however the statute does not apply if the decedent directs to the contrary in his will in this case article of decedent’s will directs the personal representative to pay out of the residue of his estate all inheritance estate succession and transfer_taxes imposed by any domestic or foreign law on account of my death or because of the transfer disposition or tam-116464-98 distribution of any property deemed a part of my taxable_estate whether or not the property with respect to which a particular tax is due is part of my probate_estate emphasis added in addition article states that in no event shall any inheritance estate succession or transfer_taxes imposed by any domestic or foreign law by reason of my death or because of the transfer disposition or distribution of any property deemed a part of my taxable_estate at my death be apportioned to or among any person or persons holding any interest in or entitled to receive any item or items included in my taxable_estate as discussed above decedent’s will directs the executor to pay out of the residuary probate_estate all estate_taxes on any property that is part of his taxable_estate and further directs that estate_taxes should not be apportioned against persons entitled to receive any interest in the taxable_estate under these circumstances we conclude that the language in article and of the will is sufficient to waive the right of reimbursement under sec_2206 issue sec_2207b prior to amendment by the taxpayer relief act of provided that if any part of the gross_estate on which tax has been paid consists of the value of property included in the gross_estate by reason of sec_2036 the decedent’s estate shall be entitled to recover from the person receiving the property the amount that bears the same ratio to the total_tax under this chapter that has been paid as a the value of the property bears to b the taxable_estate sec_2207b shall not apply if the decedent otherwise directs in a provision of his will or revocable_trust specifically referring to sec_2207b sec_2207b was added to the code by p l f and is effective for transfers after date sec_2207b was amended by b of the taxpayer_relief_act_of_1997 to eliminate the requirement that the provision can be waived only by specific reference to sec_2207b the amendment is effective with respect to estates of decedents dying after date tam-116464-98 in this case decedent retained the right under paragraph of the family_trust to revoke the trust and in addition under paragraph retained the right to receive all of the trust income therefore the value of family_trust was includible in his gross_estate under sec_2036 for federal estate_tax purposes decedent did not waive the right of reimbursement under sec_2207b by specific reference to sec_2207b in his testamentary instrument we believe that sec_2207b obligates the trustee to pay the estate_tax generated by the trust therefore under sec_2207b the burden for payment of the estate_taxes generated by inclusion of the family_trust corpus in the gross_estate is to be bourne by the family_trust however we note that the family_trust is burdened only with the tax generated by inclusion in the taxable_estate of the assets held in the family_trust on the date of death under the terms of the family_trust the portion of the trust estate passing for the spouse’s benefit under paragraph sec_4 and is not to be burdened with the payment of these taxes under the terms of decedent’s will as discussed above all other estate_taxes not attributable to the assets held in the family_trust on the date of death eg the estate_tax generated by inclusion of the insurance proceeds paid to decedent’s insurance_trust is payable from the probate_estate residue caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent