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 b04 plr-118121-04 date october ------------------- ------------------------- --------------------------- --------------------------------- -------------------- ---------------------- ---------------------- -------------------------------------------------------------------------------- re -------------------------------------------------- ----------------------------- legend grantor spouse child a child b child c grandchild a grandchild b_trust --------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------ grandchild a_trust ------------------------------------------------------------------------------------------------------------ grandchild b_trust ----------------------------------------------------------------------------------------------------------- child c trust --------------------------------------------------------------------------------------------------------- article seventh year a b c state local court --------------------------------------------------------------------------------------------------------------- state statute ------------------------------------------------------------------------------------------------------------------ ---------------------- ------- ----- ------- ----- ------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- spouse has died child c is living and the trust will terminate on her death this is in response to your correspondence dated date requesting dear --------------- rulings on the generation-skipping_transfer gst tax income_tax gift_tax and estate_tax consequences of a proposed judicial modification of the trust the facts submitted and representations made are as follows grantor died in year prior to date he was survived by his spouse spouse and their three children child a child b and child c the youngest child the trust was created in article seventh of grantor’s will and will continue until both spouse and child c have died under article seventh paragraph i of the will the net_income of the trust is to be paid quarterly one-half is to be paid to grantor’s and spouse’s then living issue per stirpes and one-half is to be paid to spouse after spouse’s death the one-half portion of income otherwise payable to spouse is to be paid to the issue per stirpes on termination of the trust the remaining property is to be distributed in equal shares to grantor’s and spouse’s then living issue per stirpes child c has b children and c grandchildren child a has died he is survived by grandchild a and grandchild a’s a children child b has died she is survived by grandchild b grandchild b’s b children and b grandchildren grandchild a and grandchild b are the current trustees proposed transaction financial situations and as a result have differing needs and desires concerning the trust the trustees propose to divide the trust into three separate trusts of equal value one of each such trusts will be held for the benefit of a grantor’s child and that child’s issue per stirpes for a child who has died the trust will be held for that child’s issue per stirpes that is the grandchild a_trust will held be for the benefit of grandchild a and his descendants the grandchild b_trust will be held for the benefit of grandchild b and his descendants and the child c trust will be held for the benefit of child c and her descendants the division will be accomplished by a pro_rata division of each asset of the trust grandchild a_trust grandchild b_trust and child c trust are referred to in this letter as the resulting trusts terms of the trust and to each other except that the distributees of income will be limited to the child or child’s issue for whom the trust is set_aside specifically each resulting trust will provide for the quarterly distribution of income to the child or grandchild for whom the trust is named and if he or she is deceased to his or her issue per stirpes the resulting trusts will not allow for the payment of principal upon the death of the last survivor of the family line for whom the trust is named the trust will terminate if not already terminated and be divided equally among the remaining trusts in existence each trust must terminate no later than upon child c’s death at that time the principal of each trust will be distributed to the persons then receiving the income from the trust per stirpes or if any such person is not then living to his or her the dispositive terms of each resulting trust will be identical to the dispositive it is represented that the current beneficiaries have differing personal and the partitioning of the trust and the appointment of the trustees of the resulting plr-118121-04 issue then living per stirpes if neither the beneficiary for whom the trust is named nor any of his or her issue is then living one-half of the trust property will be distributed as part of each of the other trusts grandchild a will be the trustee of the grandchild a_trust grandchild b will be the trustee of the grandchild b_trust and may appoint a corporate co-trustee child c or one of her children will be the trustee of the child c trust and she may appoint a corporate co-trustee each individual trustee will appoint his or her successor trustee trusts will be effected under state law by the trustees’ petitioning the local court state statute petition of the trustee or of any person interested in the trust and upon notice to all such persons may direct the establishment of two or more separate trusts for any reason not directly contrary to the primary purpose of the trust rulings requested rata allocation of each trust asset among the three resulting trusts under state statute the court having jurisdiction of an express trust upon the you have asked that we rule that the proposed division of the trust and the pro will not cause the trust or the three resulting trusts to lose their status as grandfathered trusts exempt from the gst tax and will not cause a distribution from or termination of any interest in the trust or any of the three resulting trusts to be subject_to the gst tax will result in the resulting trusts being treated as separate trusts under sec_643 will not result in the realization by the trust the resulting trusts or a beneficiary of the trust or the resulting trusts of any income gain_or_loss under sec_661 will not result in the realization of any income gain_or_loss under sec_61 or sec_1001 by the trust the resulting trusts or a beneficiary of the trust or the resulting trusts will result in the resulting trusts holding assets with the same basis they had at the time of the division under sec_1015 and holding periods for all the assets allocated to each resulting trust that include the trust’s holding_period under sec_1223 plr-118121-04 sec_2601 imposes a tax on each generation-skipping_transfer section section b a of the tax_reform_act_of_1986 and sec_26_2601-1 sec_26_2601-1 provides that any trust in existence on september will not cause any portion of the assets of the trust or any of the resulting trusts to be includible in the gross_estate of any beneficiary of the trust or the resulting trusts under sec_2036 through and will not constitute a transfer by any beneficiary of the trust or the resulting trusts that will be subject_to gift_tax under sec_2501 ruling - the gst tax a provides that the term generation-skipping_transfer means a taxable_distribution a taxable_termination and a direct_skip of the generation-skipping_transfer_tax regulations provide that the generation- skipping transfer_tax shall not apply to any generation-skipping_transfer under a_trust that was irrevocable on date but only to the extent that such transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added will be considered an irrevocable_trust except as provided in sec_26 b ii b or c relating to property includible in the grantor's gross_estate under sec_2038 and sec_2042 judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax will not cause the trust to lose its exempt status the regulation provides that the rules contained in the paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy paragraph b i a b or c of this section by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter but only if - the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and sec_26_2601-1 provides rules for determining when a modification sec_26_2601-1 provides that a modification of the governing accordingly based on the facts submitted and the representations made the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust plr-118121-04 in this case the trust was created and irrevocable before date also it is represented that no additions have been made to the trust since date consequently the trust is currently exempt from gst tax the proposed partition of the trust will result in three trusts one for each of grantor’s children’s family lines ie for the child or if the child is deceased for the child’s issue per stirpes because i the dispositive terms of each resulting trust will be the same as the dispositive terms of the trust although limited to a particular family line ii each resulting trust will terminate no later than on child c’s death and iii the distributees of the property on termination of each resulting trust will be the respective child’s issue per stirpes the proposed partition of the trust and pro_rata allocation of the trust assets among the three resulting trusts will not shift a beneficial_interest to any beneficiary who occupies a lower generation than the person or persons who held the beneficial_interest prior to the partition and will not extend the time for the vesting of any beneficial_interest in a resulting trust beyond the period provided for in the trust provided that the local court issues an order approving the partition of the trust the partitioning of the trust into the three resulting trusts and the pro_rata allocation of the assets will not affect the status of the trust or the resulting trusts as exempt from the gst tax likewise neither the partitioning nor the pro_rata allocation of assets will cause a distribution from or termination of any interest in the trust or any of the three resulting trusts to be subject_to the gst tax ruling - sec_643 prescribed by the secretary two or more trusts shall be treated as one trust if such trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries and a principal purpose of such trusts is the avoidance of the tax_imposed_by_chapter_1 in this case each resulting trust will have different beneficiaries and be managed and administered separately therefore based solely on the facts and representations submitted we conclude that the resulting trusts created by the division of the trust will be treated as separate trusts for federal_income_tax purposes ruling - sec_661 computing the taxable_income of a_trust other than a_trust to which subpart b applies sec_643 provides that for purposes of subchapter_j under regulations sec_661 provides that in any taxable_year a deduction is allowed in sec_662 provides that there shall be included in the gross_income of a based solely on the facts and representations submitted we conclude that the sec_1_661_a_-2 of the income_tax regulations provides that gain_or_loss is plr-118121-04 for the sum of the amount of income for such taxable_year required to be distributed currently and any other_amounts_properly_paid_or_credited_or_required_to_be_distributed for such taxable_year realized by the trust or estate or the other beneficiaries by reason of a distribution_of_property in_kind if the distribution is in satisfaction of a right to receive a distribution of a specific dollar amount or specific property other than that distributed or of income as defined under sec_643 and the applicable regulations if income is required to be distributed currently beneficiary to whom an amount specified in sec_661 is paid credited or required to be distributed by an estate_or_trust described in sec_661 the sum of the following amounts the amount of income_for_the_taxable_year_required_to_be_distributed_currently to such beneficiary whether distributed or not and all other_amounts properly paid credited or required to be distributed to such beneficiary for the taxable_year division of the trust into the resulting trusts is not a distribution under sec_661 or sec_1_661_a_-2 ruling sec_4 and - sec_61 sec_1001 sec_1015 sec_1223 in property and under sec_61 from an interest in a_trust property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained be the same as it would be in the hands of the donor or the last preceding owner by sec_61 provides that gross_income includes gains derived from dealings sec_1001 states that the amount_realized from the sale_or_other_disposition sec_1015 provides that if the property was acquired by gift the basis shall sec_1001 provides that the gain from the sale_or_other_disposition of 499_us_554 concerns the the court in cottage savings u s pincite concluded that sec_1_1001-1 plr-118121-04 whom it was not acquired by gift except that if the basis adjusted for the period before the date of the gift as provided in sec_1016 is greater than the fair_market_value of the property at the time of the gift then for the purpose of determining loss the basis shall be the fair_market_value sec_1223 provides that in determining the period for which the taxpayer has held property however acquired there shall be included the period for which the property was held by any other person if under chapter of subtitle a the property has for the purpose of determining gain_or_loss from a sale_or_exchange the same basis in whole or in part in his hands as it would have in the hands of such other person see also sec_1_1223-1 issue of when a sale_or_exchange has taken place that results in realization of gain_or_loss under sec_1001 in cottage savings a financial_institution exchanged its interests in one group of residential mortgage loans for another lender’s interests in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution reasonably interprets sec_1001 and stated that an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent cottage savings u s pincite the court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans cottage savings u s pincite interests of the beneficiaries of the resulting trusts will not differ materially from their interests in the trust in the proposed transaction the trust will be severed in accordance with state law on a pro_rata basis except for the changes described above all other provisions of the trust will remain unchanged the proposed transaction will not result in a material difference in_kind or extent of the legal entitlements enjoyed by the beneficiaries a partition of jointly owned property is not a sale_or_other_disposition of property where the co-owners of the joint property sever their joint_interests but do not acquire a new or additional interest as a result of the transaction thus neither gain nor loss is realized on a partition see revrul_56_437 1956_2_cb_507 basis of those assets in the hands of the original trust at the time of the transfer if under sec_1015 the basis of assets received by the new trusts is the same as the it is consistent with the court’s opinion in cottage savings to find that the sec_2036 provides that the value of the gross_estate shall include the accordingly the division of the trust and the pro_rata allocation of each trust plr-118121-04 pursuant to sec_1223 the holding periods of the assets in the hands of the new trusts will include the holding periods of the assets in the hands of the original trust asset among the three resulting trusts will not result in the realization of income gain_or_loss under sec_61 or sec_1001 by the trust the resulting trusts or any beneficiary of those trusts the basis of each asset held by the three resulting trusts immediately after the division will have the same basis as determined under sec_1015 as that asset had in the hands of the trust immediately before the division the holding_period for all the assets allocated to each resulting trust will include the trust’s holding_period under sec_1223 ruling sec_2036 through value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_consideration in money_or_money's_worth by trust or otherwise under which the decedent has retained for life or for any period not ascertainable without reference to the decedent’s death or for any period which does not in fact end before the decedent’s death - the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise if the possession or enjoyment thereof can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property and the value of the reversionary_interest immediately before the death of the decedent exceed sec_5 percent of the value of the property value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of the decedent’s death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power to alter amend revoke or terminate or where any such power is relinquished during the 3-year period ending on the date of the decedent's death sec_2038 provides that the value of the gross_estate shall include the sec_2037 provides that the value of the gross_estate shall include the in this case the trust will be divided into three trusts to represent the three family sec_2036 sec_2037 and sec_2038 apply to situations in which a decedent sec_2501 imposes a tax for each calendar_year on the transfer of property by plr-118121-04 transferred property or an interest in property and retained an interest right or power with respect to the income or principal of the transferred property or interest in this case the beneficiaries of the resulting trusts will have the same interests after the division as they had as beneficiaries of the trust therefore nothing will be transferred by them by reason of the proposed division accordingly the division of the trust and the pro_rata allocation of each trust asset among the three resulting trusts will not cause any portion of the assets of the trust or any of the resulting trusts to be includible in the gross_estate of any beneficiary of the trust or the resulting trusts to be includible in that beneficiary’s gross_estate under sec_2036 sec_2037 or sec_2038 ruling the gift_tax gift during such calendar_year by any individual sec_2511 provides that the gift_tax applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property transferred is real or personal tangible or intangible lines of grantor’s children the dispositive provisions of each trust will be identical to the dispositive provisions of the trust except each resulting trust will be limited to the respective child’s family line for which it is held each resulting trust will terminate no later than child c’s death the distributees on termination of each trust will be the respective child’s issue per stirpes transaction is carried out as proposed and is effective under the law of state we conclude that the division of the trust and the pro_rata allocation of each trust asset among the three resulting trusts will not result in a transfer by any of the beneficiaries of the trust or the resulting trusts that is subject_to federal gift_tax under sec_2501 skipping transfer_tax returns that you may file relating to this matter representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by the appropriate party while this office has not verified any part of the material submitted in support of the request for rulings it is subject_to verification and examination consequences of the facts described above under the cited provisions or any other provisions of the code or regulations a copy of this letter should be attached to any income gift estate or generation- except as specifically ruled above no opinion is expressed as to the federal tax based on the facts submitted and the representations made and assuming the the rulings contained in this letter are based upon information and plr-118121-04 the code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer requesting it sec_6110 of sincerely lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs and special industries enclosure copy for purposes


department of the treasury internal_revenue_service washington d c office_of_chief_counsel number release date uilc date postf-153657-01 internal_revenue_service national_office field_service_advice memorandum for john s repsis associate area_counsel large and mid-size business cc lm nr dal dallas texas attn silvia m rheinbolt from associate chief_counsel income_tax accounting cc ita subject exchange of property held for productive use or for investment this chief_counsel_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend taxpayer parent sub sub trustco fcorp fcorpfinance leasecorp new plane s x-firm year year year year year date date date postf-153657-01 date date issues date you requested we consider the following issues concerning the validity of an exchange of aircraft by taxpayer in a transaction intended to qualify for tax_deferral under sec_1031 of the internal_revenue_code was taxpayer’s exchange of aircraft under sec_1031 of the code a valid business transaction if not should the aircraft exchange be disallowed and the depreciation attributable to the exchange aircraft be adjusted along with alternative_minimum_tax amt and adjusted_current_earnings ace if the primary position is not sustained ie if we determine that the exchange had a valid business_purpose then should the step_transaction_doctrine be applied to taxpayer’s exchange of aircraft under sec_1031 if the step_transaction_doctrine applies should the aircraft exchange be disallowed and the depreciation attributable to the exchanged aircraft be adjusted along with alternative_minimum_tax amt and adjusted_current_earnings ace conclusions there is no direct or indirect authority precluding the service’s use of the business_purpose step transaction or substance over form doctrines to disallow a transaction designed to avoid longer depreciation as provided under sec_168 the service may reasonably argue any or all of these doctrines to show that taxpayer is not entitled to have its transaction respected as a like-kind_exchange and thereby transfer the basis of new plane to the eight old aircraft the application of these doctrines to the transaction at issue would support your adjusting the depreciation attributable to the aircraft involved along with prior calculations of taxpayer’s alternative_minimum_tax amt and adjusted_current_earnings ace for the applicable_taxable_year s consistent with your conclusions facts as one of its businesses taxpayer leases aircraft from year to year taxpayer acquired and then leased aircraft to its lessees fcorp is a nondomestic foreign air carrier in year fcorp took delivery of five new planes and had closed sale leaseback exchange transactions on four of them leasecorp an unrelated company and investor in the fourth new plane advised taxpayer concerning the possibility of investing in and acquiring the fifth new plane to implement the tax planning strategy afforded by engaging in a leaseback and exchange postf-153657-01 transaction these transactions were presented to taxpayer’s finance_committee as part of the presentation taxpayer’s personnel prepared an appropriation request the appropriation request stated taxpayer has aircraft that have expended a large portion of their tax benefits depreciation the leasing market has developed a structure that takes advantage of the ‘like-kind exchange’ provisions of the internal_revenue_code taxpayer’s sub purchases from and leases back to fcorp new plane for dollar_figure taxpayer ‘exchanges’ eight aircraft on lease to us lessees valued in total at dollar_figure that are substantially depreciated for us tax purposes as a result of this exchange taxpayer is able to obtain more accelerated tax depreciation of the cost of the new plane taxpayer leases back the new plane to fcorp for a term of years at the conclusion of the original year lease_term fcorp can buy the aircraft for a fixed price of the original purchase_price or find a replacement lessee for an additional -year term or return the aircraft to taxpayer plus pay of the original cost payback period is months on date the finance_committee of the board_of directors of taxpayer approved the transaction to set-up the transaction sub organized a domestic_trust trust trust was designed to qualify as a grantor_trust under of the code sub became the grantor of trust to fund the purchase sub contributed dollar_figure to trust in addition trust assumed dollar_figure in nonrecourse debt recourse only to the aircraft provided by an unrelated foreign bank taxpayer also organized a second domestic_trust trust designed to qualify as a grantor_trust under with taxpayer as the grantor trustco became the trustee of both trust and trust on date the various parties entered into numerous agreements participation_agreement purchase agreement lease agreement loan agreement trust agreement etc to effect the sale leaseback and like-kind_exchange lke transaction on date trust purchased new plane for dollar_figure from fcorpfinance immediately after the acquisition and pursuant to the lease agreement trust leased the aircraft to fcorp for a period of years after the end of the initial lease period date fcorp will have three options purchase the aircraft for dollar_figure find a replacement lessee for an additional years until date or return the aircraft to taxpayer and pay taxpayer dollar_figure immediately after leasing back new plane trust transferred new plane to trust in return taxpayer transferred to sub the eight older aircraft it owned and leased postf-153657-01 while the closing documents indicated that the eight aircraft were transferred from taxpayer to sub sub another subsidiary of taxpayer continued depreciating the aircraft for federal_income_tax purposes after the like-kind_exchange for the year and year tax years taxpayers are required to notify the service of lke’s by filing form_8824 in the year of the exchange during the audit for the year tax_year taxpayer indicated that none of the forms filed with the year income_tax returns were attributable to the fcorp exchange taxpayer failed to duly disclose the exchange at issue leasecorp prepared a document discussing the details of the transaction between taxpayer and fcorp which includes the following additional explanation of taxpayer’s strategy in leasing an aircraft to fcorp or any other tax-exempt_entity taxpayer cannot use the accelerated year macrs depreciation the pickle dole regulations decree that any time a company leases equipment to a tax- exempt entity it has to use straight-line_depreciation the term over which the property would be straight-line depreciated is the greater of the class_life or of the lease_term of the class_life the class_life of aircraft i sec_12 years and the lease_term of this transaction is the depreciation in this case is straight-line over taxpayer has also used a lke in this transaction to enhance its economics and offer a more attractive present_value benefit to fcorp by exchanging new plane for eight substantially older aircraft taxpayer and sub were attempting to shift the tax basis of the assets exchanged under this plan depreciation is based on the use of the property in this case taxpayer and sub traded the eight aircraft already in their portfolio for fcorp’s new plane accordingly sub used 7-year macrs in depreciating substantially_all of the dollar_figure paid for new plane since the bulk of the basis attached to the eight old aircraft and the depreciation was based on the domestic usage of the old aircraft in its summary document leasecorp also discussed the importance of the values of the aircraft exchange being equal or near in value stating to get the most efficient economic benefit from the lke the current fair_market_value of the assets to be exchanged should be equal if the values are not equal then the tax consequences of the disparity decreases the benefit of doing the lke in the same summary document leasecorp identified the fair_market_value of the eight old aircraft as about dollar_figure a little more than the value as that of new postf-153657-01 plane leasecorp also discusses the remaining tax basis in the ‘old’ assets leasecorp stated since the tax basis in these assets gets exchanged any_tax basis in the old assets gets attached to the fcorp aircraft and has to be depreciated using the straight-line method outlined above the lower the tax basis in the old assets the greater the benefits of doing lke the remaining tax basis for the old assets was dollar_figure as of the exchange date since the lke was taking place within the same consolidated_group taxpayer and its subsidiaries for both tax and accounting purposes and the changes in depreciation are solely due to the fcorp transaction the entire net effect of the new lease and lke have been included the fcorp lease this approach was used by leasecorp’s parent after consultation and approval by x-firm its accountants in its december year fcorp lke lease leasecorp also indicated that other lessors with their accountants are applying the same methodology as to how tax depreciation should be reported after the lke leasecorp indicates that the remaining depreciation available with respect to the old assets was dollar_figure the dollar_figure new asset basis must be reduced by the remaining basis of the old assets for a net_basis of dollar_figure as a result of the exchange the net_basis of dollar_figure is now attributable to the old assets and thus would be depreciated using a year macrs with a half year convention the basis of dollar_figure in the new asset would be depreciated over years using the straight-line method law and analysis sec_167 provides that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion wear_and_tear including a reasonable allowance for obsolescence of property_used_in_the_trade_or_business of the taxpayer or of property_held_for_the_production_of_income the depreciation deduction provided by sec_167 for tangible_property placed_in_service after generally is determined under sec_168 this section prescribes two method sec_1 the difference between the fair_market_value of new plane dollar_figure and the old aircraft dollar_figure is dollar_figure this difference constitutes an exchange_group_deficiency for which taxpayer should have recognized gain in its year taxable_year if this transaction was valid see sec_1_1031_j_-1 and example para iii a of sec_1_1031_j_-1 of the regulations postf-153657-01 of accounting for determining depreciation allowances one method is the general depreciation system in sec_168 and the other method is the alternative_depreciation_system in sec_168 under either depreciation system the depreciation deduction is computed by using a prescribed depreciation method recovery_period and convention the alternative_depreciation_system in sec_168 must be used for the properties described in sec_168 under sec_168 any tax-exempt_use_property is subject_to the alternative_depreciation_system sec_168 defines tax-exempt_use_property in general as that portion of any tangible_property other than nonresidential_real_property leased to a tax-exempt_entity under sec_168 a tax-exempt_entity includes any foreign_person_or_entity under sec_168 a foreign_person_or_entity includes any person who is not a united_states_person sec_168 provides that depreciation allowances under the alternative_depreciation_system are determined by using the straight-line method_of_depreciation without regard to salvage_value the applicable convention under sec_168 and a recovery_period determined under the table in sec_168 sec_168 provides that in the case of any tax-exempt_use_property subject_to a lease the recovery_period used for purposes of sec_168 cannot be less than percent of the lease_term sec_168 provides that in the case of any property transferred in any transaction between members of the same affiliated_group during any taxable_year for which a consolidated_return is made by the group the transferee will be treated as the transferor for purposes of computing the depreciation deduction determined under sec_168 with respect to so much of the basis in the hands of the transferee as does not exceed the adjusted_basis in the hands of the transferor sec_1_168_h_-1 provides that property tainted property transferred directly or indirectly to a taxpayer by a related_person related_party as part of or in connection with a transaction in which the related_party receives tax-exempt_use_property related tax-exempt_use_property will if the tainted property is subject_to an allowance for depreciation be treated in the same manner as the related tax-exempt_use_property for purposes of determining the allowable_depreciation deduction under sec_167 the tainted property is depreciated by the taxpayer over the remaining recovery_period of and using the same depreciation method and convention as that of the related tax- exempt use property sec_1_168_h_-1 provides that sec_1_168_h_-1 does not apply to so much of the taxpayer’s basis in the tainted property as is subject_to sec_168 sec_1_168_h_-1 applies to transfers on or after date and prevents basis freshening using lke sec_1_168_h_-1 provides in part that common_law doctrines or other authorities may apply to recharacterize or alter the effects of the transactions described in the regulation further the preamble to the final regulations provides that no inference is postf-153657-01 intended by the effective dates in the regulations as to the treatment of any transaction under prior_law also the preamble states that the regulations do not preclude the application of common_law doctrines such as the substance over form or step transaction doctrines and other authorities to transactions described in the regulations eg as to whether a particular transaction should be characterized as a lease or a conditional sale for federal_income_tax purposes t d 1996_1_cb_22 in the instant case sec_168 applies because taxpayer and sub are members of an affiliated_group included in the parent’s consolidated tax returns through the date consequently of sub 1’s approximate dollar_figure basis in new plane approximately dollar_figure is subject_to sec_168 and therefore depreciated using the same recovery_period and depreciation method general depreciation system as taxpayer sub 1's remaining basis approximately dollar_figure is at issue as to sub 1's remaining basis in new plane we recognize that sec_1_168_h_-1 does not apply because taxpayer and sub traded the properties on date prior to date however the preamble and sec_1_168_h_-1 suggest that regardless of whether sec_1_168_h_-1 applies the service may apply common_law doctrines including the substance over form or step transaction doctrines or other authorities to achieve the same result as provided under sec_1_168_h_-1 namely to prevent taxpayers from avoiding the application of the alternative_depreciation_system through the use of a like-kind_exchange under sec_1031 we do not know of any authority precluding the service’s use of the business_purpose step transaction or substance over form doctrines to disallow a transaction designed to avoid the requirement of a longer depreciation period as provided under sec_168 therefore we believe the service may apply any and all of these doctrines if facts and circumstances warrant their application the business_purpose and step transaction doctrines used together constitute a stronger argument for recharacterizing the transaction in the present case first articulated in 293_us_465 the business_purpose doctrine generally holds that a transaction that is not entered into for a business_purpose cannot come within the provisions of the tax law intended to apply to business transactions this doctrine has been expanded since the gregory decision at this juncture we note a fair degree of consistency in the service’s actions designed to prevent taxpayers from circumventing the intent of congress in these transactions for example the service has also promulgated sec_1_1502-80 providing that sec_1031 does not apply to intercompany_transactions occurring in consolidated_return years beginning on or after date a date which is also subsequent to date postf-153657-01 to apply sham transactions set up in the business context and is used by the courts to deny intended tax benefits of transactions that have no business_purpose other than the creation of tax benefits 364_us_361 which denied deductions for interest incurred in a sham_transaction set up for tax_avoidance purposes the step_transaction_doctrine requires that the tax consequences of interrelated steps in an integrated transaction be determined by viewing the transaction as a whole rather than by viewing each step separately the step_transaction_doctrine requires the linking together of all interdependent steps with legal or business significance rather than taking them in isolation so that federal tax_liability may be based on a realistic view of the entire transaction 489_us_726 like the business_purpose doctrine it began as an interpretation of a detailed statutory provision but has been a successful cultural imperialist on which the sun never sets boris i bittker lawrence lokken federal taxation of income estates and gifts 3d ed thus the step_transaction_doctrine is generally applicable to any integrated transaction accomplished in a series of steps that serve no purpose other than to position the taxpayer to achieve a tax advantage in applying the step_transaction_doctrine the supreme court has stated that a given result at the end of a straight path is not made a different result because reached by following a devious path 302_us_609 in the present case the overall affect of taxpayer’s series of transactions is to achieve a result that is inconsistent with congressional intent to assign a slower recovery_period for tax-exempt_use_property the exchange was evidently motivated in order to achieve a high basis for the eight older aircraft that would be eligible for depreciation under the macrs system on appropriate facts transactions and steps to transactions may be ignored under the business_purpose and step transaction doctrines when necessary to prevent taxpayer from achieving tax_avoidance in contravention to legislative policy whether a transaction should be respected and given effect for tax purposes in the manner asserted by taxpayer depends on the facts and circumstances at issue in this case the fact that taxpayer declined to explain the business_purpose for engaging in the sale-leaseback-exchange transaction with fcorp and sub1 is relevant in determining whether there were credible non-tax reasons for engaging in the transaction furthermore a determination to not respect the transaction as a like-kind_exchange may be supported in part by taxpayer’s failure to report the transaction as required on form_8824 for the years at issue and sub 2's continued practice of depreciating the eight old aircraft for the two taxable years immediately after they were allegedly transferred in the exchange postf-153657-01 in other words a taxpayer’s failure to treat its transaction in a manner consistent with its own characterization may further justify the service in recasting the transaction in a manner consistent with law and practice even in the realm of like-kind_exchanges under sec_1031 for which form of the transaction is so important to assure its validity the step_transaction_doctrine is applied where necessary to prevent abuse and give effect to legislative policy this application was tested in 190_f3d_1165 n 10th cir in that case the taxpayers through related entities acquired and then exchanged five new ranch properties which were both nondepreciable and nondepletable for depletable oil_and_gas leases in the following steps first instead of true ranches a partnership entity owned by members of the true family directly acquiring the new ranchlands the taxpayers arranged for smokey oil company a related taxpayer-controlled corporation to purchase the parcels of real_property while the true ranches acquired the operating_assets of each ranch next smokey oil company transferred the ranchlands to the true oil company a related taxpayer-controlled general_partnership in exchange for selected productive oil_and_gas leases next true oil company distributed the newly acquired ranches to the individual family_member partners of true oil company as tenants in common lastly the partners then contributed their undivided interests in the ranches to true ranches by general warranty deed the taxpayers treated the exchange of the ranch lands for the mineral properties as a like- kind exchange for which gain realized is deferred under sec_1031 the distributions from and the contributions to the partnerships involved were also nontaxable events under sec_731 and sec_721 the true family believed that a taxpayer-favorable benefit had been achieved through this series of transactions as provided under sec_1031 the property received in the exchange gets the same basis of the property transferred under this basis switching regime smokey oil company received depletable oil_and_gas leases with the same basis it had in the nondepreciable ranchland it transferred in the exchange with true oil company thus permitting it to claim cost_depletion deductions on its and income_tax returns under sec_612 this constituted a substantial tax_benefit for the taxpayers on the other hand true oil company received the non-depreciable ranchland with the same zero basis that its exchanged oil_and_gas leases once had the taxpayers’ position with respect to these transactions was that they were entitled to reap the tax benefits of turning non-depreciable high basis ranchlands into cost depletable oil_and_gas assets while true ranches was left with the nondepreciable ranchlands which now had a low dollar_figure basis in looking at this series of transactions the 10th circuit discerned no economic or business_purpose for engaging in them other than the tax advantages derived the original acquisition of the ranchlands by the smokey oil company was suspect because it was not in the ranching business moreover smokey oil company did not postf-153657-01 even take or exploit the mineral_interest in the traded ranch properties similarly suspect was the exchange of the ranchlands for oil_and_gas leases with another oil company true oil company which also was in the oil business not the ranching business also there was no apparent business reason for separating the operating_assets from the ranchlands themselves when the property was first acquired by the true family companies the operating_assets and the ranchlands did not remain under separate ownership the only apparent reason for separating the operating_assets of the ranches from the real_estate was to make it possible to exchange real_property under sec_1031 without recognizing gain from boot the only evident reason for entering in the exchange of ranchlands for mineral properties was to switch the basis between the ranches and the oil properties and to thus regain the tax advantage of depletable basis sec_612 of the code the court in true observed that the step_transaction_doctrine like the sham_transaction doctrine was a corollary of the substance over form principle while the sham_transaction doctrine looks to business_purpose and economic effects other than tax benefits the step_transaction_doctrine is tailored to examine transactions involving a series of interrelated steps for which the taxpayer is seeking independent tax treatment for each step see f 3d pincite n the court in true concluded that the step_transaction_doctrine was the appropriate way to analyze the transaction the court noted that the taxpayers avoided what would have been a natural result of a direct purchase of ranchland by engaging in a series of steps designed from the outset to circumvent the tax code by effectively depleting the cost_basis of non-depletable ranchlands f 3d pincite the court therefore concluded that the indirect route used by the taxpayer to get the ranchlands into true ranches’ possession should be ignored the true ranches partnership was treated as if it had purchased the five ranches directly in first instance along with the operating_assets 399_f2d_652 5th cir is yet another case in which the court applied the step_transaction_doctrine this time to treat a transaction as an exchange under sec_1031 the taxpayer in that case wanted a higher basis for replacement_property to inflate depreciation_deductions therefore it reported the transaction as a series of sales which were followed by purchases the court however found that the transactions constituted exchanges based on the fact that the old relinquished_property was traded for new replacement_property through a common dealer notwithstanding the documentation of the transactions as sales purchases the court concluded with the following explanation of its decision taxation is transactional and not cuneiform our tax laws are not so supple that scraps of paper regardless of their calligraphy can transmute trade-ins into sales although redwing's transfers may have been paper postf-153657-01 therefore it is reasonable and consistent for the service to superimpose this same analysis and conclusion on the present case you may choose to treat taxpayer as if it had acquired new plane directly by purchase thus new plane in taxpayer’s hands would retain the same high cost_basis the eight older aircraft leased to domestic carriers retain a low basis because sec_1031 would be inapplicable the substance_over_form_doctrine which provides that the substance of the transaction rather than its form should determine its tax consequences offers an alternative argument in 435_us_561 the supreme court provided its analysis of how and when this doctrine should apply in a number of cases the court has refused to permit the transfer of formal legal_title to shift the incidence of taxation attributable to ownership of property where the transferor continues to retain significant control_over the property transferred e g 333_us_591 309_us_331 in applying this doctrine_of substance over form the court has looked to the objective economic realities of a transaction rather than to the particular form the parties employed the court has never regarded the simple expedient of drawing up papers 327_us_280 as controlling for tax purposes when the objective economic realities are to the contrary in the field of taxation administrators of the laws and the courts are concerned with substance and realities and formal written documents are not rigidly binding helvering v lazarus co u s pincite see also 356_us_260 324_us_331 nor is the parties' desire to achieve a particular tax result necessarily relevant 363_us_278 although the taxpayer in the above case frank lyon co prevailed the analysis provided by the court has a certain degree of relevance to the present case it is worthy of note for example that ownership of all exchange property is retained within the same control group of taxpayer thus it is arguable that under the sunnen and clifford rationale the transfer of legal_title by means of the exchange should not shift sales they were actual exchanges a taxpayer may engineer his transactions to minimize taxes but he cannot make a transaction appear to be what it is not documents record transactions but they do not always become the sole criteria for transactional analysis f 2d pincite postf-153657-01 the incidence of taxation attributable to ownership of new plane or the eight older aircraft it is well established that in determining the incidents of taxation the service should look through form and search out the substance of a transaction 264_f2d_161 5th cir 324_us_331 and 293_us_465 the fifth circuit has also characterized this principle as a basic concept of tax law particularly pertinent to cases involving a series of transactions designed and executed as parts of a unitary plan to achieve an intended result it further stated that such plans will be viewed as a whole regardless of whether the effect of doing so is imposition of or relief from taxation and that the series of closely related steps in such a plan are merely the means by which to carry out the plan and will not be separated 214_f2d_685 5th cir it is also proper to apply the substance over form principle to promote the effective administration of the tax policies of congress when ‘the true nature of the transaction is otherwise disguised by mere formalisms which exist solely to alter tax_liabilities 137_f3d_1231 10th cir development hazards and other considerations postf-153657-01 -13- postf-153657-01 heather c maloy associate chief_counsel income_tax accounting by george f wright assistant branch chief branch


internal_revenue_service department of the treasury washington dc index number number release date person to contact telephone number refer reply to cc dom p si - plr-117625-99 date date x a b d1 year dear this letter responds to your letter dated date submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 of year a and b the shareholders of x represent that they intended that x begin operations as an s_corporation beginning in year x’s first taxable_year x’s form ss-4 application_for employer_identification_number and x’s action of the shareholders of x without a meeting indicate that x intended to be an s_corporation however due to a miscommunication x’s attorney and accountant each thought that the other filed a form_2553 election by a small_business_corporation on behalf of x thus a form_2553 was not timely filed by x for year for year x filed form_1120s u s income_tax return for an s_corporation and x’s shareholders filed form_1040 u s individual_income_tax_return consistent with x being an s_corporation sec_1362 of the code provides that if -- a an mr william m apple election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x's first taxable_year accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x's year taxable_year a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x sincerely yours branch j thomas hines acting branch chief office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


id office uilc cca_2008102808290657 ---------------- number release date from ------------------ sent tuesday date am to ------------------ cc ------------------- subject re bonus_depreciation on yr indian_reservation_property year macrs life sec_1_168_k_-1 of the income_tax regulations provides that the recovery_period is determined in accordance with sec_168 for purposes of sec_168 thus the recovery periods assigned under sec_168 are not used for purposes of sec_168 -----------------


t c memo united_states tax_court william m hezel petitioner v commissioner of internal revenue respondent docket nos filed date william m hezel pro_se peter reilly and lloyd e mueller for respondent memorandum opinion dawson judge these cases were assigned to special_trial_judge robert n armen jr pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_183 the court agrees with unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable years in issue and rule references are to the tax_court rules_of_practice continued and adopts the opinion of the special_trial_judge which is set forth below opinion of the special_trial_judge armen special_trial_judge these cases are before the court on respondent's motions to dismiss for lack of jurisdiction and petitioner's motions to restrain assessment levy lien and collection as supplemented the principal issue for decision is whether the court has jurisdiction over the petitions filed in these cases background on date respondent issued a notice_of_deficiency to petitioner in which respondent determined deficiencies in and additions to petitioner's federal income taxes as follows additions to tax_year deficiency sec_6651 sec_6654 dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number also on date respondent issued a separate notice_of_deficiency to petitioner in which respondent determined a deficiency in petitioner's federal_income_tax for in the amount of dollar_figure and additions to tax under sec_6651 and sec_6654 in the amounts of dollar_figure and dollar_figure respectively both notices of deficiency were addressed to petitioner pincite knight continued and procedure arnold rd memphis tennessee the knight arnold rd address by letter dated date petitioner mailed the notices of deficiency back to respondent marked refusal for cause without dishonor u c c petitioner's date letter to which an affidavit and declaration of truth was appended contained various tax_protester arguments on date petitioner filed two separate petitions with the court contesting the determinations made by respondent in the above-described notices of deficiency the petitions arrived at the court in an envelope bearing a u s postal service postmark date of date petitioner indicated on each of the petitions that his address was the knight arnold rd address on date petitioner filed a motion to restrain assessment levy lien and collection in each docket attached to petitioner's motions are copies of a notice_of_levy and a notice_of_federal_tax_lien these documents indicate that respondent is attempting to collect the deficiencies and the additions to tax that she determined are owing from petitioner for the taxable years through petitioner contends that respondent's collection efforts are improper because petitioner filed petitions with the court contesting respondent's determinations for the taxable years through on date petitioner supplemented his motions on date respondent filed a motion to dismiss for lack of jurisdiction in each docket in her motions respondent asserts that the court lacks jurisdiction because of petitioner's failure_to_file his petitions within the 90-day period prescribed in sec_6213 in responses filed to petitioner's motions to restrain assessment and collection respondent contends that the court lacks jurisdiction to grant such relief in these cases in a statement filed date petitioner contends that the notices of deficiency that were mailed to him on date are null and void because respondent did not respond to his letter dated date discussion this court's jurisdiction to redetermine a deficiency depends upon the issuance of a valid notice_of_deficiency and a timely filed petition rule a c 93_tc_22 90_tc_142 sec_6212 expressly authorizes the commissioner after determining a deficiency to send a notice_of_deficiency to the taxpayer by certified or registered mail it is sufficient for jurisdictional purposes if the commissioner mails the notice_of_deficiency to the taxpayer at the taxpayer's last_known_address sec_6212 81_tc_42 the taxpayer in turn ha sec_90 days or days if the notice is addressed to a person outside of the united_states from the date that the notice_of_deficiency is mailed to file a petition in this court for a redetermination of the deficiency sec_6213 there is no dispute that respondent mailed the notices of deficiency to petitioner at his last_known_address on date further petitioner admits that he received the notices of deficiency and in early date returned them to respondent marked refusal for cause without dishonor u c c petitioner did not file his petitions for redetermination with the court until date--some months after the notices of deficiency were mailed thus it is evident that petitioner did not timely file his petitions for redetermination consequently we will dismiss these cases for lack of jurisdiction on the ground that petitioner failed to file his petitions within the 90-day time period prescribed in sec_6213 although petitioner cannot pursue his case in this court he is not without a remedy in short petitioner may pay the tax file a claim_for_refund with the internal_revenue_service and if the claim is denied sue for a refund in the federal district_court or the u s court of federal claims see 55_tc_138 as a final matter we turn to petitioner's motions to restrain assessment and collection sec_6213 provides that the tax_court may enjoin assessment or collection if the commissioner is attempting to assess or collect amounts that have been placed in dispute in a timely-filed petition for redetermination 99_tc_466 96_tc_707 the record reflects that the amounts that respondent has assessed and is attempting to collect relate to petitioner's tax_liability for as a consequence of our holding that we lack jurisdiction over those years it follows that we lack jurisdiction to enjoin assessment and collection powell v commissioner supra accordingly we will deny petitioner's motions for lack of jurisdiction to reflect the foregoing appropirate orders granting respondent's motions denying petitioner's motions and dismissing these cases for lack of jurisdiction will be entered


internal_revenue_service number release date index number --------------------- -------------------------------------- --------------------------------------- re ---------------------------------------------- --------------------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------- id no ---------------- telephone number -------------------- refer reply to cc psi plr-104451-15 date date legend ------------------------------------------------ --------------------------- -------------------------------------------------------------- ----------------------- --------------------- -------------------- ------------------------------- ------------- -------------------------- ------------ -------------------------- -------------------------------- ------- ------------------------ --------------------------------------------------------------------------------- taxpayer date trust son sibling sibling foundation state date state date trust x date state court ---------------------------------------------------------------------------------------------------------- trustee state statute state statute state statute state statute state statute state statute state statute year year ----------------------- -------------------------------------------- ----------------------------------------- ----------------------------------------- -------------------------------------------- ---------------------------------------------------- ------------------------------------------------ ---------------------------------------------------- ------ ------ plr-104451-15 dear --------------- this letter responds to your authorized representative’s letter dated date requesting a ruling on the gift_tax consequences of the proposed disclaimer to be executed by taxpayer facts the facts submitted and representations made are as follows on date trust an irrevocable_trust was established for the benefit of son pursuant to article i of trust the trustee shall distribute the net_income of the trust for that year to son for his life provided that during any period or periods of any time son is legally married his spouse is to receive one-half of the income son would otherwise be entitled if son dies leaving children distribution of income is to be made to such children as are living on each distribution date share and share alike provided however that if son leaves a surviving_spouse then spouse will receive all the distributable_net_income for spouse’s life as falls within the term of trust pursuant to article ii if son dies leaving surviving him a spouse who was not in being at the date of these presents or children trust shall terminate upon the death of the survivor of spouse children sibling and sibling or the expiration of twenty-one years after the death of the survivor of son sibling and sibling whichever shall first occur if son leaves no spouse or children surviving trust shall terminate upon the death of the survivor of sibling and sibling article iii provides that upon termination of trust the trustee shall deliver the entire corpus and undistributed_income to foundation trust is being administered in state taxpayer and son were married on date in state taxpayer was not in being on date son has adult children from a previous marriage and one surviving sibling sibling on date prior to his marriage to taxpayer son established an irrevocable_trust trust for the benefit of taxpayer article b of trust provides that during the lifetime of taxpayer as long as taxpayer is cohabitating with son taxpayer is to receive dollar_figurex each month adjusted monthly based upon an index which is to be charged first to income then to principal until the first distribution of principal at age --- in addition after son’s death and continuing until the first distribution of principal at age --- --- the trustee shall pay for taxpayer’s direct medical and educational expenses the trustee may in the trustee’s sole and absolute discretion make distributions of principal to taxpayer before or in addition to the principal distributions under article b iv and if the trustee believes there are valid and supportable reasons plr-104451-15 for the distribution and that son’s goal of making monthly distributions until taxpayer attains the age of --- will not be thwarted article b iv provides that upon taxpayer attaining the age of --- years one-third of trust shall be distributed to taxpayer one-half of the remainder of trust shall be distributed when taxpayer attains the age of --- years and the balance shall be distributed to taxpayer at the age of --- years article b v provides that if taxpayer and son marry such that taxpayer is entitled to receive and does receive distributions from trust and taxpayer does not disclaim rights under trust taxpayer’s rights under trust shall terminate and assets of trust shall be distributed or held in trust as set forth in section of trust article provides that if at the death of son son and taxpayer are cohabiting the trustee shall hold and administer the balance of the trust estate for the benefit of taxpayer and distributions shall be made as set forth in article b if at the death of son son and taxpayer are not cohabiting or taxpayer is deceased the trustee shall distribute the trust to the beneficiaries listed in article article provides that if upon the death of taxpayer the trust has not been distributed in full or if taxpayer ceases to cohabitate with son whichever occurs earlier the trustee shall divide the trust estate into equal shares one share for each named grandchild of son as provided in article as are then living or all for the survivor s of them in an affidavit taxpayer attests that taxpayer did not participate in the establishment of trust had no control_over the provisions son made for taxpayer’s benefit or the conditions upon which taxpayer was to receive or not receive those benefits taxpayer further attests that taxpayer had no knowledge of trust until after it was established taxpayer intends to execute and deliver to the trustee of trust a disclaimer to irrevocably disclaim taxpayer’s entire beneficial_interest in trust in the proposed disclaimer taxpayer states that none of the trust property has been distributed to taxpayer taxpayer has not received or accepted any benefit or payment from trust and taxpayer has not accepted any consideration in return for making this disclaimer taxpayer states that taxpayer irrevocably disclaims taxpayer’s entire beneficial_interest in trust the disclaimer is intended to be effective under state and state law based upon article of trust after taxpayer disclaims taxpayer’s entire beneficial_interest in trust all the net_income of trust will be distributed to son for his life furthermore if son dies leaving children distribution of income shall be made to such children as are living on each distribution date share and share alike the disclaimer will be executed within nine months of date taxpayer’s and son’s marriage date plr-104451-15 on date by petition in state court the trustee of trust trustee sought an order to deposit fifty percent of the income of trust ie the amount to be distributed to son’s spouse under article of trust the funds with state court state court denied the request instead ordering trustee to not distribute and continue to hold this amount in trust until further order of the court accordingly as of the date of this ruling_request taxpayer has not received any distributions from trust taxpayer requests the following rulings taxpayer’s disclaimer of taxpayer’s entire beneficial_interest in trust within nine months following the marriage date will be deemed to be made within a reasonable_time after knowledge of the existence of the transfer for purposes of sec_25_2511-1 of the gift_tax regulations taxpayer’s disclaimer of taxpayer’s entire beneficial_interest in trust within nine months following their marriage will not constitute a taxable gift under sec_2501 of the internal_revenue_code the provisions in trust terminating taxpayer’s beneficial_interest in such trust in the event taxpayer does not disclaim taxpayer’s interest in trust do not constitute consideration in return for making the disclaimer or otherwise constitute the acceptance of ownership of the interest in trust law and analysis trust is administered in state under state statute to be effective a disclaimer must be in writing declare the writing as a disclaimer describe the interest disclaimed be signed by the person making the disclaimer and acknowledged in the manner provided for deeds of real_estate to be recorded in state state statute provides that the disclaimer must be delivered to the trustee serving when the disclaimer is delivered under state statute and state statute a disclaimer may be made at any time unless the disclaimant accepts the portion of the interest sought to be disclaimed the disclaimant voluntarily assigns conveys encumbers pledges or transfers the portion of the interest sought to be disclaimed or contracts to do so the portion of the interest sought to be disclaimed is sold pursuant to a judicial sale or the disclaimant is insolvent when the disclaimer becomes irrevocable taxpayer and son are residents of state under state statute a disclaimer is effective when filed within a reasonable_time after the person able to disclaim acquires knowledge of the interest in the case of an interest created by a living_trust a disclaimer is conclusively presumed to have been filed within a reasonable_time if it is filed within nine months after whichever of the following times occurs latest the time plr-104451-15 of the creation of the trust the time the first knowledge of the interest is acquired by the person able to disclaim and the time the interest becomes indefeasibly vested state statute provides that the disclaimer must be in writing signed by the disclaimant identify the creator of the interest describe the interest to be disclaimed and state the disclaimer and the extent of the disclaimer state statute provides that a disclaimer must be filed with the trustee or person responsible for distributing the interest to the beneficiary state statute provides that a disclaimer may not be made after the beneficiary has accepted the interest sought to be disclaimed sec_2501 imposes a tax for each calendar_year on the transfer of property by gift by any individual resident or nonresident sec_2511 provides that the gift_tax imposed by sec_2501 shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-1 provides in relevant part that in the case of transfers creating an interest in the person disclaiming made before date where the law governing the administration of the decedent’s estate gives a beneficiary a right completely and unqualifiedly to refuse to accept ownership of property transferred from a decedent a refusal to accept ownership does not constitute the making of a gift if the refusal is made within a reasonable_time after knowledge of the existence of the transfer is unequivocal is effective under local law and is made before the disclaimant has accepted the property compare sec_2518 and sec_25_2518-1 through providing rules for determining whether a disclaimer is a qualified_disclaimer effective for estate and gift_tax purposes in the case of the disclaimer of an interest in property that is created in the beneficiary disclaiming by a transfer made after date as noted above under sec_25_2511-1 if the interest to be disclaimed was created before date the disclaimant must disclaim the interest in the property within a reasonable_time after obtaining knowledge of the existence of the transfer creating the interest to be disclaimed rather than within a reasonable_time after the distribution or vesting of the interest see 455_us_305 in this case taxpayer had knowledge of trust in year however taxpayer was not a beneficiary of trust until taxpayer became son’s spouse on date in year taxpayer had no interest in trust until son married taxpayer taxpayer will execute a disclaimer within nine months after taxpayer’s and son’s marriage the date taxpayer became son’s spouse accordingly under these circumstances the proposed disclaimer will be considered to be made within the reasonable_time prescribed in sec_25_2511-1 plr-104451-15 under sec_25_2511-1 the disclaimer must be unequivocal revrul_76_156 1976_1_cb_292 which considers the application of sec_25_2511-1 concludes that a disclaimer is unequivocal if the disclaimant’s act of refusal is unambiguous in its consequences that is the disclaimant must unqualifiedly refuse to accept ownership of the property for example a disclaimer is unequivocal if the disclaimed property must pass as otherwise provided in the instrument and not pursuant to the direction of the disclaimant see also anderson v commissioner tcmemo_1988_423 in this case the disclaimed interest will pass to other beneficiaries as provided in trust and not pursuant to any direction on the part of taxpayer under sec_25_2511-1 the disclaimers must be effective under local law under state law where taxpayer and son reside taxpayer’s disclaimer of taxpayer’s entire_interest in trust within nine months of marrying son is conclusively presumed to have been filed within a reasonable_time state statute under state law where trust is being administered taxpayer may disclaim at any time unless the taxpayer accepts the portion of the interest sought to be disclaimed or voluntarily assigns conveys encumbers pledges or transfers the interest sought to be disclaimed state statute and state statute as required under both state and state law a disclaimer is invalid if it is made after taxpayer has accepted the interest sought to be disclaimed in this case state court has ordered the trustee of trust to not distribute and continue to hold the funds of trust in trust until further order of the court consequently as of the date of this ruling_request taxpayer has not received any distributions from trust accordingly if taxpayer satisfies the procedural requirements prescribed under the laws of state and state the disclaimer will be valid under local law finally under sec_25_2511-1 the disclaimer must be made before the disclaimant has accepted the property for purposes of sec_25_2511-1 the disclaimant has accepted the benefits of the property if the disclaimant accepts consideration in return for the disclaimer see anderson v commissioner tcmemo_1988_423 to constitute consideration the promise must have been offered by one party and accepted by the other as one element of the contract monroe v commissioner 124_f3d_699 5th cir in monroe the court considered whether the decision to disclaim was part of a mutually-bargained-for consideration or a mere unenforceable hope of future benefit monroe f 3d pincite see also lute v united_states 19_fsupp2d_1047 d neb in this case taxpayer has not accepted any benefits of the disclaimed property ie the property in trust it is represented that taxpayer has not received any distributions from trust further state court ordered that trustee of trust not distribute any funds from trust to taxpayer and instead ordered trustee to hold the funds in trust until further order of the court further taxpayer has not and will not receive any consideration in return for the disclaimer in order for taxpayer’s interest in plr-104451-15 trust to be treated as consideration in return for the disclaimer taxpayer and spouse would have to have entered into a mutual bargain or contract agreement in this case article b v provides that if taxpayer and son marry such that taxpayer is entitled to receive and does receive distributions from trust and taxpayer does not disclaim rights under trust taxpayer’s rights under trust shall terminate and assets of trust shall be distributed or held in trust as set forth in section of trust it is represented and taxpayer attests that taxpayer did not participate in the establishment of trust had no control_over the provisions son made for taxpayer’s benefit or the conditions upon which taxpayer was to receive or not receive those benefits taxpayer further attests that taxpayer had no knowledge of trust until after it was established accordingly taxpayer and son did not enter into any bargain regarding taxpayer’s interest in trust and the proposed disclaimer therefore taxpayer did not accept any consideration in return for making the disclaimer accordingly based on the facts submitted and representations made we conclude that taxpayer’s disclaimer of taxpayer’s entire beneficial_interest in trust within nine months following the marriage date will be deemed to be made within a reasonable_time after knowledge of the existence of the transfer for purposes of sec_25_2511-1 moreover we conclude that taxpayer’s disclaimer of taxpayer’s entire beneficial_interest in trust within nine months following the marriage will not constitute a taxable gift under sec_2501 further we conclude that the provisions in trust terminating taxpayer’s beneficial_interest in such trust in the event taxpayer does not disclaim taxpayer’s interest in trust do not constitute consideration in return for making the disclaimer or otherwise constitute the acceptance of ownership of the interest in trust 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 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination plr-104451-15 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs special industries enclosures cc