t c memo united_states tax_court shawn michael lewis petitioner v commissioner of internal revenue respondent docket no 1540-10l filed date shawn michael lewis pro_se miriam c dillard for respondent memorandum findings_of_fact and opinion paris judge this case arises from a petition for judicial review filed in response to a notice_of_determination concerning collection action s under sec_6320 and or the only issue for decision is whether respondent may proceed with the proposed levy action to collect petitioner’s income_tax liabilities for tax years and as well as trust fund recovery penalty assessments for the first and second quarters of tax_year findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received in evidence are incorporated herein by this reference petitioner resided in florida when the petition was filed on date petitioner filed a voluntary chapter bankruptcy petition respondent filed a proof_of_claim in the bankruptcy case on date and an amended proof_of_claim on date for petitioner’s income_tax liabilities for tax years and and for petitioner’s trust fund recovery penalty assessments for the first and second quarters of tax_year on or about date petitioner filed individual federal_income_tax returns for tax years and on date respondent filed a second amended proof_of_claim revising the amounts claimed in light of petitioner’s recently filed tax returns for tax years and on july 1unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as amended and in effect at all relevant times petitioner filed an objection to respondent’s second amended proof_of_claim in the bankruptcy proceeding on date the bankruptcy court confirmed petitioner’s chapter plan over respondent’s objection on date respondent filed a response to petitioner’s objection to respondent’s second amended proof_of_claim an evidentiary hearing on the objection was scheduled for date this hearing was continued to date and was continued again to date at the date hearing petitioner withdrew his objection to respondent’s second amended proof_of_claim following the bankruptcy proceeding respondent continued to examine petitioner’s income_tax returns for tax years and as a result of the ongoing examination petitioner and respondent agreed to a partial abatement of tax and additions to tax for tax_year and to additional assessments of tax and additions to tax for tax years and petitioner signed form_4549 income_tax examination changes agreeing to these changes the abatement for tax_year 2there does not appear to be any actual documentary_evidence in the record of petitioner’s signing form_4549 there is neither a copy of the signed form_4549 nor a recording entry in respondent’s transcript showing that one was signed however petitioner does not dispute that he assented to the changes and testified at trial that he likely signed form_4549 and the additional assessments for tax years and were made on date on date respondent sent petitioner letter final notice notice_of_intent_to_levy and your right to a hearing for the tax periods at issue on date petitioner requested a collection_due_process cdp hearing for the tax periods at issue in the letter attached to his cdp hearing request petitioner also requested a face-to-face cdp hearing petitioner’s cdp case was first assigned to settlement officer d varnerin so varnerin in the internal_revenue_service irs office of appeals in plantation florida plantation office on date the plantation office sent petitioner a letter which listed so varnerin as the person to contact on date so varnerin and petitioner discussed the case in a telephone conversation in this conversation petitioner reiterated his request for a face-to-face cdp hearing so varnerin informed petitioner that he was not currently in compliance with his federal_income_tax filing_requirements for tax years and and that he had not made estimated_tax payments for tax years and petitioner told so varnerin that he had indeed filed his tax_return and that he was not required to file returns or pay estimated_taxes for and because he was unemployed and was receiving government assistance so varnerin advised petitioner that if he could provide verification of his compliance so varnerin would transfer the case to the jacksonville florida office of appeals jacksonville office for a face-to-face cdp hearing on date petitioner sent so varnerin a letter formally requesting that the case be transferred to the jacksonville office for a face-to-face cdp hearing attached to this letter were the documents required to verify petitioner’s compliance so varnerin inspected the documents and verified that petitioner was in compliance so varnerin then transferred petitioner’s cdp case to the jacksonville office at the jacksonville office petitioner’s cdp case was assigned to settlement officer j breazeale so breazeale on date so breazeale sent a letter informing petitioner that he had been assigned to petitioner’s case the letter further requested that petitioner contact so breazeale within days of the date of the letter to schedule a cdp hearing the letter also explained that for collection alternatives to be considered petitioner should submit a proposal to resolve the outstanding balance and a completed form 433-a collection information statement for wage earners and self-employed individuals along with supporting documents after receiving the letter dated date petitioner called so breazeale and left him a voice mail message in his message petitioner again stated his desire to be granted a face-to-face cdp hearing on date so breazeale returned petitioner’s call in this phone conversation petitioner restated his request for a face-to-face cdp hearing petitioner also reasserted his contention that he was under the protection of a chapter bankruptcy plan and restated his desire to offer collection alternatives so breazeale advised petitioner that to be considered for collection alternatives he would have to submit the forms and documents listed in the letter dated date petitioner agreed to provide the documentation and asked whether he could have until date to mail the documents so breazeale agreed this phone call lasted approximately minutes shortly following the date phone call petitioner mailed an assortment of financial documents to so breazeale so breazeale claims to have never received these documents petitioner and so breazeale had no further communication after this time until date when so breazeale issued to petitioner the notice_of_determination sustaining the proposed levy on january 3petitioner testified at trial that he did not include a form 433-a in this package of documents petitioner filed a petition with this court for review of so breazeale’s determination opinion under sec_6331 if a person liable to pay any_tax neglects or refuses to pay the same within days after notice_and_demand it shall be lawful for the secretary to collect such tax by levy upon all property and rights to property belonging to such person a taxpayer may appeal the proposed levy to the irs under sec_6330 by requesting an administrative hearing if an adverse determination is reached the taxpayer is afforded the opportunity for judicial review of the determination in the tax_court sec_6330 here petitioner seeks review of respondent’s determination that the proposed levy be sustained i standard of review where the validity of the underlying tax_liability is properly at issue the court will review the matter de novo 115_tc_35 where the underlying tax_liability is not properly at issue the court will review the commissioner’s administrative determination for abuse_of_discretion 114_tc_604 114_tc_176 an abuse_of_discretion is any_action that is arbitrary capricious or without sound basis in law or fact 112_tc_19 the underlying tax_liability may be properly at issue at a collection_due_process_hearing only when the taxpayer has not received a notice_of_deficiency or has not otherwise had an opportunity to challenge the liability sec_6330 where a taxpayer has filed a bankruptcy action and the commissioner has submitted a proof_of_claim for unpaid federal tax_liabilities the taxpayer has had the opportunity to challenge the underlying tax_liability for the purposes of sec_6330 see 124_tc_69 additionally a taxpayer who consents to additional assessments by signing form_4549 is also deemed to have had the opportunity to dispute his or her tax_liability for the years included in the form_4549 117_tc_324 respondent submitted a proof_of_claim in petitioner’s bankruptcy action on date an amended proof_of_claim on date and a second amended proof_of_claim on date petitioner’s chapter bankruptcy plan was confirmed on date after the confirmation of his bankruptcy plan petitioner signed form_4549 agreeing to a partial abatement of tax and additions to tax for tax_year and to additional assessments of tax and additions to tax for tax years and since petitioner had the opportunity to dispute the underlying liabilities for the tax years at issue in bankruptcy court and has waived the opportunity to dispute the adjustments made thereafter his underlying tax_liabilities are not properly at issue in this case accordingly the applicable standard of review is for abuse_of_discretion ii abuse_of_discretion sec_6330 requires the commissioner to give the taxpayer notice of a proposed levy and notice of the right to a fair hearing before an impartial officer of the irs office of appeals sec_6330 and b at the hearing the taxpayer may raise appropriate spousal defenses challenge the appropriateness of collection actions and offer collection alternatives sec_6330 additionally as discussed supra the taxpayer may challenge the existence or amount of the underlying tax_liability only if the taxpayer did not receive a notice_of_deficiency or did not otherwise have an opportunity to challenge the underlying liability sec_6330 at the hearing generally the appeals officer must consider the above-stated issues raised by the taxpayer verify that the requirements of applicable law and administrative procedure have been met and consider whether any proposed collection action balances the need for efficient collection_of_taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary sec_6330 underlying liability and other sec_6330 issues must be raised at the appeals hearing to be properly raised before this court 129_tc_107 petitioner’s cdp hearing request raised the following issues with respect to the review of his case that petitioner was willing to offer collection alternatives that the amounts respondent claimed were inaccurate in that they did not reflect amounts paid to respondent through a liquidating_trust in bankruptcy that petitioner was under the protection of his confirmed chapter bankruptcy plan that the requirements of applicable law and administrative procedure had not been met and that sustaining the proposed levy would place undue_hardship on petitioner and would be more intrusive than necessary the request went on to offer background on petitioner’s underlying bankruptcy action and outlined his current financial difficulties additionally petitioner’s request noted his desire to have a face-to-face cdp hearing in light of the complex nature of his case after over a year without a response petitioner was finally notified that his case had been assigned to so varnerin in the plantation office so varnerin upon verification of compliance with applicable filing and estimated_tax requirements transferred petitioner’s case to the jacksonville office so that he could be afforded a face-to-face cdp hearing the case was subsequently reassigned to so breazeale so breazeale did not afford petitioner a face-to-face cdp hearing as requested so breazeale also did not afford petitioner a scheduled telephone cdp hearing it seems that the only communication between petitioner and so breazeale from the notification letter on date to the issuance of the notice_of_determination on date was the phone call on date which lasted approximately minutes the expressed purpose of this phone call was to discuss petitioner’s request for a face-to-face cdp hearing during the call petitioner reasserted his desire for a face-to-face conference on the basis of the complexity of his bankruptcy issues asked for a total of his liabilities and restated his desire to explore collection alternatives so breazeale advised petitioner that he would have to submit the financial documentation requested in his previous letter in order to be eligible for collection alternatives at no point did so breazeale indicate that the phone call would constitute petitioner’s cdp hearing so breazeale had no further contact with petitioner until the issuance of the notice_of_determination on date so breazeale’s determination to sustain the proposed levy was based solely on petitioner’s failure to provide him with the requested documentation necessary to consider collection alternatives petitioner has testified that he mailed financial documentation4 to so breazeale timely respondent claims that those documents were never received regardless of this dispute so breazeale made his determination without following up with petitioner after the date phone conversation similarly so breazeale made his determination without reviewing any of the issues that petitioner raised with respect to his chapter bankruptcy plan or the alleged default on that plan all of these determinations were made without the benefit of a scheduled cdp hearing in any format in reviewing the administrative record it is difficult to conclude that so breazeale dedicated much effort to a meaningful review of the issues presented by petitioner’s cdp hearing request respondent does a commendable job of attempting to argue that each individual defect in so breazeale’s administrative review can be rebutted to show that said defect was not an abuse_of_discretion however respondent’s argument seeks to quilt together a string of exceptions to account for so breazeale’ sec_4petitioner testified at trial that he did not mail in form 433-a but did send an assortment of other financial records and the records relating to his ch bankruptcy proceeding deviation from what one would consider a thorough review of petitioner’s case while each individual defect on its own may be insufficient to support a holding that respondent abused his discretion the cumulative effect of such defects demonstrates that so breazeale acted both arbitrarily and capriciously in rendering his determination accordingly the court holds that respondent abused his discretion in sustaining the proposed levy the court has considered all of the arguments made by the parties and to the extent they are not addressed herein they are considered unnecessary moot irrelevant or without merit to reflect the foregoing an appropriate decision will be entered


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 b07 plr-135491-06 date date -------------------------- ----------------------------- -------------------------------------------------------------------------------------------- ----------------------- -------------------------------------------------------------------------------------------- ----------------------- -------------------------------------------------------------------------------------------- ----------------------- ------------------------ -------------------------- date child grandchild ---------------------------------- grandchild ------------------------ grandchild ---------------------------- trust -------------------------------------------------------------------------------------------- ----------------------- -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- ----------------------- ----------------------- -------------------------------------------------------------------------------------------- ----------------------- -------------------------- -------------------------- ------------------------- ------------------------- ------ -------------------------------------------- legend grantor grantor trust trust trust trust trust trust date date date date state statute this letter responds to your letter dated date and subsequent grantor created trust trust and trust on date trust is for the grantor created trust trust and trust on date trust is for the grantor died on date child died on date child’s spouse and all three grantor created trust on date trust became irrevocable on the death of plr-135491-06 dear ---------- correspondence submitted on behalf of certain trusts requesting rulings under sec_61 sec_1001 sec_1015 sec_1223 and sec_2601 of the internal_revenue_code benefit of child child’s spouse and grandchild trust is for the benefit of child child’s spouse and grandchild trust is for the benefit of child child’s spouse and grandchild benefit of child child’s spouse and grandchild trust is for the benefit of child child’s spouse and grandchild trust is for the benefit of child child’s spouse and grandchild grantor on date trust is for the benefit of child and his family grandchildren are still living grandchild is married and has two children grandchild is married and has one child grandchild is married and has five children date date and date are before date each trust is administered for tax purposes as a separate trust and files tax returns under its distinct taxpayer_identification_number for convenience trust trust and trust pool their assets in one investment account and share equally in income expenses gains and losses similarly trust trust and trust pool their assets in one investment account and share equally in income expenses gain and losses the terms of trust trust trust trust trust and trust are identical trust trust trust trust trust and trust continue until the death of child child’s spouse and the grandchild for whom the trust is held each grandchild has a testamentary limited_power_of_appointment to appoint to a class consisting of his or her spouse and issue the last surviving original individual trustee is deceased the trust instruments direct that upon the death of the last surviving original individual trustee the adult beneficiaries of the trust shall appoint a successor corporate trustee who shall serve with the remaining individual trustees as the remaining individual trustees die or resign the trust instruments provide that they are not to be replaced so that the corporate trustee will become the sole trustee article second sec_1 of each trust instrument provides in relevant part that the trustees may transfer convey and dispose_of the property at any time article second sec_3 provides the trustees have the power and authority to make execute and deliver any and all deeds assignments article second paragraph a of the trust trust agreement provides in collectively trust trust trust trust trust trust and trust plr-135491-06 conveyances and such other instruments as may be necessary or proper to carry out the powers herein granted to them all of which may be exercised by them without the order or approval of any court relevant part that the trust will be held for the benefit of child during his life upon child’s death paragraph c provides that the remaining trust shall be held for the benefit of child’s spouse upon the death of child’s spouse the trust shall be divided into separate trusts one each for the benefit of grandchild grandchild and grandchild or the living children of any deceased grandchild article fifth paragraph provides the trustees have the power and authority to make execute and deliver any and all deeds assignments conveyances and such other instruments as may be necessary or proper to carry out the powers herein granted to them all of which may be exercised by them without the order or approval of any court constitute the original trusts the trustees will create trust a_trust b_trust c and trust d collectively the new trusts under the authority of state statute and the terms of the original trusts trust a will be held for the primary benefit of grandchild and will consist of the merged assets of trust and trust trust b will be held for the primary benefit of grandchild and will consist of the merged assets of trust and trust trust c will be held for the primary benefit of grandchild and will consist of the merged assets of trust and trust trust d will be held for the benefit of child’s spouse grandchild grandchild and grandchild and will consist of the assets of trust dispositive provisions of the new trusts will be identical in all respects to the existing provisions in the original trusts accordingly the new trusts will have the same vesting date as the original trusts the trustee administrative provisions in each of the new trusts will be amended to permit the surviving trustees to continue to appoint individuals as successor trustees whenever there is a vacancy in addition the new trusts will allow the trustees to calculate individual trustees’ fees under an external standard that sets a ceiling on trustee compensation the terms of the new trusts will require the new trustees may not be related or subordinate to the family of child or child’s spouse no beneficiary or potential beneficiary of the new trusts may serve as a trustee trusts and the merger of trust assets the original trusts were irrevocable on date and therefore exempt from the gst tax the proposed transactions will not result in a constructive_addition and will not cause the new trusts to be subject_to the gst tax the proposed transactions will not cause the original trusts the new trusts or any beneficiary to recognize gain_or_loss under sec_61 or sec_1001 except for the deletion of child who is deceased and the trustee provisions the you have requested the following rulings with respect to the creation of the new sec_26_2601-1 provides that except as provided in sec_2601 imposes a tax on every generation-skipping_transfer sec_2611 defines the term ageneration-skipping transfer to include a plr-135491-06 each asset transferred to a new trust will have the same basis and holding_period as it had in the original trust ruling sec_1 and taxable_distribution taxable_termination and a direct_skip under b a of the tax_reform_act_of_1986 and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the gst tax provisions do not apply to any gst under a_trust as defined in sec_2652 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 sec_26_2601-1 or c any trust in existence on date is considered an irrevocable_trust except as provided in sec_26_2601-1 or c which relate to property includible in a grantor s gross_estate under sec_2038 and sec_2042 in the present case the original trusts are considered to have been irrevocable on date because neither sec_2038 nor sec_2042 applies judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 or hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status the rules contained in sec_26_2601-1 are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst 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 sec_26_2601-1 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 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 the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided in the original trust furthermore a modification that is administrative in nature that only sec_26_2601-1 provides that a modification of the governing sec_26_2601-1 provides rules for determining when a modification in this case the original trusts are generation-skipping trusts because they plr-135491-06 indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered a shift in a beneficial_interest in a_trust provide for distributions to more than one generation of beneficiaries below the grantor s generation date date and date are prior to date and the original trusts were irrevocable on date the original trusts therefore are exempt from the gst tax pursuant to sec_26_2601-1 the proposed creation of the new trusts and merger of trust assets will result in four new trusts because the terms of the new trusts will be the same as the terms of the original trusts the proposed creation of the new trusts and the allocation of assets among the new trusts do not shift a beneficial_interest 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 in addition the proposed transaction does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided in the original trust based on the facts submitted and representations made we conclude that the proposed creation of the new trusts and merger of the original trust assets will not affect the original trusts status as exempt from the gst tax as a result the proposed transaction will not constitute a constructive_addition and will not cause a distribution from or termination of any interest in the original trusts or any of the new trusts to be subject_to the gst tax ruling sec_3 and in property 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 ' c except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under ' on the sale_or_exchange of property shall be recognized sec_1015 provides that if property is acquired by a transfer in trust other than a transfer in trust by a gift bequest or devise the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on such transfer 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_1001 provides that the gain from the sale_or_other_disposition of sec_1_1015-2 provides that in the case of property acquired after plr-135491-06 date by transfer in trust other than by transfer in trust by gift bequest or devise the basis_of_property so acquired is the same as it would be in the hands of the grantor increased by the amount of gain or decreased in the amount of loss recognized to the grantor on the transfer under the law applicable to the year in which the transfer was made if the taxpayer acquired the property by transfer in trust this basis applies whether the property be in the hands of the trustee or the beneficiary and whether acquired prior to termination of the trust and distribution of the property or thereafter 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 such property was held by any other person if under chapter of subtitle a such 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 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 in 499_us_554 the supreme court of the united_states ruled on the elements necessary to determine that under sec_1001 a sale_or_exchange resulting in realization of gain_or_loss had occurred the court held that realization under sec_1001 required a sale exchange or other_disposition and in the case of an exchange the receipt of property that was materially different from the property disposed of by the trustees where the merger or consolidation is in the best interests of the beneficiaries moreover the terms of the trust instruments establishing the original trusts authorize the trustees to execute the necessary documents in order to carry out the powers granted the trustees with respect to the transfer of assets from the trusts by virtue of the trust powers granted to the trustees under the state statute and the original trust instruments the trustees of the original trusts are authorized to merge the assets into the new trusts and to transfer trust assets from the original trusts to the new trusts consequently the beneficiaries of the new trusts are acquiring their interests in the new trusts by reason of the exercise of the trustees’ existing authority under state law to merge or consolidate the original trusts and to transfer the trust assets in furtherance of this merger the beneficiaries are not therefore acquiring their interests in the new trusts as a result of the exchange of their interests in the original trusts or as the result of an exchange of interests between themselves accordingly there does not appear to be any reciprocal exchange involving the legal rights and entitlements of the beneficiaries under the trusts here because no exchange has occurred for purposes in this case state statute clearly authorizes the consolidation or merger of trusts plr-135491-06 of sec_1001 it is unnecessary to analyze whether the materially different standard has been satisfied we therefore conclude that the proposed mergers of the original trusts into the new trusts and the transfer of assets from the original trusts to the new trusts will not cause the original trusts the new trusts or any of the income beneficiaries to recognize any gain_or_loss under sec_1001 from a sale_or_other_disposition of property because sec_1001 does not apply to the division of trust assets under sec_1015 the basis of the trust assets will be the same after the proposed transaction as the basis of those assets in the original trusts furthermore 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 trusts concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter 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 being sent your attorney provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is this ruling is directed only to the taxpayer s requesting it sec_6110 except as expressly provided herein no opinion is expressed or implied the rulings contained in this letter are based upon information and sincerely melissa c liquerman melissa c liquerman senior technician reviewer branch passthroughs special industries enclosure copy for sec_6110 purposes


office_of_chief_counsel internal_revenue_service memorandum number release date cc tege eoeg et2 postn-130348-03 uilc date april to ---------------------- revenue_agent -------------------- from lynne camillo chief cc tege eoeg et2 request for technical assistance on fica refund claim subject this chief_counsel_advice responds to your memorandum dated may in accordance with sec_6110 chief_counsel_advice may not be used or cited as precedent legend college ------------------------------------------------------ effect of a private_letter_ruling you have asked for advice on dealing with college’s refund claim college filed a refund claim for federal_insurance_contributions_act fica_taxes asserting that amounts paid to non-national research service award nrsa research fellows were not wages for fica tax purposes the purpose of this memorandum is to assist you in developing the relevant facts in order to process the refund claim the following provides a discussion of the law regarding the income and employment_tax treatment of stipends paid to research fellows and suggestions regarding factual development in this case the office_of_chief_counsel issued plr date to college ruling that amounts paid to non-nrsa fellows were noncompensatory and thus not wages for employment_tax purposes thus college’s refund claim must be examined based upon the standards under which private letter rulings may be relied upon by taxpayers revproc_2004_1 sec_11 2004_1_irb_45 describes the effect of a letter_ruling section dollar_figure provides that a taxpayer ordinarily may rely upon a letter_ruling received from the office_of_chief_counsel subject_to certain conditions and limitations section dollar_figure provides that in examining a taxpayer’s return and determining the taxpayer’s liability the field_office must ascertain whether the conclusions stated in the letter_ruling are accurately reflected in the return the representations upon which the letter_ruling was based reflected an accurate statement of the controlling facts the transaction was carried out substantially as proposed and there had been any change in the law that applies to the period during which the transaction or continuing series of transactions were consummated if when determining the liability the field_office finds that a letter_ruling should be revoked or modified the findings and recommendations of the field_office will be forwarded through the appropriate director to the appropriate associate office within the office_of_chief_counsel for consideration before further action is taken by the field_office such a referral to the associate office will be treated as a request for technical expedited advice and the provisions of revproc_2004_2 relating to requests for technical expedited advice team will be followed except that no consensus among field_office taxpayer and associate office will be required to make the request subject_to team procedures otherwise the letter_ruling is to be applied by the field_office in the determination of the taxpayer's liability appropriate coordination with the associate office must be undertaken if any field official having jurisdiction over a return or other matter proposes to reach a conclusion contrary to a letter_ruling previously issued to the taxpayer facts the relevant facts are generally set forth in college’s plr submission and plr date copies enclosed the refund claim relates to stipends paid to research fellows participating in programs described by college as mirroring the nrsa program it is necessary to understand the nature and characteristics of nrsa fellowships in order to determine whether the non- nrsa fellowship grants at issue in the refund claim in fact mirror nrsa fellowships the following describes nrsa fellowships nih grants and nrsa awards nih issues two types of awards individual awards and institutional awards nih conducts a national competition to choose individual recipients of research training awards in specific health-related areas the guidelines for individual awards provide that the major emphasis of the application_for an individual grant should be the research training experience and broadening of scientific competence the individual applicant must identify a sponsoring institution and an active investigator who will supervise the research nih provides funds to the institution for distribution to the recipients fellows must provide progress reports to nih with all applications for continuing support the nih guidelines for institutional awards provide that nih will award nrsa institutional training grants to eligible institutions to develop or enhance research training opportunities for individuals selected by the institution who are training for careers in specified areas of biomedical and behavioral research the guidelines further provide that the purpose of the nrsa program is to help ensure that highly trained scientists are available in adequate numbers and in appropriate research areas and fields to carry out the nation’s biomedical and behavioral research agenda the institution’s research training program director is responsible for the selection and appointment of trainees and the overall direction of the training program awards may not be used to support residencies in a medical specialty any clinical services must be confined to those that are part of the research training the following terms of appointment generally apply to fellows working under either an individual grant or an institutional grant generally no individual may receive more than five years of nrsa support at the pre-doctoral level and three years of nrsa support at the post-doctoral level fellows are required to pursue research training on a full-time basis defined a sec_40 hours per week or as specified by the sponsoring institution fellows are paid stipends in amounts determined by nih stipends may be supplemented by an institution from non-federal funds provided the individual is not required to perform additional services fees resulting from clinical practice professional consultation or other comparable activities performed pursuant to the purposes of the award may not be retained by the fellow such fees are assigned to the grantee institution for disposition a fellowship may be terminated if nih determines that the individual materially failed to comply with the terms and conditions of the award or its purpose the nih provides certain rules on the use of nih funds to provide certain employee_benefits fellows are entitled to the normal vacations and holidays available to individuals in comparable training positions at the grantee or sponsoring institution nrsa fellows receive days of paid sick leave per year individuals may receive up to days of parental leave per year nih funds may not be used to provide retirement benefits nih permits nih funds to be used to pay for the individual’s health insurance if health insurance is required of all individuals in similar training positions but not health insurance for the individual’s family nih provides certain rules on the use of research findings fellows are encouraged to have their research findings published but must acknowledge nih support in publications an nrsa fellow is free to copyright any publications developed from the research however the government retains the right to a royalty-free nonexclusive and irrevocable license to reproduce translate publish use and dispose_of publications no fellowship_grant may contain any provision giving the government any patent rights to inventions made by the fellow nrsa post-doctoral fellows receiving nrsa support for more than months must payback the nih by performing certain services upon completion of their fellowship there is no payback requirement for pre-doctoral fellows for post-doctoral fellows nih generally requires either months post-doctoral service for the government or months of health related research training or teaching at least hours per week law income_tax treatment the federal_income_tax treatment of scholarships and fellowship grants is addressed in ' of the code sec_117 provides that gross_income does not include any amount received as a qualified_scholarship by an individual who is a candidate_for_a_degree at an educational_organization described in ' b a ii describing generally a school_college_or_university under sec_117 the term qualified_scholarship means any amount received by an individual as a scholarship or fellowship_grant to the extent that the recipient establishes that in accordance with the grant such amount is used for qualified_tuition_and_related_expenses sec_117 provides that qualified_tuition_and_related_expenses are tuition and fees required for the enrollment or attendance of a student at an educational_institution and fees books supplies and equipment required for courses of instruction at such an educational_organization amounts received for room board travel and incidental living_expenses are not related expenses thus scholarship receipts that exceed expenses for tuition fees books supplies and certain equipment are not excludable from a recipient's gross_income under sec_117 sec_117 provides that the exclusion for qualified scholarships does not apply to that portion of any amount received which represents payment for teaching research or other services by the student required as a condition for receiving the qualified_scholarship or fellowship regulations dealing with compensatory scholarships have been upheld by the supreme court of the united_states which has described excludable grants as relatively disinterested 'no- strings' educational grants with no requirement of any substantial quid pro quo from the recipient 394_us_741 fellowship stipends paid to non-degree candidates for general living_expenses generally do not meet the requirements of sec_117 thus such fellowship stipends are generally includable in gross_income employment_tax treatment sec_3101 and sec_3111 impose fica_taxes on wages as that term is defined in sec_3121 the term wages is defined in sec_3121 for fica purposes as all remuneration for employment with certain specific exceptions sec_3121 defines employment for fica purposes as any service of whatever nature performed by an employee for the person employing him with certain specific exceptions under sec_3306 tax-exempt organizations described in sec_501 are not subject_to federal_unemployment_tax_act futa_tax sec_3402 relating to income_tax_withholding generally requires every employer making a payment of wages to deduct and withhold income taxes from the wages sec_3401 provides that wages for income_tax_withholding purposes means all remuneration for services performed by an employee for his employer with certain specific exceptions sec_3121 and sec_3401 provide that for purposes of fica tax and income_tax_withholding respectively the definition of wages does not include any benefit provided to or on behalf of an employee if at the time such benefit is provided it is reasonable to believe that the employee will be able to exclude such benefit from income under sec_117 for purposes of determining whether a fellowship_grant is wages for employment_tax purposes the service examines whether the grant is compensatory or noncompensatory a fellowship_grant will generally be includable in gross_income under sec_117 because such grants are generally provided for living_expenses not tuition and fees however in determining whether a fellowship_grant is wages the standard is not merely whether the grant is excludable under sec_117 instead a fellowship_grant is wages for fica and income_tax_withholding purposes only if the grant is remuneration for employment within the meaning of sec_3121 and sec_3401 whether a fellowship_grant is compensatory or noncompensatory is determined based upon the standards of ' c notice_87_31 1987_1_cb_475 notice_87_31 provides that a scholarship or fellowship_grant that compensatory within the meaning of sec_117 is wages for fica and income_tax_withholding purposes sec_1_117-4 of the regulations provides that the following are not considered amounts received as a scholarship or fellowship_grant any amount_paid or allowed to or on behalf of an individual to enable him to pursue studies or research if such amount represents either compensation_for past present or future employment services or represents payment for services which are subject_to the direction or supervision of the grantor any amount_paid or allowed to or on behalf of an individual to enable him to pursue studies or research primarily for the benefit of the grantor however amounts paid or allowed to or on behalf of an individual to enable him to pursue studies or research are considered to be amounts received as a scholarship or fellowship_grant for the purpose of sec_117 if the primary purpose of the studies or research is to further the education and training of the recipient in his individual capacity and the amount provided by the grantor for such purpose does not represent postn-130348-03 compensation or payment for the services described in subparagraph of this paragraph neither the fact that the recipient is required to furnish reports of his progress to the grantor nor the fact that the results of his studies or research may be of some incidental_benefits to the grantor shall of itself be considered to destroy the essential character of such amount as a scholarship or fellowship_grant sec_117 was enacted by the tax_reform_act_of_1986 pub_l_no proposed income_tax regulations sec_1 d interpreting sec_117 provides payment for services for purposes of this section a scholarship or fellowship_grant represents payment for services when the grantor requires the recipient to perform services in return for the granting of the scholarship or fellowship a requirement that the recipient pursue studies research or other activities primarily for the benefit of the grantor is treated as a requirement to perform services a requirement that a recipient furnish periodic reports to the grantor for the purpose of keeping the grantor informed as to the general progress of the individual however does not constitute the performance of services a scholarship or fellowship_grant conditioned upon either past present or future teaching research or other services by the recipient represents payment for services under this section prop_reg sec_1 d provides examples applying this rule example b receives a dollar_figure scholarship from v corporation on date for academic year as a condition to receiving the scholarship b agrees to work for v after graduation b has no previous relationship with v the dollar_figure scholarship represents payment for future services for purposes of this section thus the dollar_figure scholarship must be included in b's gross_income as wages example on date c is awarded a fellowship for academic year to pursue a research project the nature of which is determined by the grantor university w c must submit a paper to w that describes the research results the paper does not fulfill any course requirements under the terms of the grant w may publish c's results or otherwise use the results of c's research c is treated as performing services for w thus c's fellowship from w represents payment for services and must be included in c's gross_income as wages case law there is extensive case law involving application of sec_117 in cases where amounts are paid in connection with research activities the courts have found the following facts and circumstances relevant in determining whether such payments represent compensation_for services whether the services of the researcher were directly related to the fulfillment of a contractual commitment under a specifically sponsored project 49_tc_389 42_tc_503 fulton v commissioner t c memo postn-130348-03 whether the work performed by the fellow was materially different from the work of other research associates who work in the laboratory woodfin v commissioner t c memo whether the researcher had a past employment relationship with a provider of research funds or was expected to be employed by the provider of any research funds bingler harper v commissioner t c memo remuneration paid to the fellow relative to remuneration paid to other non- fellows performing similar research services for the payor woodfin v commissioner t c memo zolnay hours worked and whether hours worked varies depending upon workload woodfin zolnay t c the amount of clinical services performed and whether any clinical services were directly related to the research project biebersdorf v commissioner 60_tc_114 kammerer v commissioner t c memo whether the results of research must be turned over to the grantor langley v commissioner t c memo and whether rights to intellectual_property are real and not merely remote and speculative faloona v commissioner t c memo 439_fsupp_440 e d mo the nature and extent of progress reports littman participation in retirement and health benefit plans zolnay service rulings revrul_73_564 1973_2_cb_28 ruled that a research grant received by a college professor was not excludable under sec_117 as a fellowship_grant in reaching this conclusion the ruling identifies the following as relevant facts and circumstances the grant was contingent upon the taxpayer remaining a researcher the taxpayer’s past experience was a significant factor in receiving the grant the grantor approved the proposed research and the grantor reserved rights to patents in particular the reservation of rights in patents and inventions does not further an educational purpose with respect to an individual grantee and thus contradicts any such claimed purpose see also rev ruls 1974_1_cb_39 amounts received were primarily for the benefit of the grantor where the grantor retained a nonexclusive license to the results of the research 1973_1_cb_54 although there was no guarantee that the work product of the taxpayer would be of value to the hospital the hospital had the right to that work product in case it was thus the hospital extracted a quid pro quo from the taxpayer and the primary purpose of the grant was for the benefit of the hospital-grantor 1972_1_cb_40 amounts received were primarily for the benefit of the grantor where the amount of the grant was based on the recipient’s level of experience and grantor reserved the royalty-free use of copyrighted material and patent rights arising from research postn-130348-03 background on the taxability of nih nrsa grants revrul_72_263 holds that a stipend paid_by nih to a physician for post-doctoral research training at a medical school is not excludable from gross_income as a scholarship or fellowship_grant the service found there to be a substantial quid pro quo because among other reasons the researcher was selected based on his potential for research the amount of the stipend was based on his relevant experience and the nih reserved copyright and patent rights revrul_77_319 1977_2_cb_48 held that nrsa grants were compensatory and thus not excludable under sec_117 the ruling found that the government required a substantial quid pro quo for two reasons first the government required payback to be made through post-fellowship service in the national health service corp or in a health_maintenance_organization in a medically underserved area second the government reserved the right to royalty-free use of any copyrighted materials produced as a result of the research performed during the award period at issue in 439_fsupp_440 e d mo aod aod lexi sec_163 was whether amounts received under an nih research fellowship were excludable under sec_117 the district_court concluded that the fellowship amounts were excludable in reaching this conclusion the court noted the following facts the nih is statutorily required to collect and make available through publications and other appropriate means information as to and the practical application of such research the purpose of nih fellowships is to promote training for research in health and health-related entities the nih specifically provides that the grantee is not an employee of the nih the recipient did not submit progress reports to the nih the recipient was limited by the terms of the fellowship to spending no more than ten percent of his time teaching the recipient performed only a negligible amount of patient care the recipient’s research had no practical application and served only to benefit the academic community as a whole although the nih reserved certain patent and copyright_rights no reserved rights had ever been enforced or were ever expected to be enforced and it was anticipated that no patentable or copyrightable work would be produced the court found not to be probative the facts that the recipient competed for the position and pursued the research activities on a full-time basis obra ’81 modified the payback requirement referred to in revrul_77_319 the payback requirement was eliminated for the first twelve months of awards further the payback requirement became limited to the recipient engaging in health research or teaching or any combination thereof which is in accordance with the usual patterns of academic employment for the specified period service postn-130348-03 was no longer required in the national health service corp or in a health_maintenance_organization in a medically underserved area the conference_report to obra ’81 provides the conferees recognized that the jurisdiction of the permanent tax exemption for nrsas remains with the house ways and means and senate finance committees however as the purpose of the awards - a matter directly in the purview of the conferees - is at the heart of the dispute the conferees feel obligated to clarify their intent regarding the primary purpose of the nrsa program national research service awards are not made for the purposes of receiving services designated by the grantor rather the payback requirement offers benefits to the nation from the participation of nrsa recipients in the research enterprise as the committee does not believe that the payback requirement is a quid pro quo the tax exemption should be applicable h_r conf_rep thus congress’s basis for concluding that nrsa grants are noncompensatory was that the awards benefit the nation as a whole krupin and faloona offered a similar rationale in concluding that nrsa grants are noncompensatory following obra ’81 the service issued revrul_83_93 1983_1_cb_364 obsoleting revrul_77_319 the only rationale provided by the ruling is that revrul_77_319 was being obsoleted in light of obra ’81 thus the service has no published position on whether nrsa grants in their current form are noncompensatory however the service’s administrative position is that nrsa grants are noncompensatory within the meaning of sec_117 the amounts that are the subject of the present refund claim were not derived from nrsa grants however the authorities dealing with nrsa and nih grants are instructive in identifying the facts and circumstances relevant in determining whether the grants at issue were substantially_similar to nrsa fellowship grants and whether the non-nrsa fellowship grants were compensatory to the extent the grants were distinguishable from nrsa fellowship grants in ways that show a benefit to the grantor or to another person such as a provider of research funding the grants may have been compensatory within the meaning of sec_117 for example if rights to intellectual_property benefited the grantor or another person and not merely the scientific community as whole the grants may have been compensatory in addition if clinical services or other service not directly connected to research training were required the grants may have been compensatory based on the relevant facts and circumstances discussed in the above authorities the following provides advice for factual development in this case postn-130348-03 case development hazards and other considerations the following suggestions are organized to help you understand the purpose of the questions asked and information requested the bracketed material is intended to explain the purpose of the question or request for information --------------------------- ----------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ -------- ------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ ------------------------- ------------------------------------------------------------------------------------------------------------ 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------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ ----------------- -------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ --------- ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------- postn-130348-03 this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions attachments college’s private_letter_ruling request submission private_letter_ruling nrsa guidelines


t c memo united_states tax_court jon a and linda a jewett petitioners v commissioner of internal revenue respondent docket no filed date steven r stolar for petitioners ric d hulshoff for respondent memorandum opinion pajak special_trial_judge respondent determined a deficiency in petitioners’ federal_income_tax of dollar_figure for the taxable_year unless otherwise indicated section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure the issue for decision is whether petitioners are entitled to deduct actual travel_expenses some of the facts have been stipulated and are so found petitioners resided in reno nevada at the time their petition was filed because petitioners did not meet the substantiation and recordkeeping requirements of sec_7491 the burden_of_proof remains on petitioners rule a through petitioner husband petitioner was a merchant seaman during he was the chief engineer on the s s sealand producer a container ship his typical tour of duty wa sec_56 days plu sec_1 day travel each way between his home and the port where his tour began for a total of days the ship traveled to various ports principally in the caribbean and gulf of mexico meals_and_lodging were provided by petitioner’s employer and were available to him during the periods in that he was assigned to a vessel and on active status petitioner testified that while in port he would leave the ship and incur expenses on shore petitioners filed a form_1040 u s individual_income_tax_return for their taxable_year return on schedule a itemized_deductions attached to petitioners’ return petitioners claimed a deduction for meals incidental_expenses full m ie in the total amount of dollar_figure petitioners alleged that this deduction was deemed substantiated pursuant to revproc_98_64 1998_2_cb_825 the parties stipulated that this full m ie rate deduction purportedly was supported by a sailor travel statement attached to petitioners’ return after petitioners’ return was filed 115_tc_210 was issued during the examination of petitioners’ return petitioners conceded that they were not entitled to the full m ie rate deduction as claimed instead petitioners conceded they were entitled to the lesser total amount of dollar_figure which represents the incidental expense portion of the m ie rate as allowed by johnson v commissioner supra the dollar_figure adjustment in the notice_of_deficiency represents the subtraction of the incidental expense of dollar_figure from the dollar_figure expense claimed on petitioners’ return petitioners now seek a deduction for actual expenses_incurred while in the course of travel as this court noted in johnson v commissioner supra pincite taxpayers to the extent that the amounts set forth in the revenue procedures fail to reflect the actual cost of their incidental expenditures are entitled to a deduction for their actual expenses in such a situation however taxpayers must be prepared to meet all the substantiation requirements including especially written documentation as to the amounts of those costs the court goes on to refer to the sec_274 regulations which except taxpayers from strict substantiations in the case of expenditures of less than a prescribed amount petitioner like the taxpayer in johnson has not shown that he made any expenditure that fits within these exceptions johnson v commissioner supra pincite n sec_274 imposes stringent substantiation requirements for the deduction of travel_expenses taxpayers must substantiate by adequate means certain elements in order to claim deductions such as the amount of such expenditure the date of the expenditure or use the place of each separate expenditure and the business_purpose for an expenditure or use sec_274 sec_1_274-5t temporary income_tax regs fed reg date to substantiate a deduction by means of adequate_records a taxpayer must maintain an account book diary log statement of expense trip sheets and or other documentary_evidence which in combination are sufficient to establish each element of expenditure or use the log must be made at or near the time of the expenditure sec_1_274-5t and ii temporary income_tax regs fed reg date petitioner claimed that he prepared a log listing his travel_expenses at or near the times of the expenditures we are not required to accept petitioner’s self-serving statements 87_tc_74 our review of this log leads us to conclude it was prepared at one time and the entries could not have been made at or near the times of the expenditures respondent also observes that petitioners took the position on their return that they were entitled to a deduction based on a per_diem rate without the need for substantiation and maintenance of a calendar log of actual expenses is inconsistent with that position respondent further commented that the return had nearly documents attached to it to support petitioners’ claim but the log was not attached for the aforesaid reasons we do not give the purported log any credence petitioner also referred to the so-called supporting schedule of expenses attached to the return this schedule bears the name of a certified_public_accountant on each page petitioners’ counsel stated at trial that this was prepared during the audit this obviously was not made at or near the time of any of the expenditures moreover this schedule was attached to petitioners’ return which was an exhibit attached to the parties’ stipulation this court has long held that the return is merely a statement of the petitioners’ claim and does not establish the facts contained therein 70_tc_391 62_tc_834 28_tc_1034 our review of the record shows there was no record made at or near the time of any of the expenditures claimed as actual expenses nor has petitioner substantiated such expenses by other_sufficient_evidence johnson v commissioner supra we reject petitioners’ position because we find that petitioners did not substantiate the actual expenses we agree that petitioners are entitled to claim the incidental_expenses as computed in accord with johnson and as allowed by respondent in the notice_of_deficiency accordingly we sustain respondent’s determination contentions we have not addressed are irrelevant moot or meritless decision will be entered for respondent