internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc corp 4-plr-129938-01 date date number release date index number holdings acquiring target target foreign corp corp new target new target foreign bank sub state a state b state c government agency this letter responds to your date request for rulings on certain federal_income_tax consequences of a transaction that was consummated after the date of your request additional information was provided in correspondence dated date and date the information submitted for consideration is summarized below the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury plr-129938-01 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 summary of facts your request states the following information a holdings a state a corporation is a bank_holding_company holdings is the common parent of an affiliated_group that files a consolidated federal_income_tax return with its subsidiaries including acquiring target and target b acquiring target and target are state a chartered banks holdings owns all of the stock of acquiring target and target c foreign corp a state b corporation is a bank_holding_company that is unrelated to holdings foreign corp owns all of the stock of foreign bank d corp a state c_corporation is unrelated to holdings corp owns all of the stock of sub for what are represented to be valid business reasons holdings wanted to combine the operations of target target and acquiring and to cause the sale of the bank charters of target and target government agency would not permit state a bank charters to be transferred by themselves holdings proposed to effect this combination in a manner that the service has ruled upon in accordance with revproc_89_50 1989_2_cb_631 government agency refused to approve such form government agency required that holdings effect the transaction the transaction in the manner described below the transaction i holdings sold all of the stock of target to foreign corp in exchange for a cash payment in the amount equal to the sum of i the book_value of target amount x1 and ii the value of the target bank charter and any required minimum capital amount x2 holdings then sold all of the stock of target to corp in exchange for a cash payment in the amount equal to the sum of i the book_value of target amount y1 and ii the value of the target bank charter and any required minimum capital amount y2 ii target merged with and into foreign bank merger foreign corp caused foreign bank to transfer all the assets that foreign bank received from target in merger except for the target bank charter and any minimum capital to acquiring in exchange for holdings’ payment of amount x1 and acquiring's assumption of the liabilities attributable to target immediately prior to merger target merged plr-129938-01 with and into sub merger corp caused sub to transfer all the assets that sub received from target in merger except for the target bank charter and any minimum capital to acquiring in exchange for holdings’ payment of amount y1 and acquiring's assumption of the liabilities attributable to target immediately prior to merger all of the parties to the agreements effecting the transaction have agreed to treat the transaction consistently with the requested rulings provided for herein for federal tax purposes representations in connection with the transaction the following representations have been made a all transfers of stock and assets described in steps i and ii above occurred pursuant to written binding contracts between the parties entered into before these steps were undertaken b at the time of the transaction the fair_market_value of the constructive acquiring stock and other consideration received by holdings were approximately equal to the fair_market_value of the target and target stock surrendered in the exchange c there is no plan or intention by holdings to sell exchange or otherwise dispose_of a number of shares of constructive acquiring stock received in the transaction that would reduce holdings' ownership of acquiring stock to a number of shares having a value as of the date of the transaction of less than percent of the value of all of the formerly outstanding_stock of target and target as of the same date for purposes of this representation shares of target and target stock exchanged for cash or other_property surrendered by dissenters or exchanged for cash in lieu of fractional shares of acquiring stock are treated as outstanding target and target stock on the date of the transaction moreover shares of target and target stock and shares of acquiring stock held by holdings and otherwise sold redeemed or disposed of prior or subsequent to the transaction are being considered in making this representation d acquiring acquired at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets held by each of target and target immediately prior to the transaction for purposes of this representation amounts paid_by target and target to dissenters amounts paid_by target and target to shareholders who receive cash or other_property amounts used by target and target to pay its reorganization expenses and all redemptions and distributions except for regular normal dividends made by target and target immediately preceding the transfer are included as assets of target and target held plr-129938-01 immediately prior to the transaction e after the transaction holdings will be in control of acquiring within the meaning of sec_368 of the internal_revenue_code f except as may be deemed to occur as a result of the requested recast of the transaction under sec_1_1502-13 of the income_tax regulations acquiring has no plan or intention to reacquire any of its stock constructively issued in the transaction g acquiring has no plan or intention to sell or otherwise dispose_of any of the assets of target or target acquired in the transaction except for dispositions made in the ordinary course of business h the respective liabilities of target and target assumed by acquiring plus the respective liabilities if any to which the transferred assets were subject at the time of the transaction were incurred by target and target in the ordinary course of their respective businesses and are associated with the assets transferred i following the transaction acquiring will continue the historic businesses of target or use a significant portion of target 1's historic_business_assets in a business and acquiring will continue the historic businesses of target or use a significant portion of target 2's historic_business_assets in a business j at the time of the transaction acquiring did not have outstanding any warrants options convertible securities or any other type of right pursuant to which any person could acquire stock in acquiring that if exercised or converted would affect holdings' acquisition or retention of control of acquiring as defined in sec_368 k acquiring target target and holdings have paid and will pay their respective expenses if any incurred in connection with the transaction l there was no intercorporate indebtedness existing between acquiring and target or between acquiring and target that was issued acquired or will be settled at a discount m no parties to the transaction are investment companies as defined in sec_368 and iv n at the time of the transaction the fair_market_value of the respective assets of target and target transferred to acquiring equalled or exceeded the sum of the respective liabilities of target and target assumed by acquiring plus the amount of the respective liabilities of target and target if any to which the transferred assets were subject plr-129938-01 o at the time of the transaction the respective total adjusted_basis of the assets of target and target transferred to acquiring equalled or exceeded the sum of the respective liabilities of target and target to be assumed by acquiring plus the amount of the respective liabilities of target and target if any to which the transferred assets were subject p neither target nor target is under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 q foreign bank transferred all of its assets attributable to target and sub transferred all of its assets attributable to target to acquiring except that they retained the target and target respective corporate charters and those assets necessary to satisfy state law minimum capital requirements to maintain corporate existence immediately after the completion of step ii of the transaction r for purposes of the representation that acquiring acquired at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets held by each of target and target immediately prior to the transaction the corporate charters of target and target and any minimum capital are included as assets of target and target respectively held immediately prior to the transaction s assuming the transaction is recast as requested the bank charters deemed to be acquired by acquiring will be treated for federal tax purposes as distributed by acquiring in redemption of a portion of holdings' acquiring stock and as though holdings contributed the bank charters to the capital of new target and new target in exchange for the issuance of new target and new target stock to holdings immediately following this deemed_distribution and contribution new target and new target will be treated for federal tax purposes as new corporations and each will obtain new employer identification numbers rulings based solely upon the information submitted and the representations set forth above we rule as follows for federal_income_tax purposes the transaction will be viewed as i the acquisition by acquiring of all of the respective assets of target and target including the bank charters and any amounts constituting minimum capital solely in exchange for constructive acquiring common_stock and the assumption by acquiring of the respective liabilities of target and target ii the distribution to holdings by target and target of the respective amounts of constructive acquiring stock in exchange for all of holdings' respective target and target stock in complete_liquidation of target and target iii the distribution by acquiring of the plr-129938-01 bank charters of target and target and any minimum capital in redemption of a portion of holdings’ acquiring stock constructively received in ii above iv the contribution by holdings of the respective bank charters of target and target and any minimum capital respectively received in iii above to the capital of new target the deemed contribution to new target and new target the deemed contribution to new target respectively in exchange for the issuance of new target and new target stock respectively to holdings and v the sale of all of the respective stock of new target and new target to foreign corp the deemed sale of new target and corp the deemed sale of new target respectively for amount x2 and amount y2 respectively the acquisition by acquiring of all of the respective assets of target and target including the bank charters and the amounts constituting the minimum capital if any solely in exchange in each case for constructive acquiring common_stock and the assumption by acquiring of the respective liabilities of target and target followed by the distribution to holdings by target and target of the constructive acquiring stock in exchange for all of holdings' respective target and target stock in complete_liquidation of target and target will constitute tax-free reorganizations within the meaning of sec_368 of the code no gain_or_loss will be recognized by acquiring upon the receipt of the target and target assets in exchange for constructive acquiring stock sec_1032 the basis of each asset of target and target including the bank charters in the hands of acquiring will be the same as the basis of such asset in the hands of target and target immediately prior to the transaction sec_362 the holding_period of each asset of target and target including the bank charters in the hands of acquiring will include the period during which such asset was held by target or target as the case may be immediately prior to the transaction sec_1223 no gain_or_loss will be recognized by target or target upon the transfer of all of their assets to acquiring in exchange for constructive acquiring stock and the assumption by acquiring of the respective liabilities of target and target sec_361 and sec_357 no gain_or_loss will be recognized by target or target on their distribution of constructive acquiring stock in exchange for holdings' respective target and target stock sec_361 no gain_or_loss will be recognized to holdings upon the receipt of constructive acquiring stock in exchange for its target and target stock plr-129938-01 sec_354 the basis of the shares of constructive acquiring stock received by holdings will be the same as its basis in the target and target stock surrendered in exchange therefor sec_358 the distribution by acquiring of the target and target charters and any minimum capital in redemption of holdings' constructive acquiring stock will be treated as a redemption to which sec_302 applies sec_1_1502-13 the distribution of the target and target bank charters and any minimum capital in redemption of holdings' constructive acquiring stock will not be included in the gross_income of holdings holdings will however be required to make a corresponding negative adjustment in the amount of the distribution to its basis in its acquiring stock under sec_1_1502-32 sec_1_1502-13 acquiring will recognize gain_or_loss under sec_311 or sec_1_1502-13 from the distribution of the target and target bank charters and any minimum capital in redemption of holdings' constructive acquiring stock and such gain_or_loss shall be taken into account under the timing rules of sec_1_1502-13 sec_1_1502-13 sec_1_1502-13 with respect to such gain_or_loss with respect to the bank charter and any minimum capital of target such gain_or_loss shall be taken into account upon the deemed sale of the new target sec_1_1502-13 with respect to such gain_or_loss with respect to the bank charter and any minimum capital of target such gain_or_loss shall be taken into account upon the deemed sale of the new target sec_1_1502-13 holdings' basis in each of the target and target bank charters and any minimum capital will be the fair_market_value of such asset sec_301 the holding_period of each of the target and target bank charters and any minimum capital in the hands of holdings will include the holding_period of such asset in the hands of target or target as the case may be sec_1_1502-13 immediately following the deemed contribution of new target new target will be treated for federal tax purposes as a new corporation and will obtain a new employer_identification_number rev_proc 1989_2_cb_631 see also revrul_73_526 c b immediately following the deemed contribution of new target new target will be treated for federal tax purposes as a new corporation and will obtain a new employer_identification_number rev_proc 1989_2_cb_631 see also revrul_73_526 c b plr-129938-01 caveats no opinion is expressed about the tax treatment of the transaction under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above rulings procedural statements this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant sincerely associate chief_counsel corporate by stephen p fattman chief branch


t c summary opinion united_states tax_court les hicks petitioner v commissioner of internal revenue respondent docket no 7577-08s filed date les hicks pro_se james e archie for respondent laro judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case 1unless otherwise indicated section references are to the applicable versions of the internal_revenue_code and rule references are to the tax_court rules_of_practice and procedure petitioner petitioned the court to redetermine respondent’s determination of a dollar_figure deficiency in petitioner’s federal_income_tax and a dollar_figure accuracy-related_penalty under sec_6662 and b for a substantial_understatement_of_income_tax we first decide whether petitioner’s gross_income includes his distributive_share of the income of personal home healthcare agency l l c d b a crown health services phha we hold it does we decide second whether petitioner is liable for the accuracy-related_penalty we hold he is i preliminaries background the parties submitted this case to the court fully stipulated pursuant to rule the stipulated facts and accompanying exhibits are incorporated herein by this reference petitioner resided in texas when his petition was filed ii phha phha is a texas limited_liability_company phha reports its operations for federal_income_tax purposes as if it were a partnership and on the basis of a calendar_year petitioner owned a 10-percent interest in phha an unrelated individual owned the remaining 90-percent interest phha issued petitioner a schedule_k-1 partner’s share of income deductions credits etc for the schedule_k-1 reported that petitioner’s share of phha’s ordinary business income for was dollar_figure petitioner did not receive any actual distributions from phha during iii tax_return petitioner filed a form_1040 u s individual_income_tax_return for using the filing_status of single petitioner did not report on that return or otherwise include in his gross_income for any of the dollar_figure phha reported to him iv respondent’s determination respondent determined in the notice_of_deficiency that petitioner’s gross_income for included the dollar_figure and increased petitioner’s gross_income accordingly that increase also caused a dollar_figure computational increase to petitioner’s gross_income with respect to social_security_benefits that he received respondent also determined in the notice_of_deficiency that petitioner was liable for an accuracy-related_penalty for a substantial_understatement_of_income_tax discussion i income_tax deficiency a burden_of_proof taxpayers generally bear the burden of proving that the commissioner’s determinations set forth in a notice_of_deficiency are incorrect see rule a 290_us_111 in certain cases however sec_7491 shifts the burden_of_proof to the commissioner we need not decide which party in this case bears the burden_of_proof as to the income_tax deficiency because we decide that issue without regard to burden_of_proof b distributive_share of phha income petitioner argues that the dollar_figure is not taxable to him in because he did not receive any actual distributions from phha during that year we disagree with petitioner’s argument that the dollar_figure is not taxable to him in a partner such as petitioner must take into account his distributive_share of each item of partnership income even if no partnership income is actually distributed to him during the year to which the distributive_share relates see sec_702 410_us_441 103_tc_170 sec_1_702-1 income_tax regs we sustain respondent’s determination as to the income_tax deficiency ii accuracy-related_penalty respondent determined that petitioner is liable for an accuracy-related_penalty under sec_6662 and b for a substantial_understatement_of_income_tax sec_6662 and b imposes a 20-percent accuracy-related_penalty for any portion of an underpayment that is attributable to a substantial_understatement_of_income_tax an understatement is the excess of the amount of tax required to be shown on the return for the taxable_year over the amount of tax imposed that is shown on the return reduced by any rebate see sec_6662 an understatement is substantial if it exceeds the greater of percent of the tax required to be shown on the return for the taxable_year or in the case of an individual dollar_figure see sec_6662 the commissioner bears a burden of production with respect to the applicability of an accuracy-related_penalty see sec_7491 that burden requires that the commissioner produce sufficient evidence that it is appropriate to impose an accuracy-related_penalty once he has met his burden the burden_of_proof is upon the taxpayer to prove that the accuracy-related_penalty does not apply because of reasonable_cause substantial_authority or the like see sec_6662 sec_6664 116_tc_438 we discern from the record that petitioner’s understatement exceeds the greater of dollar_figure or percent of the amount required to be shown on the return thus we conclude that respondent has met his burden of production petitioner makes neither an argument nor an assertion that he is not liable for the accuracy-related_penalty we also do not find any facts that would lead us to conclude that petitioner is not so liable we sustain respondent’s determination as to the accuracy-related_penalty iii conclusion we have considered all of petitioner’s contentions and allegations and we conclude that those contentions and allegations not discussed herein are without merit or irrelevant to reflect the foregoing decision will be entered for respondent


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 plr-116952-17 date date legend x state date date date date date date date a b c trust trust trust trust ----------------------------------------------------------------------------------------------- ----------------------------------- ------------- --------------------- --------------------- --------------------- ------------------------- ------------------------- -------------------------- ---------------------- ----------------------- ----------------------- ----------------------------------------------------------------------------------------------- ------------------------------------ ---------------------------------------- ---------------------------------------- ----------------------------------------------------------------------------------------------- ----------------------------------- ----------------------------------------------------------------------------------------------- ----------------------------------- dear --------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representatives requesting inadvertent termination relief under sec_1362 of the internal_revenue_code plr-116952-17 facts the information submitted states that x was incorporated under the laws of state on date and elected to be an s_corporation effective date on date a and b each owned shares of x on date a transferred shares of x stock to trust a revocable_trust treated as a wholly-owned grantor_trust under sec_671 and sec_676 on date b transferred shares of x stock to trust a revocable_trust treated as a wholly- owned grantor_trust under sec_671 and sec_676 on date a died and trust pursuant to its terms transferred its shares of x to trust on date b transferred shares of x stock to trust x represents that trust intended to be a qualified_subchapter_s_trust qsst described in sec_1361 as of date and thereafter however c the income_beneficiary failed to make a qsst election within the meaning of sec_1361 thereby causing x’s s_corporation_election to terminate on date on date b died and trust ceased to be a grantor_trust but continued to qualify as an eligible s_corporation shareholder under sec_1361 for the two year period beginning on the date of b’s death effective date trust pursuant to its terms transferred its shares of x stock to trust x represents that trust intended to be a qualified_subchapter_s_trust qsst described in sec_1361 as of date and thereafter however c the income_beneficiary failed to make a qsst election within the meaning of sec_1361 thereby causing x’s s_corporation_election to terminate on date x represents that all circumstances resulting in the termination of its s_corporation_election were inadvertent and not motivated by tax_avoidance further since date x and x’s shareholders have continually treated x as an s_corporation as such all items of income gain loss and deduction recognized by x since date have been allocated among the shareholders of x x and its shareholders agreed to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary law sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that for purposes of subchapter_s the term small_business_corporation means a domestic_corporation which is not an ineligible plr-116952-17 corporation and which does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be an s_corporation shareholder sec_1361 provides that a qsst whose beneficiary makes an election under sec_1361 will be treated as a_trust described in sec_1361 and the beneficiary of such trust shall be treated as the owner for purposes of sec_678 of that portion of the trust which consist of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1_1361-1 provides that the current income_beneficiary of the trust must make the election under sec_1361 by signing and filing with the service_center where the corporation files its income_tax return the applicable form or a statement including the information listed in sec_1_1361-1 sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that if an election under sec_1362 by any corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which the termination occurred and each person who was a shareholder in such corporation at any time during the period specified pursuant to f agrees to make such adjustments consistent with the treatment of such corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such termination such corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and representations made we conclude that x’s s_corporation_election terminated beginning on date when the stock in x was transferred to trust because a timely qsst election was not filed under sec_1361 we conclude that the termination was inadvertent within the meaning of sec_1362 plr-116952-17 moreover had x’s s_corporation_election not already terminated on date it would have terminated on date when stock was transferred to trust and a timely qsst election was not filed for the trust similarly this would have been inadvertent termination within the meaning of sec_1362 therefore we conclude that x will continue to be treated as an s_corporation for the period from date provided that x’s s_corporation_election was valid and was not otherwise terminated under sec_1362 this ruling is conditioned upon the income_beneficiary of trust and trust filing a qsst election for each trust effective upon the date the trust received shares of x all elections must be filed with the appropriate service_center within days of the date of this ruling a copy of this letter should be attached to each qsst election accordingly x’s shareholders in determining their respective income_tax liabilities must include their pro_rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to stock basis as provided in sec_1367 and take into account distributions made by x as provided by sec_1368 except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion regarding whether x is otherwise eligible to be treated as an s_corporation or whether trust and trust are eligible to be treated as qssts 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 pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s authorized representatives sincerely laura c fields laura c fields senior technician reviewer branch passthroughs special industries enclosures copy of letter copy for purposes cc


department of the treasury i n t e r n al r e v e n u e s e r v i c e w as h i n g t o n d c date o f f ic e o f c h ief c o u n sel number release date uilc 25a cc ita frev-113710-00 memorandum for mr john zeller associate area_counsel sb_se from heather c maloy associate chief_counsel income_tax accounting subject louisiana tuition program for students tops this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 of the internal_revenue_code this chief_counsel_advice should not be cited as precedent your memorandum analyzes the federal_income_tax treatment of awards made under the louisiana tuition opportunity program for students tops the tops awards consist of payments made by an agency of the state of louisiana either directly to or on behalf of louisiana students enrolled in post-secondary education programs we concur with and restate here your views and analysis concerning the interrelationship of the tops award with sec_25a and sec_117 of the internal_revenue_code in the situations you presented in accordance with discussions between members of our respective staffs we are amplifying and clarifying your analysis and applying it in some additional situations which may arise our analysis is based on the proposed_regulations under sec_25a we will be happy to consult further with you as needed upon publication of final regulations issues how may a student receiving a tops award treat that award under sec_25a and sec_117 of the code we concur with your view that this memorandum should be limited to the tops award as amended by the louisiana legislature and effective date although the analysis may be similar for other tax-free educational_assistance awards those awards should be analyzed based on their specific facts frev-113710-00 what are the tax consequences to a student who delays receiving a tops award until after he or his parent or guardian files his income_tax return conclusions the tax treatment of a tops award depends on whether the award is included in or excluded from the gross_income of the recipient if the student establishes that an amount greater than or equal to the award is used to pay qualified_tuition_and_related_expenses the student may exclude the amount of the award from gross_income under sec_117 but any sec_25a education tax_credit shall be calculated based upon the total qualified_tuition_and_related_expenses paid_by the taxpayer less the amount of the tops award if however the recipient includes the tops award in income and pays the qualified_tuition_and_related_expenses with his own funds there will be no reduction to the total qualified_tuition_and_related_expenses upon which the sec_25a credits are calculated the delayed receipt of a tops award that is excluded under sec_117 is treated by the proposed_regulations as a refund of qualified tuition and expenses paid the proposed_regulations provide that if in a taxable_year refund year a taxpayer or someone other than the taxpayer receives a refund of qualified_tuition_and_related_expenses paid on behalf of a student for which the taxpayer claimed an education tax_credit in a prior taxable_year the tax_imposed_by_chapter_1 of the internal_revenue_code for the refund year is increased by the recapture_amount we recommend that the examination functions of the internal_revenue_service should take the steps necessary to assure that the sec_25a credits are properly recaptured in the subsequent year facts under the louisiana tuition opportunity program for students tops the louisiana legislature provides state-funded financial assistance to louisiana residents enrolled in post-secondary education programs at public and accredited private institutions within the state la rev stat ann west supp section contains detailed rules on the eligibility requirements for initial receipt and subsequent retention of tops awards in general the award money is appropriated annually by the legislature to an administrative agency the agency in turn makes a direct payment on behalf of a qualifying student to the institution in which the student is enrolled section e the tops statute originally provided that tops’ awards made on behalf of qualified students' were to be used for tuition however in the louisiana legislature went from a system that required a tops award to be used for tuition to a system that measures the amount of the award by the amount of tuition effective date section a was amended to provide that a qualified student shall be frev-113710-00 awarded by the state an amount determined by the administering agency to equal the tuition charged by the public university emphasis added section a f directs the administering agency to provide guidelines and procedures directing that when tuition is paid from a source other than the tops award the award shall be applied by the institution attended by the student toward payment of expenses other than tuition which are described in the term cost of attendance as that term is defined in u s c ii sic as amended for the purpose of qualifying the student or his parent or guardian for the federal_income_tax credits provided for under sec_25a emphasis added the term cost of attendance is defined in u s c 1087ll - to include tuition fees costs for rental or purchase of any equipment materials or supplies required of all students in the same course of study the term also encompasses allowances for books supplies transportation and miscellaneous personal expenses including a computer rental or purchase and for room and board as noted above a tops award may be paid_by the administering agency on behalf of the student to the institution at which an individual is enrolled however louisiana law alternatively provides that a student may delay acceptance of the tops award until after the student if he is not claimed as a dependent of a parent or guardian on a federal_income_tax return or his parent or guardian if he is so claimed as a dependent files his federal_income_tax return section k a i the amount of a delayed award depends on whether a sec_25a education tax_credit was claimed on the relevant federal_income_tax return if the student delays the acceptance of his award and the student parent or guardian does not claim a sec_25a education tax_credit on his federal tax_return the administering agency shall pay directly to the student the amount of the award the agency would otherwise have paid to the institution on the student's behalf section k a iii however if the student delays the acceptance of his award and the student parent or guardian does claim a sec_25a education tax_credit for money spent on the student's tuition at a post-secondary institution then the amount awarded by the state will be affected louisiana provides in this circumstance that t he administering agency shall pay directly to the student an amount equal to the amount of the award that would have been paid to the eligible institution on behalf of the student less the amount of the tax_credit claimed plus as an incentive for claiming the credit and thus reducing the cost la acts no la acts no the amount awarded ordinarily is an amount equal either to the tuition charged by the particular school if the student attends a public college or university or to the weighted average of amounts paid_by the state for tuition to public colleges and universities if the student attends a private school section a g frev-113710-00 to the state of this program an amount equal to twenty-five percent of the amount of the credit claimed section k a ii any student electing to take a delayed award will receive the award directly and may spend the amount of the award on any of his or her cost s of attendance as defined above law and analysis the sec_25a education tax_credit sec_25a provides for the hope scholarship credit and the lifetime_learning_credit collectively referred to as the education tax_credit in general the education tax_credit allows individual taxpayers to claim a nonrefundable tax_credit against their federal_income_tax for the payment of certain post-secondary educational expenses assuming the other requirements of sec_25a are met the credit may be claimed if the taxpayer pays qualified_tuition_and_related_expenses or alternatively qualified expenses' within the meaning of sec_25a as you noted the relationship between such qualified expenses and the tops award is crucial to the analysis in this case definition of qualified_tuition_and_related_expenses under sec_25a sec_25a defines qualified_tuition_and_related_expenses as tuition and fees required for the enrollment or attendance for courses of instruction at an eligible_educational_institution qualified expenses specifically do not include expenses associated with any course or other education involving sports_games_or_hobbies unless that course is part of the degree program sec_25a student activity fees athletic fees insurance expenses or other expenses unrelated to the individual’s academic course of instruction are also not included in the definition of qualified_tuition_and_related_expenses sec_25a a student parent or guardian who pays tuition from non-tops sources and who seeks to receive the additional incentive payment must provide the administering agency proof of the amount of the sec_25a credit he or she received section k b additionally the proposed_regulations provide that the term qualified_tuition_and_related_expenses does not include any noncredit course unless the course or other education is part of the student's degree program in the case of the lifetime_learning_credit expenses paid for courses involving sports_games_or_hobbies or for noncredit courses are allowed only if the course or other instruction was taken by the student to acquire or improve job skills prop_reg sec_1_25a-2 frev-113710-00 sec_1_25a-2 of the proposed_regulations restates the statutory definition found in sec_25a the proposed_regulations then add that except as provided by prop_reg sec_1_25a-2 discussed below the general test used to determine whether a fee is qualified is whether the fee is required to be paid to the eligible_educational_institution as a condition of the student's enrollment or attendance at the institution prop_reg sec_1_25a-2 fees for books supplies and equipment used in a course of study and fees charged by an educational_institution that are not directly used for or allocated to an academic course constitute qualified expenses only if the fees must be paid to the institution for the student's enrollment or attendance at said institution prop_reg sec_1_25a-2 prop_reg sec_1_25a-2 provides an exception to the general_rule that required fees are eligible for the education tax_credit that proposed regulation specifically states that regardless of whether the fee must be paid to the institution for enrollment therein qualified_tuition_and_related_expenses do not include the following personal expenses the costs of room and board insurance medical_expenses transportation and similar personal living or family_expenses sec_1_25a-2 of the proposed_regulations describes the treatment of a required comprehensive fee which typically includes charges for tuition fees and some or all the personal expenses listed above the proposed_regulations require educational institutions to make a reasonable allocation between qualified expenses and personal expenses and provide that the portion of the comprehensive fee that is allocable to personal expenses is not a qualified expense the sec_117 exclusion for qualified scholarships sec_117 of the code states 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_institution sec_117 defines a qualified_scholarship as being any amount received by an individual to the extent the individual establishes that in accordance with the conditions of the grant such amount was used for qualified_tuition_and_related_expenses sec_117 defines qualified_tuition_and_related_expenses as a tuition and fees required for enrollment or attendance and as b fees books supplies and equipment required for courses of instruction prop_reg sec_1 c repeats and then amplifies the statutory definition of qualified_tuition_and_related_expenses as follows emphasis added in order to be treated as related expenses under this section the fees books supplies and equipment must be required of all students in the particular course of instruction incidental_expenses are not considered cid cid cid cid cid frev-113710-00 related expenses incidental_expenses include expenses_incurred for room and board travel research clerical help and equipment and other expenses that are not required for either enrollment or attendance at an educational_organization or in a course of instruction at such educational_organization prop_reg sec_1 c provides that a grant may be a qualified_scholarship even if the grant does not expressly require that the amounts received be used for tuition and related expenses however the proposed regulation also provides that if the grant either specifies that any portion of the grant cannot be used for tuition or related expenses or designates any portion to be spent on such items as room or board the amounts so specified or designated are not amounts received as a qualified_scholarship prop_reg sec_1 e provides that an individual seeking to exclude from gross_income any amount received as a qualified_scholarship must maintain records establishing both the amounts used for qualified_tuition_and_related_expenses and the total amount of such qualified_tuition_and_related_expenses upon request the recipient also must submit documentation concerning the conditions and requirements of the particular grant subject_to the other rules of sec_117 prop_reg sec_1 e provides that qualified_scholarship amounts are excludable without the need to trace particular grant dollars to particular expenditures_for qualified_tuition_and_related_expenses a grant or award that is not excludable under sec_117 must be included in the recipient's gross_income under sec_61 generally under proposed sec_1 a any amount of a scholarship that is not excludable under sec_117 is includable in the gross_income of the recipient for the taxable_year in which such amount is received notwithstanding the provisions of sec_102 relating to exclusion_from_gross_income of gifts the relationship of sec_25a and sec_117 adjustments to qualified_tuition_and_related_expenses required upon receipt of a grant or scholarship it is evident from the above discussion that sec_25a and sec_117 and their respective proposed_regulations define the term qualified_tuition_and_related_expenses in substantially the same way under both code sections the phrase qualified_tuition_and_related_expenses or alternatively qualified expenses encompasses tuition and may include books supplies and specified fees however qualified expenses do not include several items -- such as expenses for room and board or for transportation -- that may be considered part of the cost of attendance under the federal student aid rules not surprisingly congress determined that a student should not be entitled to both a credit and an exclusion for the same expenses to prevent a double tax_benefit sec_25a states that before the education tax_credit can be calculated qualified_tuition_and_related_expenses shall be reduced by amounts paid for the benefit of an frev-113710-00 individual that are allocable to a qualified_scholarship excludable from gross_income under sec_117 prop_reg sec_1_25a-5 is to the same effect for purposes of this reduction prop_reg sec_1_25a-5 creates a default or ordering rule the proposed regulation states that a scholarship or fellowship_grant is considered a qualified_scholarship excludable from income under sec_117 unless emphasis added i ii the grant is reported as income on the taxpayer's federal_income_tax return or the grant must be applied by its terms to expenses other than qualified_tuition_and_related_expenses within the meaning of sec_117 such as room and board the presumption underlying the ordering rule -- that for sec_25a purposes a scholarship or fellowship_grant is treated as excludable under sec_117 unless one of two conditions is met -- is illustrated in prop_reg 25a-4 example the example states that university x charges student a a total of dollar_figure dollar_figure for tuition and dollar_figure for room and board and awards student a a dollar_figure scholarship the terms of which permit it to be used to pay any of the student's costs of attendance including room and board student a pays the dollar_figure balance of her bill from a combination of savings and amounts earned from a summer job because student a does not report any portion of the award in her income and because the terms of the award do not require it to be used on non-qualified expenses student a is treated for purposes of calculating the education tax_credit as having paid only dollar_figure dollar_figure tuition minus dollar_figure excludable scholarship of qualified_tuition_and_related_expenses federal tax consequences of the louisiana tops award under sec_25a and sec_117 as noted earlier prior to being amended in louisiana law required that awards made to students under the tops program be spent on tuition as such the amount of any award was excludable from gross_income under sec_117 and reduced the amount of qualified expenses eligible for the education tax_credit however in the louisiana legislature amended the tops statute for the express purpose of qualifying a student or his parent or guardian for the sec_25a credit the legislature amended the tops statute to -- sec_25a and c provides for a similar reduction in the amount of qualified expenses taken into account for the credit in the event an individual receives specified excludable educational_assistance allowances or other types of exempt_income other than a gift bequest devise or inheritance excludable from gross_income under sec_102 frev-113710-00 provide that tops awards are in an amount equal to tuition rather than being for tuition cause the administering agency to direct the institution that whenever the tops award is paid on behalf of the student and the student’s tuition is paid from a source other than the tops award the award is to be applied by the educational_institution toward payment of those costs of attendance other than tuition and permit a student to elect to defer receipt of a tops award and to spend the amount received on costs of attendance other than tuition and provide that the amount of the award will be reduced if a sec_25a credit is claimed we view these statutory provisions as terms of the grant and discuss below the effect the service should give these terms in applying sec_25a and sec_117 to award recipients clearly louisiana through and above changed the tops award from one restricted to use for tuition to one that might be used for those costs of attendance that are not qualifying expenses were and the only statutory changes the federal tax consequences would be simple to state the recipient could exclude the tops award under sec_117 upon a showing that an amount at least equal to the amount of the award was used for qualifying expenses but would be required to reduce the qualified expenses available for the sec_25a credit by the amount excluded on the other hand qualified expenses for credit purposes would not be reduced to the extent the student included the award in income ie elected not to exclude the award under sec_117 by broadening the use to which a tops award may be put louisiana achieved in and its apparent objective of allowing the award recipients both to claim the sec_25a credit and to receive the state-based financial aid represented by the tops award a more difficult question involves wherein the state’s administering agency directs an educational_institution to apply a tops award to costs of attendance other than tuition in the event the tops award is paid on behalf of the student and the student’s tuition is paid from a source other than the award under proposed sec_1 c a grant may not be excluded from income if it specifies that any portion of the grant cannot be used for tuition or related expenses or designates any portion to be spent on such items as room or board if is such a term then under sec_117 a tops grant would not be excludable whenever applies we do not believe that in applying sec_25a the service should construe as being a term of the grant sufficiently specific to require the grant’s inclusion in gross_income first we believe the service should view term permitting but not requiring use of the award for qualifying expenses as being the primary grant term second we believe that the direction in reflects an effort to trace a particular source of funds to a particular expenditure through a mere bookkeeping entry which effort should be disregarded under the proposed sec_117 regulations frev-113710-00 louisiana permits application of each tops award either to tuition or to other cost-of- attendance expenses all awards are made subject_to this term the flexibility thereby gained - that the tops award can be applied to qualifying or non-qualifying expenses - does not satisfy the proposed sec_1 c requirement that the grant’s terms preclude use of the funds for qualifying expenses so far as we are aware no penalty such as cancellation of the award attaches to the award recipient if the institution contrary to what is suggested by applies the award to qualifying expenses or if the recipient seeks to exclude the award which treats the award as an amount used for qualified expenses under these circumstances it is difficult to say that the terms of the grant preclude applying the award amount to qualified expenses instead we believe the service should construe louisiana’s permission to apply the award either to qualifying or non-qualifying expenses as the term of primary significance in applying sec_117 louisiana’s direction to the administrative agency to provide policies and procedures on directing institutions how to apply tops awards in certain circumstances is not a grant term that is a sufficiently specific restriction to non-qualifying expenditures to satisfy the provisions of the proposed_regulations second our interpretation of above is bolstered by proposed sec_1 e which provides that an award may be excluded without tracing particular grant dollars to particular expenditures_for qualified_tuition_and_related_expenses we think that louisiana’s direction to the institution described in above is simply another way of tracing the grant in this case to expenditures that are not consistent with exclusion but tracing a particular award to non-qualifying expenditures is not the test under the proposed_regulations rather the test requires the terms of the grant to preclude expenditure payment of tuition with the grant as we discussed above we do not believe the current terms governing tops awards restrict the award to non-qualifying expenditures if tracing is not necessary to claim an exclusion mere tracing should be inadequate to defeat an exclusion claimed by the student under the terms of the grant as we construe them therefore the service should give effect to louisiana’s changes under above which permit the award to be used for either qualifying or non-qualifying expenses under this interpretation the exclusion of the grant is determined by the tax reporting of the grantee the service should not construe above as a term requiring inclusion of the tops award in income even in situations in which it applies if the recipient’s tax reporting is to the contrary and entitlement to exclusion under sec_117 is otherwise satisfactorily demonstrated if the student includes the award in income the award does not reduce qualified expenses for purposes of the education credit conversely if the student properly excludes the award from income pursuant to sec_117 qualified expenses must be reduced by the amount of the award for purposes of the education tax_credit if the student has received multiple awards applicable to tuition the amount spent on tuition is still the maximum amount of such awards that may be excluded so our view creates no anomalies in the application of sec_117 frev-113710-00 we believe the following two scenarios represent likely scenarios you may see if receipt of the tops award is not deferred a student at a private louisiana college receives a tops award directs that the award be applied toward qualified expenses and pays the balance of the tuition owing from his own funds the student may exclude the tops award up to the amount of tuition paid from his gross_income under sec_117 but must subtract the amount of the excluded award from the total amount of qualified expenses paid in calculating the sec_25a education tax_credit a student receives a tops award pays qualified expenses from her own funds and directs consistent with the tops direction that the entire amount of the tops award be applied toward cost-of-attendance expenses other than qualified expenses the student may then either include the amount of the tops award in her gross_income or exclude it up to the amount of tuition paid under sec_117 whether she needs to reduce her qualified expenses by the tops award amount when calculating the sec_25a education tax_credit depends on whether she chose to exclude the award under sec_117 as we note in passing in the next section these results are unchanged if the award is received after the close of the year in which tuition is paid and before the filing of the return for that year recapture of a delayed tops award as noted earlier la rev stat 1k encourages tops recipients to defer receipt of their award so that a sec_25a credit may be claimed after the subject tax_return is filed the state statute provides that the recipient will be paid the award less the amount of the sec_25a credit plus a twenty-five percent incentive amount we concur in your view that the state of louisiana is awarding the incentive in the hope that the federal government -- through its allowance of the sec_25a credit -- will effectively reduce louisiana's expenses in the tops program as we believe that louisiana’s deferred receipt approach ordinarily requires award recipients or their parents to recapture the credit previously taken we also concur in your recommendation that the examination functions of the internal_revenue_service should take the steps necessary to assure that the sec_25a credits taken are properly recaptured in the subsequent year a student enrolled at a public louisiana college and receiving a tops award must make the same calculation as the student enrolled at a private school however because a tops award is more likely to cover the full amount of tuition at a public than at a private college the student at a public college is less likely than his private-college counterpart to have excess tuition on which to claim a credit frev-113710-00 the proposed_regulations provide for determining credits after reducing qualified expenses by refunds or excludable tuition assistance received during the taxable_year or in the following taxable_year before filing of a return for the year in which the qualifying expenses were paid the proposed_regulations also provide rules for recapturing credits taken in prior years when either a refund of qualified expenses paid or excludable tuition assistance attributable to the expenses of the prior year is received the recapture is effected by adding the recaptured credit to the taxes due for the year the refund or assistance is received two provisions proposed sec_1_25a-5 and f are relevant to the tops program of deferring the payment of the award until after a sec_25a credit is claimed proposed sec_1_25a-5 provides that if a taxpayer or the taxpayer’s spouse or claimed dependent receives in a taxable_year refund year after filing the federal_income_tax return for a prior taxable_year any excludable educational_assistance for the qualified_tuition_and_related_expenses paid during the prior taxable_year any education credit claimed for the prior taxable_year is subject_to recapture as provided in sec_1 25a- f proposed sec_1_25a-5 provides that the recapture_amount is the difference between the credit claimed in the prior taxable_year and the redetermined credit the redetermined credit is computed by first reducing the amount of the qualified_tuition_and_related_expenses for which a credit was claimed in the prior taxable_year by the amount of the refund of the qualified_tuition_and_related_expenses resulting in redetermined qualified expenses and then computing the credit using the redetermined qualified expenses and the relevant facts and circumstances of the prior taxable_year such as modified_adjusted_gross_income any redetermination of the tax_liability for the prior taxable_year by audit or amended_return will be taken into account in computing the redetermined credit proposed sec_1 25a f i provides that the recapture_amount increases the tax_imposed_by_chapter_1 of the internal_revenue_code the income_tax for the refund year we present scenarios you may see if receipt of the tops award is deferred and if the recipient does or does not seek to receive the incentive payment for claiming a sec_25a credit receiving louisiana’s incentive payment a student who is entitled to receive a tops award in year defers receipt until year pays or his or her parent pays qualifying expenses in year from his or her own funds claims or his parent claims a sec_25a credit for qualifying expenses paid in year then receives in year the deferred tops award reduced by the credit claimed but increased by the additional_amount after the filing of the tax_return for year on which is claimed the sec_25a credit for the qualifying expenses paid the student chooses to demonstrate in accordance with sec_117 that the award is excludable based on the qualifying expenses paid in year since no portion must be used to pay non-qualifying expenses therefore the person claiming the credit is frev-113710-00 treated as having received a refund of qualifying expenses paid in year must recompute the year sec_25a credit claimed and must include the excess_credit claimed as tax on the return for the year of the receipt of the refund in this case year the year of receipt of the scholarship excluded under sec_117 receiving full tops award on deferred basis a student who is entitled to a tops award in year defers receipt until year pays or his or her parent pays qualifying expenses in year from his or her own funds then receives the full amount of the tops award in year after the filing of the year tax_return on which the sec_25a credit for the tuition paid in year would be claimed if proper thereby declining to receive the incentive payment if a year sec_25a credit is claimed with respect to the qualifying expenses paid apparently contrary to louisiana’s terms for deferred payment of the full amount of the award and the student claims that the tops award received is excluded from income under sec_117 based on the payment of year qualifying expenses the year sec_25a credit must be recomputed and the excess recaptured in year if the tops award is included in the student’s income there is no need to recompute the sec_25a credit thus if any sec_25a credit is taken for year in scenario or above it would be subject_to recapture upon the deferred receipt of a tops award in year that is excluded from income based upon payment of the year qualifying expenses as noted above the recapture is determined by treating the tops amount received and excluded from income as a refund of qualified expenses paid in recomputing the year credit and reporting as tax in the year the award is received year the amount by which the year credit taken exceeds the year recomputed credit you may wish to suggest that the appropriate service officials undertake efforts to convey the service’s views to louisiana residents both in pre-filing and post-filing efforts if we may be of further assistance including upon publication of the final regulations please telephone this office at


office_of_chief_counsel internal_revenue_service memorandum number release date cc pa apjp b02 jmmoran postf-109326-05 third party communication none date of communication not applicable uilc date june to kimberley j peterson associate area_counsel cc lm ctm sj attn laura schmidt from blaise g dusenberry special counsel administrative provisions judicial practice cc pa apjp ------------------------------------- subject this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent this is in reply to your request concerning the application of six-year period of limitations under sec_6501 that is triggered by a taxpayer’s substantial omission of gross_income from the computation of tax_shown_on_the_return in particular you ask whether 357_us_28 has any application regarding whether an overstated basis is taken into account in determining whether gross_income has been omitted in the reporting of a sale of business property you also ask what is the standard for an adequate_disclosure of an item of omitted gross_income legend partnership x gp partner llc date date date date dollar_figurev --------------------------------------------------------------------- ------------------------------------------------------------------------ --------------------------------------------------------------- ---------------- ----------------- ----------------- ----------------- --------------- postf-109326-05 dollar_figurew dollar_figurex dollar_figurey dollar_figurez --------------- -------------- -------------- -------------- issues if the full amount of the proceeds from the sale of property used in a trade_or_business is shown on a partnership return but the basis of the property is overstated whether any gross_income has been omitted from the return for purposes of the six-year period of limitations for substantial omissions of gross_income what is the standard for determining whether the taxpayer may avoid the six-year period of limitations on assessment otherwise triggered by a substantial omission of gross_income from the tax shown on a return by disclosing the omitted item in the return or in a statement attached to the return in a manner that adequately apprises the service of the nature and amount of the item conclusions overstating basis for the sale of property used in a trade_or_business results in an omission of gross_income for purposes of the six-year period because gross_income is determined after reducing sales proceeds by basis except in the case of a sale of a good or service the sale of property used in a trade_or_business is not a sale of a good or service for such purposes a disclosure is adequate if the omission is apparent from the face of the return to a reasonable man facts partnership x is a tefra partnership partnership x’s general_partner gp is an s_corporation partnership x has several individual limited partners a corporate limited_partner and limited_liability_company limited_partner partner llc partnership x’s form_1065 u s partnership return of income is a short-year initial return which shows the date started business as date the omitted gross_income arises from a sale on date which was reported on form_4797 sales of business property that was attached to the form_1065 the revenue_agent examining the form_1065 found that the sales receipts were fully reported on form_4797 however the revenue_agent believes that the basis of the assets prior to the step-up was zero the revenue_agent believes that partnership x stepped-up the basis of business property the form_4797 reports the sale of property used in a trade_or_business the disposition of noncapital assets other than inventory or property_held_primarily_for_sale to customers in the ordinary course of a trade_or_business and the disposition of capital assets not reported on schedule d postf-109326-05 under sec_754 and sec_743 after entering into a series of steps designed for this purpose the revenue_agent believes the transaction fails under an economic_substance theory and the national_office agrees that the transaction was abusive the sale transaction partnership x only reported one sale on form_4797 part iii gain from disposition of property under sec_1245 sec_1250 sec_1252 sec_1254 and sec_1255 reports a sale of oil gas properties acquired on date and sold on date the gross_sales prices is dollar_figurev the cost or other basis plus expense of sale is dollar_figurew which is also the adjusted_basis no deprecation or depletion is shown as reducing that amount leaving a total gain of dollar_figurex that gain is subject_to recapture of dollar_figurey as sec_1254 property for intangible_drilling_and_development_costs expenditures_for development of mines and other natural deposits and mining exploration_costs leaving dollar_figurez as net sec_1231 gain the step-up_in_basis transaction schedule b line reveals that there was a distribution or transfer eg by sale or death of a partnership_interest during the tax_year the form instructions for that line provide that if there was a distribution or transfer the partnership may elect to adjust the basis of partnership assets under sec_754 by attaching the statement described under elections made by the partnership on page of the instructions the following statements were provided on a separate sheet attached to the form_1065 statement regarding a partnership technical_termination pursuant to sec_708 and the regulations there under partnership x terminated on date on that date certain partners sold over ownership_interest in the partnerships capital and profits to partner llc on date partner llc acquired additional partnership interests through purchases these transactions resulted in a new partnership for federal_income_tax purposes the new partnership retains the same federal employee identification_number as reflected within the capital accounts the partnership books were restated to reflect the value of the assets as required in the regulations under sec_704 as reflected within this return in the event of a sale of these assets proper adjustments have been made to reflect the tax basis and the proper taxable gain sec_754 election statement the partnership hereby elects pursuant to sec_754 to adjust the basis of partnership property as a result of a distribution_of_property or sale_or_exchange of a partnership_interest as provided in sec_734 sec_743 postf-109326-05 law sec_6501 of the internal_revenue_code provides that if the taxpayer omits_from_gross_income an amount properly includible therein which is in excess of percent of the amount of gross_income stated in the return the tax may be assessed or a proceeding in court for the collection of such tax may be begun without assessment at any time within years after the return was filed for purposes of this subparagraph- i in the case of a trade_or_business the term gross_income means the total of the amounts received or accrued from the sale_of_goods or services if such amounts are required to be shown on the return prior to diminution by the cost of such sales or services and ii in determining the amount omitted from gross_income there shall not be taken into account any amount which is omitted from gross_income stated in the return if such amount is disclosed in the return or in a statement attached to the return in a manner adequate to apprise the secretary of the nature and amount of such item analysis partnership level tefra adjustments and irc c versus partner-level adjustments and sec_6501 we anticipate that any adjustments arising in connection with the subject issues will be partnership level tefra adjustments and irc c ie the gain from the sale of partnership assets we understand that as revenue_agent is contesting the form of the transaction the adjustments may turn out to be related to the sale of partnership interests usually adjustments concerning sales of partnership interests are not a partnership_item however sec_301_6231_a_3_-1 includes as a partnership_item the optional adjustments to the basis of partnership property under sec_754 including necessary preliminary determinations such as the determination of a transferee partner's basis in a partnership_interest as the revenue_agent considers the economic_substance of the transaction if the agent has questions concerning the nature of the adjustments and the appropriate notices for any proposed assessment the agent may wish to contact ----------------------------- while the six-year period applicable in the subject case appears to be that in irc c we look to the law as developed under sec_6501 to apply that the period of limitations for assessing income_tax with respect to any person which is attributable to partnership items or affected items for a partnership taxable_year is three years after the date on which the partnership return was filed or the last day for filing such return determined without regard to extensions whichever is later irc a if a partnership omits_from_gross_income an amount in excess of percent of the amount of gross_income stated on its partnership return then irc a is applied by substituting years for years irc c issue postf-109326-05 tefra provision regarding the above issues see 114_tc_533 appeal dismissed and remanded 249_f3d_175 3d cir regarding the interplay between irc and partnership x has properly reported dollar_figurev as gross_sales proceeds but understated net sales proceeds by dollar_figurew if gross_income for purposes of sec_61 is gross_receipts there is no omission if gross_income is gross_sales proceeds reduced by basis dollar_figurew is omitted from the form_1065 for purposes of sec_61 sec_61 reflects the general principal that gross_income takes into account the cost of the item sold for example in regard to sec_61 which concerns gross_income derived from business sec_1_61-3 provides that in a manufacturing merchandising or mining business ‘gross income’ means the total sales less the cost_of_goods_sold similarly in regard to sec_61 which concerns gains from dealing in property sec_1_61-6 provides that the gain is the excess of the amount_realized over the unrecovered cost or other basis for the property sold or exchanged which is in accordance with sec_1001 gross_income for purposes of sec_6501 is defined by reference to sec_61 see 101_tc_294 at note except as provided by sec_6501 which treats the gross_receipts as gross_income in the case of a trade_or_business selling a good or service clearly sec_6501 nullifies sec_1_61-3 for purposes of the six-year period just as clearly sec_6501 has no effect on dealings in property in a nonbusiness setting what is referred to as a casual sale in some opinions see 84_tc_203 which concerned a nonbusiness investor and indicates that sec_61 is not subject_to sec_6501 in the case of a trade_or_business ‘gross income’ is equated with gross_receipts otherwise ‘gross income’ means those items listed in sec_61 which includes among other things gains derived from dealings in property n5 sec_61 schneider v commissioner t c memo which also concerned a nonbusiness investor a casual sale of a capital_asset we believe the treatment of sales of business property is also straight forward and that any uncertainty results only from trying to apply statements in 357_us_28 concerning the extended assessment_period for omissions in the irc of to the revised provision in the irc of which remains unchanged in the irc of and from taking statements about equating gross_receipts with gross_income in the case of a trade_or_business such as that in insulglass out of context insulglass concerns a nonbusiness activity and the statement was made in the contest of contrasting a business and a nonbusiness activity the case did not address compare or contrast sales of goods and services and sales of other items within the context of business activity in colony the taxpayer understated the gross_profits on the sales of certain lots of land for residential purposes as a result of having postf-109326-05 overstated the basis of such lots by erroneously including in their cost certain unallowable items of development expense u s pincite the supreme court held for the taxpayer suggesting that an overstated basis in contrast to the omission of sales proceeds provides something for the service to check while the supreme court interpreted the irc of 1939’s predecessor to sec_6501 it stated its conclusion was in harmony with the unambiguous language of sec_6501 e a u s pincite the supreme court had before it a case of a sale_of_goods or services the taxpayer's principal business was the development and sale of lots in a subdivision see 26_tc_30 aff’d 244_f2d_75 6th cir rev’d 357_us_28 in cases not concerning a sale_of_goods or services colony‘s approach seems to conflict with sec_6501 see 273_f3d_402 1st cir in which the first circuit questions whether colony’s main holding carries over from the irc for land sales in general gross_income on land sales is normally computed as net gain after subtracting basis sec_61 sec_1001 sec_1_61-6 accordingly we do not believe that colony provides any authority for treating gross_receipts as gross_income for the sale of land or other_property rather under the current irc that treatment depends on whether the property sold is a good or service the sale of business property reported on form_4797 is not the sale of a good or service rather it is the sale of an item that is may be used by a business to sell goods and services in determining the amount of income stated on a tax_return for purposes of the six-year period as well as any omissions from the computation of that income the taxpayer’s share of partnership income is taken into account moreover in determining the amount of stated gross_income as well as omitted gross_income for purposes of the six-year period second tier partnership information is taken into account 116_tc_31 aod cc-2002-03 date while harlan concern partner-level adjustments and sec_6501 as indicated above we take the same approach with partnership-level adjustments under irc c in this regard we note that schedule b line reveals that partnership x is a partner in another partnership thus triggering the application of harlan note that a threshold requirement for a tier to be taken into account is the partner must properly identify the partnership in the partner’s return without such a reference in the taxpayer's own return there is no relief even if another return actually discloses the transaction 417_f2d_991 5th cir mel dar corp v commissioner tcmemo_1960_56 rev’d on other issue 309_f2d_525 9th cir cert_denied 372_us_941 in general the return which shows the disclosure normally is the only taxpayer's own return 220_f2d_65 9th cir for example income taxable to the beneficiary reported on the trust return is not by itself a disclosure for purposes of omissions on the beneficiaries returns even though the service knows the beneficiaries and trusts are arelated 116_tc_31 multi-tiered pass-through arrangements issue postf-109326-05 the tax_court has described the test of whether a taxpayer has adequately disclosed an omitted item as follows the proper application of the rule is whether an adjustment might be apparent from the face of the return to the elusive ‘reasonable man ’ hines v commissioner tcmemo_1989_17 aff’d without opinion 893_f2d_1330 3d cir see also 64_tc_460 acq 1976_2_cb_3 the tax_court explains further in another opinion as follows the statement must however be sufficiently detailed to apprise the commissioner and her agents as to the nature and amount of the transaction so that a decision as to whether to select the return for audit may be a reasonably informed one 98_tc_341 aff’d in part and rev’d in part on another issue 998_f2d_567 8th cir 88_tc_1020 and university country club inc t c pincite in addition we believe that 273_f3d_402 1st cir is particularly applicable to the subject case cc f western operations lp shows that the return must give a revenue_agent a reason to investigate further regarding the omitted income it is not enough that a taxpayer may string together a series of inferences that could have lead to the discovery of omitted income in cc f western operations lp the partnership omitted from the form_1065 items of gross_income arising from being relieved of a share of partnership liabilities upon the sale of several partnership interests cc f western operations lp attached the sch k-1 of the partnerships which showed its share of their liabilities the court however found that nothing in cc f western’s form_1065 indicated the allocation of debt or other sales terms rejecting cc f western’s contention that if the service had combined the amounts reported on the twelve k-1s attached to the return the court said in the end the safe_harbor provision of sec_6501 has to be read in light of its purpose namely to give the taxpayer the shorter limitations_period where the taxpayer omitted a particular income item from its calculations but disclosed it in substance the chain of inferences relied upon by western is simply too thin and doubtful to meet this requirement f 3d pincite an example of a return providing a reason to investigate further regarding the omitted income is shown in university country club inc in that case the service determined that receipts from the sale of class b stock represented taxable_income to petitioner because in substance the stock was a license for the privilege of using petitioner's facilities that taxpayer treated the receipts as nontaxable contributions to capital from the sale of that stock the taxpayer attached a balance_sheet that showed a capital stock account comprised of two classes of common_stock and a capital surplus account a postf-109326-05 reconciliation schedule of the capital surplus account showed the account to be comprised of general membership for pool and golf the tax_court found that reporting the dollar value of class b stock on the balance_sheet of the initial return rather than classifying the proceeds from the sale of stock as income is a type of disclosure described by the supreme court t c pincite we note that it has been said that the touchstone in cases of this type is whether respondent has been furnished with a ‘clue’ as to the existence of the error 54_tc_1336 aff'd per curiam 444_f2d_90 8th cir the origin of this clue test is colony and it is routinely referenced in opinions of the tax_court and other courts eg it is the decision referenced by university country club inc in the quote in the preceding paragraph the clue does not provide a definite test as the court continued concededly this does not mean simply a ‘clue’ which would be sufficient to intrigue a sherlock holmes but neither does it mean a detailed revelation of each and every underlying fact t c pincite as indicated by the first circuit in cc f western operations f 3d pincite the clue test is not based on statutory language at this time we are not referring to the clue test because we believe some taxpayers are taking the test out of context cc f western operations represents the best statement of our current view of the law accordingly we recommend that the revenue_agent consider the relevant returns in view of the test stated above if he had not already done so in his initial review of the return after the examining function has made its review you may wish to contact us to double-check that the test is applied properly case development hazards and other considerations ------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- colony explained why the service is not at a disadvantage if sales proceeds are disclosed even if basis is overstated as indicated in issue above that explanation has limited applicability under the irc of and the irc of as to this issue the explanation does not address the requirement that the service be apprised of the nature and amount of the item we note that the service has the burden to establish the omission from gross_income and that burden will be met if the revenue_agent is correct regarding the existence of an overstated basis if partnership x counters by claiming the omitted item was adequately disclosed partnership x has the burden to establish that the return contains an adequate_disclosure hines supra further shifting of the burden of persuasion may occur if an issue of adequate_disclosure develops but the ultimate burden to persuade the court that the disclosure was adequate rests with the partnership x see 85_tc_535 postf-109326-05 ------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------- 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 if you have any questions please contact ----------------- -- --------------------


internal_revenue_service number release date index number 2056a ------------------------ --------------------------- ------------------------------ 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-142738-11 date date legend legend decedent spouse trust - u s trustee date date date date date date attorney --------------------------------------------- --------------------------------------------------- ----------------------------------------------------------------------------------------- ------------------------ ---------------------------------------------------------- ---------------- ---------------- --------------------- --------------------- ------------------- ----------------------- ------------------------- dear ---------------------- this letter responds to your letter dated date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to file form 706-qdt u s estate_tax_return for qualified domestic trusts to notify and certify to the internal_revenue_service service that spouse who is the beneficiary of trust has become a united_states citizen decedent died intestate on date survived by spouse at the time of decedent’s death spouse was not a united_states citizen on date spouse established a qualified_domestic_trust qdot trust under sec_2056a also on date spouse executed an irrevocable assignment to trust on date spouse as executrix of decedent’s estate timely filed decedent’s form_706 united_states estate and generation-skipping_transfer_tax return and elected on schedule m to treat trust as a qdot on date spouse became a u s citizen it is represented that spouse has continuously resided in the united_states from the date of decedent’s death and at all times thereafter and remains a resident_of_the_united_states on date trust was plr-142738-11 funded with assets that passed to her from decedent on date decedent’s estate filed a form 706-qdt it is represented that no distributions have been made from trust to spouse or any other person attorney inadvertently failed to advise spouse about the necessity to file the form and failed to prepare form 706-qdt until date thus the u s trustee did not make such notification and certification of spouse’s u s citizenship during the required time period upon discovery of this failure u s trustee and spouse promptly submitted this private_letter_ruling request law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2056 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate is determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property that passes or has passed_from_the_decedent to the surviving_spouse sec_2056 provides that except as provided in paragraph if the surviving_spouse is not a citizen_of_the_united_states no deduction shall be allowed under sec_2056 sec_2056 provides that paragraph shall not apply to any property passing to the surviving_spouse in a qdot there are three main requirements under sec_2056a that must be satisfied in order for a_trust to be a qdot the trust instrument must require that at least one trustee of the trust be an individual citizen_of_the_united_states or a domestic_corporation and provides that no distribution other than a distribution of income may be made from the trust unless a trustee who is an individual citizen_of_the_united_states or a domestic_corporation has the right to withhold from the distribution the tax imposed by sec_2056a on the distribution in addition the trust must meet the requirements of the regulations under sec_2056a finally the executor must make an election under this section on the federal estate_tax_return to qualify the property for the federal estate_tax_marital_deduction sec_2056a provides that an estate_tax is imposed on - a any distribution before the date of death of the surviving_spouse from a qualified_domestic_trust and b the value of the property remaining in a qualified_domestic_trust on the date of the death of the surviving_spouse sec_2056a provides in part that if the surviving_spouse of the decedent becomes a citizen_of_the_united_states and if such spouse was a resident_of_the_united_states at all times after the date of death of the decedent and before such plr-142738-11 spouse becomes a citizen_of_the_united_states then the tax imposed by sec_2056a shall not apply to any distributions before such spouse becomes a citizen and the tax imposed by sec_2056a shall not apply sec_20_2056a-10 and of the estate_tax regulations provides in part that a qdot is no longer subject_to the sec_2056a estate_tax if the surviving_spouse becomes a citizen_of_the_united_states and the spouse was a resident_of_the_united_states at all times after the death of the decedent and before becoming a united_states citizen and the u s trustee of the qdot notifies the internal_revenue_service and certifies in writing that the surviving_spouse has become a united_states citizen notice is to be made by filing a final form 706-qdt on or before april 15th of the calendar_year following the year in which the surviving_spouse becomes a united_states citizen unless an extension of time for filing is granted under sec_6081 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except in subtitles e g h and i sec_301_9100-3 sets forth the standards that the commissioner uses to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute these standards indicate that the commissioner should grant relief when the taxpayer provides evidence proving to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or to advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore u s trustee is granted an extension of time until date to file the required notice and certification with the service that spouse is a u s citizen this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-142738-11 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 sincerely lorraine e gardner senior counsel branch passthroughs special industries enclosure cc


t c no united_states tax_court fort howard corporation and subsidiaries petitioner v commissioner of internal revenue respondent docket no filed date in 103_tc_345 we held that sec_162 i r c precluded petitioner from deducting or amortizing the costs and fees other than interest that petitioner paid in to borrow funds used in the leveraged_buyout of its stock sec p of the small_business job protection act of publaw_104_188 110_stat_1755 which was signed by the president on date and applies retroactively to provides that the expense disallowance rule_of sec_162 does not apply to any deduction for amounts which are properly allocable to indebtedness and amortized over the term of such indebtedness held in light of this statutory modification we now hold that the expense disallowance rule_of sec_162 as amended on date does not preclude petitioner from taking this opinion supplements our previously filed opinion in 103_tc_345 deductions for the amount of costs and fees it paid_or_incurred that are properly allocable to indebtedness and amortized over the term of such indebtedness james l malone iii kristen e hazel and lonn w myers for petitioner lawrence c letkewicz william e bogner and dana e_p hundrieser for respondent supplemental opinion ruwe judge on date we issued an opinion that resolved some but not all of the issues in this case 103_tc_345 the parties have now settled the remaining issues one of the issues resolved in our prior opinion was whether sec_162 k precluded petitioner from deducting or amortizing the costs and fees other than interest that petitioner paid in to borrow funds used in the leveraged_buyout lbo of its stock we held that such costs and fees were paid_or_incurred in connection with a redemption and that sec_162 precluded petitioner from deducting or amortizing them for purposes of computing its taxable_income 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure on date the president signed the small_business job protection act of publaw_104_188 110_stat_1755 the act section p of the act provides that the expense disallowance rule_of sec_162 does not apply to any deduction for amounts which are properly allocable to indebtedness and amortized over the term of such indebtedness 110_stat_1887 this provision takes effect as if included in the amendment made by sec_613 of the tax_reform_act_of_1986 publaw_99_514 100_stat_2251 which applies to amounts paid_or_incurred after date the act's amendment of 2including the amendment made by sec p of the small_business job protection act of publaw_104_188 110_stat_1755 sec_162 as it applies to this case provides k stock_redemption expenses -- in general --except as provided in paragraph no deduction otherwise allowable shall be allowed under this chapter for any amount_paid or incurred by a corporation in connection with the redemption of its stock exceptions --paragraph shall not apply to-- a certain specific deductions--any-- i deduction allowable under sec_163 relating to interest ii deduction for amounts which are properly allocable to indebtedness and amortized over the term of such indebtedness or iii deduction for dividends continued sec_162 applies to the period in which the costs and fees at issue in this case were paid_or_incurred and changes the tax treatment of the costs and fees other than interest that petitioner paid_or_incurred to borrow funds the court's opinion filed in date obviously did not reflect the act's amendment of sec_162 in date the parties therefore have jointly moved that we reconsider our opinion concerning sec_162 and issue a supplemental opinion applying the amendment we shall grant the joint motion to reconsider the parties have agreed to the amount of costs and fees allocable to indebtedness we now hold that the expense disallowance rule_of sec_162 as amended on date does not preclude petitioner from taking deductions for the amount of costs and fees it paid_or_incurred that are properly allocable to indebtedness and amortized over the term of such indebtedness continued paid within the meaning of sec_561 b stock of certain regulated_investment_companies --any amount_paid or incurred in connection with the redemption of any stock in a regulated_investment_company which issues only stock which is redeemable upon the demand of the shareholder 3the act's amendment to sec_162 does not affect the court's previous determination with respect to whether dollar_figure million of the dollar_figure million fee paid to morgan stanley should be characterized as interest see fort howard corp v commissioner supra pincite an appropriate order will be issued granting the parties' joint motion for reconsideration of opinion decision will be entered under rule