internal_revenue_service number release date index number ----------------------------- ---------------- ---------------- ------------------------ - department of the treasury washington dc person to contact ----------------------------- id no ------------- ----------------------------------------------------- telephone number --------------------- refer reply to cc psi b04 - plr-120674-03 date march re ----------------- legend date date date grantor_trust trust trust trust a daughter grandchild grandchild grandchild foundation state state statute state statute dear ------------- ------------------ ------------------ ------------------- ------------------------- ---------------------------------------------------------------- -------------------------------------------------------------------- --------------------------------------------------------- -------------------------- ------------------------------------------------------------------------ --------------------------- --------------------------------- ------------------ ---------------------------- ------------------------- --------------------------------- --------- ---------------------------------------------------------------- ---------------------------------------------------------------- this is in response to your letter dated date and prior submissions requesting rulings on the generation-skipping_transfer_tax effects of the proposed transaction this letter responds to your request the facts and representations submitted are summarized as follows on date grantor established an irrevocable_trust trust for the benefit of grantor s grandchildren at the time of the creation of trust daughter had one child grandchild subsequently daughter plr-120674-03 had two additional children grandchild and grandchild the trust was to be divided into separate equal trusts for each of grantor s grandchildren subsequently trust was divided into three separate trusts trust for the benefit of grandchild trust for the benefit of grandchild and trust for the benefit of grandchild grandchildren s trusts article i paragraph of trust provides generally that the trustee will distribute net_income or accumulated income or corpus of each trust for the primary beneficiary s support maintenance and comfort in such amounts as the trustee in his sole discretion determines the primary beneficiary is defined as the child of daughter for whose benefit a separate trust is established article paragraph provides generally that upon the 25th birthday of each primary beneficiary or upon the 5th anniversary date of the death of daughter whichever occurs later the trustee will pay and distribute free and clear of trust an undivided one-third interest in the respective separate trust corpus article paragraph provides that upon the death of a beneficiary the trustee will continue to hold all assets in trust for the lineal_descendants of the primary beneficiary brothers or sisters of the primary beneficiary spouse of the primary beneficiary foundation or other charitable corporations but never for the estate or creditors of the primary beneficiary or for the creditors of the estate of the primary beneficiary in such amounts and interests as the primary beneficiary shall appoint by his last will and testament the primary beneficiary may release the power during his lifetime as to part or all of the assets in the absence of the exercise of the power_of_appointment the trust assets will continue to be held in trust for the lineal_descendants of the primary beneficiary then living or if none for the primary beneficiary s brothers and sisters then living in equal shares or if none for the lineal_descendants of a per stirpes or if none for foundation to be used solely in state x article paragraph provides that the trustee will distribute accumulated income or corpus to the succeeding beneficiaries as set forth in paragraph article paragraph provides that each separate trust will terminate twenty-one years after the death of all of grantor s grandchildren living at the time of execution of trust upon termination the trustee will distribute the assets of each separate trust to the then beneficiary of the trust the initial trustee of trusts was an individual trustee the trust document does not specifically address the number of trustees but implies that one single trustee will administer the grandchildren s trusts following trust s formation in year and prior to date multiple persons transferred assets to trust daughter died on date after date under daughter s last will and testament all of her property and estate was devised equally to each of the grandchildren s trusts grandchild as executor of daughter s estate filed a form_706 united_states estate and generation-skipping_transfer_tax return no schedule r was filed and the executor did plr-120674-03 not allocate any generation-skipping_transfer_tax_exemption to any transfer made at death daughter did not allocate any gst_exemption to any transfers made during her lifetime the trustee proposes to petition the appropriate court to modify trust a certified_public_accountant will trace the origin of all transfers to trust by various transferors each of the original separate grandchildren’s trusts will be severed on a fractional basis this fractional severance will be accomplished by using an allocation fraction as described in sec_26 b iv of the generation-skipping_transfer_tax regulations pursuant to the proposed modification each of the grandchildren s trusts would be divided into two trusts a gst non- exempt trust consisting of that fraction of each trust attributable to the post-september additions to the trusts and a gst exempt trust consisting of that fraction of each trust attributable to the pre-date additions to the trusts the severed trusts will be funded either with a pro-rata portion of each asset held by the original undivided grandchildren’s trusts or on a non pro-rata basis provided the funding is based the fair_market_value of assets on the date of funding the severed trusts will have terms identical to the respective grandchildren’s trust however each trust will provide that the extraordinary_distribution of one-third of the trust assets made to the primary beneficiary after date will be made from the severed trusts on a non pro-rata basis such that distributions may be made selectively first from the gst non-exempt trusts rather than from the gst exempt trusts in addition the trustee proposes to modify trust so that the advisory board would have the power to name multiple trustees in order for each of the separate trusts to be administered by a separate trustee you have requested the following rulings the division of the grandchildren s trusts will constitute a qualified_severance under sec_2642 of the internal_revenue_code following the severance of each of the grandchildren s trusts into two trusts the extraordinary_distribution of one-third of the trust assets may be made to the primary beneficiary from the severed trusts on a non pro-rata basis such that distributions may be made selectively first from the gst non-exempt trusts rather than from the gst exempt trusts following the severance of each of the grandchildren s trusts into two trusts all distributions that are permitted under the trust_indenture may be made to the beneficiaries from the severed trusts on a non pro-rata basis such that distributions may be made selectively first from the gst non-exempt trusts rather than from the gst exempt trusts a judicial modification of the trust_indenture that authorizes the advisory board to name multiple trustees in order for each of the separate trusts to be administered by a separate trustee will not cause the gst exempt trusts to become subject_to chapter as provided in ' b i d transferor to a skip_person sec_2601 imposes a tax on every generation skipping transfer gst made by a under section a of the tax_reform_act_of_1986 the gst tax is generally sec_26_2601-1 provides that if an addition is made after september plr-120674-03 applicable to generation-skipping transfers made after date however under section b a of the tax reform act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer from a_trust if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date to a_trust which was irrevocable on date a pro_rata portion of subsequent distributions from and terminations of interests in property held in the trust is subject_to the gst tax provisions if an addition is made the trust is thereafter deemed to consist of two portions a portion not subject_to the gst tax and a portion subject_to the gst tax the non- chapter portion represents the value of all assets of the trust as it existed on date the applicable_fraction as defined in sec_2642 for the non-chapter portion is deemed to be one and the inclusion_ratio as defined in sec_2642 is zero the chapter portion of the trust represents the value of all additions to the trust made after date the inclusion_ratio of the chapter portion is determined under sec_2642 construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under section b a of the tax reform act and sec_26_2601-1 or of the generation-skipping_transfer_tax regulations will not cause the trust to lose its exempt status sec_26_2601-1 provides rules for determining when a modification judicial sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust by judicial reformation or non-judicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust under sec_2602 the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate under sec_2641 the applicable_rate is the maximum rate_of_tax on an estate_tax transfer multiplied by the inclusion_ratio the inclusion_ratio is defined in ' as the excess of over the applicable_fraction for the trust from which the transfer is made or for the direct_skip the applicable_fraction is a fraction in which the numerator is the gst_exemption allowable under ' allocated to the trust or direct_skip and the denominator is the value of the property transferred to the trust or involved in the direct_skip reduced by any federal estate_tax or state death_tax actually recovered from the trust and any charitable deduction allowed under ' or ' with respect to such property under ' a for purposes of determining the inclusion_ratio in the case of estate’s of decedents dying prior to date every individual is allowed a gst_exemption of dollar_figure adjusted for inflation as provided in sec_2631 which may be allocated by the individual or the individual's executor to any property with respect to which the individual is the transferor for gst tax purposes plr-120674-03 sec_2632 provides that any allocation by an individual of his or her gst tax exemption under ' a may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual s estate regardless of whether such a return is required to be filed sec_2632 provides that any portion of an individual s gst_exemption which has not been allocated within the time prescribed by ' a shall be deemed to be allocated first to property which is the subject of a direct_skip occurring at such individual s death and second to trusts with respect to which such individual is the transferor and from which a taxable_distribution or a taxable_termination might occur at or after such individual s death under sec_2642 if a_trust is severed in a qualified_severance the trusts resulting from such severance will be treated as separate trusts for purposes of generation-skipping_transfer_tax sec_2642 provides that a qualified_severance means the division of a single trust and the creation by any means available under the governing instrument or local law of two or more trusts if the single trust was divided on a fractional basis and the terms of the new trusts in the aggregate provide for the same succession of interests of beneficiaries as are provided in the original trust if a_trust has an inclusion_ratio of greater than zero and less than one a severance is a qualified_severance only if the single trust is divided into two trusts one of which receives a fractional share of the total value of all trust assets equal to the applicable_fraction of the single trust immediately before the severance in such case the trust receiving such fractional share will have an inclusion_ratio of zero and the other trust will have an inclusion_ratio of one under sec_2642 a qualified_severance may be made at any time under sec_2652 for purposes of chapter the term transferor means the decedent in the case of any property subject_to tax imposed by chapter and the donor in the case of any property subject_to tax imposed by chapter sec_26_2652-1 provides that the individual with respect to whom property was most recently subject_to federal estate or gift_tax is the transferor of that property for purposes of chapter under sec_26_2654-1 if there is more than one transferor with respect to a_trust the portions of the trust attributable to the different transferors are treated as separate trusts for purposes of chapter sec_26_2654-1 provides that with respect to a portion of a_trust treated as a separate trust under sec_26_2654-1 an individual’s gst_exemption is allocated to the separate trust state statute provides that the trustee may unless expressly prohibited by the terms of the instrument establishing the trust divide a_trust into two or more separate trusts without a judicial proceeding if the trustee reasonably determines that the division of the trust could result in a significant decrease in current or future federal income gift estate generation-skipping_transfer taxes or any other tax imposed on property if the trustee divides the trust the terms of the separate trusts must be identical to the terms of the original trust but differing tax elections may be made for the separate trusts plr-120674-03 state statute provides that upon the petition of a trustee or beneficiary a court may order that the terms of the trust be modified if because of circumstances not known or anticipated by the settlor compliance with the terms of the trust would defeat or substantially impair the accomplishment of the purposes of the trust in the instant case each grandchildren’s trust was irrevocable on date however under the terms of daughter’s will her residuary_estate was distributed equally to each trust on her death after date such that under sec_26_2601-1 a pro_rata portion of each grandchildren’s trust is subject_to the gst tax under sec_26_2654-1 that portion of each grandchildren’s trust attributable to daughter’s bequest is treated for gst tax purposes as a separate trust with respect to which daughter is the transferor under sec_26_2654-1 and sec_2632 daughter’s available gst_exemption was automatically allocated equally to each of these separate trusts and the inclusion_ratio for each separate trust is determined under sec_2642 gst non-exempt trust the trusts will be severed on a fractional basis determined in accordance with sec_26_2601-1 each gst exempt trust and gst non-exempt trust will provide for the same succession of interests of beneficiaries as is provided prior to severance further the severance of each trust as proposed will not result in shifting a beneficial_interest in the gst exempt trust and gst non-exempt trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person who held the beneficial_interest prior to the severance further the proposed severance will not extend the time for vesting of any beneficial_interest in the severed trusts beyond the period provided for in the original trust prior to severance each grandchildren’s trust will be severed into two trusts a gst exempt trust and a in addition the trustee will petition the court to permit the advisory board to appoint additional trustees so that each individual trust may have a separate trustee the modification is permitted under state law further the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in ' than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust accordingly we rule as follows the division of each grandchildren’s trust into a gst-exempt trust and a gst non- exempt trust will not cause the gst-exempt trusts to become subject_to chapter as provided in sec_26_2601-1 further the severance constitutes a qualified_severance for purposes of sec_2642 the inclusion_ratio for each gst non-exempt trust will be determined under sec_2642 based on the value of the property transferred to each grandchildren’s trust as of date and the amount of daughter’s gst_exemption that was automatically allocated to the portion of each grandchildren’s trust attributable to daughter’s bequest that is treated for gst tax purposes as a separate trust under sec_26_2654-1 with respect to which daughter is the transferor following the severance of each of the grandchildren s trusts into two trusts the extraordinary_distribution of one-third of the trust assets may be made to the primary beneficiary plr-120674-03 from the severed trusts on a non pro-rata basis such that distributions may be made selectively first from the gst non-exempt trusts rather than from the gst exempt trusts following the severance of each of the grandchildren s trusts into two trusts all distributions that are permitted under the trust_indenture may be made to the beneficiaries from the severed trusts on a non pro-rata basis such that distributions may be made selectively first from the gst non-exempt trusts rather than from the gst exempt trusts name multiple trustees in order for each of the separate trusts to be administered by a separate trustee will not cause the gst exempt trusts to become subject_to chapter as provided in ' b i d a judicial modification of the trust_indenture that authorizes the advisory board to 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 consequences of the transaction under the cited provisions or under any other provisions of the code except as specifically ruled herein we express or imply no opinion on the federal tax these rulings are directed only to the taxpayers requesting it sec_6110 provides that it may not be used or cited as precedent sincerely george l masnik chief branch associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes cc


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc dom p si plr-111358-99 date date index nos number release date legend trust date mother sister date date bank date date date state statute case dear we received the date request for rulings concerning the estate gift and generation-skipping_transfer gst tax consequences of the creation of a_trust this letter responds to that request the facts and representations submitted are as follows trust was established by taxpayer on date for her benefit the original trustees of trust were mother and sister article i a of trust provides that the trustees shall distribute the net_income from trust to taxpayer in quarter-annual or more frequent installments for taxpayer’s life or until the termination of trust whichever event occurs first article i b of trust provides that the trustees shall apply such amounts of trust corpus as they in their sole and absolute discretion deem necessary to provide liberally for taxpayer’s support maintenance medical_care education and general welfare for taxpayer’s life or until the termination of trust whichever event occurs first article i c of trust provides that at any time after taxpayer attains the age of thirty-six she shall have the right to withdraw all or any part of the assets then remaining in trust upon all of the trust assets being distributed to taxpayer trust shall terminate article i d of trust provides that if taxpayer dies before the termination of trust assets remaining in trust at the time of taxpayer’s death shall be distributed to taxpayer’s issue per stirpes or if no issue of taxpayer are then living the assets shall be distributed to sister or to her issue per stirpes if she is not then living or if neither sister nor any of her issue are then living the assets shall be distributed to those persons then living who would be entitled to inherit personal_property from the taxpayer in accordance with the then applicable state laws of descent and distribution whereupon trust shall terminate article xiii of trust provides that any trustee shall have the right to resign at any time upon thirty days written notice to the beneficiaries then entitled either absolutely or at the discretion of trustees to trust income who shall upon receipt of the notice have the right within fifteen days after receipt of such notice to appoint a successor trustee if no such successor trustee is designated in trust or if designated is not qualified or declines to serve and provided further there is no surviving trustee to continue to serve following the date of the resigning trustee’s termination article xiii further provides that in the event a successor trustee is not designated within the specified time by the beneficiaries the trustee desiring to resign may apply to a court of competent jurisdiction for the appointment of a successor trustee and for the judicial settlement of his or her or its accounts on date which was before date taxpayer who had reached age thirty- six executed a waiver of indenture of trust whereby she waived her rights to terminate trust and to withdraw any portion of trust corpus on date which was before date taxpayer mother and sister executed an irrevocable designation of successor trustee designating bank to serve as successor co- trustee with sister upon the death incapacity or resignation of mother mother died on date survived by taxpayer sister sister’s three children and sister’s two grandchildren it is represented that mother had no other living or deceased issue under the terms of mother’s will the residue of her estate is to be distributed to her issue per stirpes article fourth of mother’s will provides that if any assets are held in trust for the benefit of taxpayer under the terms of trust the portion of mother’s residuary_estate distributable to taxpayer rather than being distributed directly to her shall be distributed to the trustees then serving to be administered pursuant to the terms of trust it is represented that mother made no taxable_gifts to her grandchildren or more remote issue and that none of mother’s generation-skipping_transfer_tax_exemption had previously been used it is represented that after allocating a small portion of mother’s gst tax exemption to certain assets which passed to mother’s grandchildren the remainder of mother’s gst tax exemption exceeded the amount passing to trust under article fourth of mother’s will it is represented that the personal representative of mother’s estate allocated the remainder of mother’s gst tax exemption to the portion of mother’s estate passing to trust it is also represented that form_706 for mother’s estate was filed on date and that an estate_tax closing letter was issued to mother’s estate on date the trustees of trust now propose to establish a second separate trust the corpus of which will consist of all assets which have been or will be distributed to trust from mother’s estate it is represented that the trustees would administer both trusts under the terms of the original trust agreement dated date and modified on date but that at all times the trustees would segregate the assets of each trust and would maintain separate custodial accounts accounting_records etc hereinafter trust will be referred to as trust a and the trust holding the property from mother’s estate will be referred to as trust b state statute provides that unless otherwise provided in the trust instrument a trustee has the power to segregate by allocation to a separate_account or trust a specific amount from a portion of or specific assets included in the trust property of any trust that statute also provides that each separate trust must be held and administered upon the identical terms and conditions of the trust from which it was severed in the present case the trustees are not prohibited under the terms of trust or state law from segregating the portion of trust from mother’s estate the following rulings are requested upon taxpayer’s death taxpayer will be treated as the transferor of trust a under sec_2036 and sec_2612 mother will be treated as the transferor of trust b for estate and gst tax purposes and taxpayer will not be treated as the transferor of trust b for gift estate or gst tax purposes law and analysis sec_2033 provides that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death sec_2036 through provide for the inclusion in the gross_estate of property transferred by the decedent if the decedent has either retained an interest in or power over the property transferred sec_2601 of the code imposes a tax on every generation-skipping_transfer sec_2611 provides that the term generation-skipping_transfer means a taxable_termination a taxable_distribution or a direct_skip sec_2612 provides that the term taxable_termination means a termination by death lapse of time release of a power or otherwise of an interest_in_property_held_in_trust unless - - a immediately after such termination a non-skip_person has an interest in property or b at no time after such termination may a distribution be made from such trust to a skip_person under sec_2612 a direct_skip is a transfer subject_to federal estate or gift_tax made by a transferor to a skip_person sec_2613 defines a skip_person as a natural_person who is assigned to a generation which is two or more generations below that of the transferor or a_trust in which all the interests are held by skip persons or a_trust where after the transfer no trust distributions may be made to a non-skip_person under sec_2631 every individual is allowed a gst tax exemption of dollar_figure which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2652 provides as a general_rule that the term transferor means the decedent in the case of property subject_to the estate_tax or the donor in the case of property subject_to the gift_tax in applying this rule the identity of the transferor and thus the character of the transfer is determined by reference to the most recent transfer of the property that was subject_to the estate or gift_tax thus in the case of the bequest of a life income_interest in a_trust to a child of the decedent with a remainder_interest to a grandchild the trust property is subject_to estate_tax in the estate of the decedent and as a result the decedent is the transferor of the property sec_2654 provides that the portions of a_trust attributable to transfers from different transferors shall be treated as separate trusts and substantially separate and independent shares of different beneficiaries in a_trust shall be treated as separate trusts except as provided in the preceding sentence a single trust is not authorized to be treated as two or more trusts under sec_26_2654-1 if there is more than one transferor with respect to a_trust the portions of the trust attributable to the different transferors are treated as separate trusts for purposes of chapter sec_26_2654-1 provides that with respect to a separate share treated as a separate trust an individual’s gst tax exemption is allocated to the separate trust based on the information submitted and the representations made we conclude that upon taxpayer’s death taxpayer will be treated as the transferor of trust a for estate and gst tax purposes and mother will be treated as the transferor of trust b for estate and gst tax purposes this ruling is based on the facts presented and the applicable law in effect on the date of this letter if there is a change in material fact or law local or federal before the transactions in this ruling take effect the ruling will have no force or effect this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely james c gibbons assistant to the chief branch office of the assistant chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes


t c memo united_states tax_court david w schieber and janet l schieber petitioners v commissioner of internal revenue respondent docket no filed date steven ray mather for petitioners lori a amadei for respondent memorandum findings_of_fact and opinion morrison judge respondent hereinafter the irs issued the petitioners david w schieber and janet l schieber a notice_of_deficiency for the tax_year in the notice the irs determined that the schiebers had a dollar_figure deficiency in income_tax and were liable for a dollar_figure section-6662 penalty the schiebers timely filed a petition under sec_6213 for redetermination of the deficiency and the penalty we have jurisdiction under sec_6214 this case involves the tax treatment of a canceled debt sec_61 defines gross_income to include income from cancellation of debt this rule is subject_to certain exceptions found in sec_108 see 531_us_206 one such exception is in sec_108 which excludes from gross_income any amount that would otherwise be includable by reason of the cancellation of the taxpayer’s debt in whole or in part if the cancellation occurs when the taxpayer is insolvent sec_108 1unless otherwise indicated all references to sections are to the internal_revenue_code in effect for the tax_year all references to rules are to the tax_court rules_of_practice and procedure all dollar amounts are rounded to the nearest dollar 2the schiebers resided in california when they filed the petition therefore an appeal of our decision in this case would go to the u s court_of_appeals for the ninth circuit unless the parties designate the court_of_appeals for another circuit in writing see sec_7482 and 3the concept of gross_income is significant because taxable_income is the difference between gross_income and deductions sec_63 the amount of tax depends on the amount of taxable_income sec_1 thus if an amount is included in gross_income the tax_liability is greater than if it were not included 4the internal_revenue_code refers to income from canceled debt as income from the discharge_of_indebtedness sec_61 sec_108 provides that the amount of income excluded under sec_108 shall not exceed the amount by which the taxpayer is insolvent the term insolvent is defined by sec_108 as the excess of liabilities over the fair_market_value of assets whether and by how much a taxpayer is insolvent is determined on the basis of the taxpayer’s assets and liabilities immediately before the cancellation of debt sec_108 the sole issue in this case is whether the schiebers’ interest in a california public employees’ retirement_system calpers defined benefit pension_plan is considered an asset in determining whether they were insolvent on date the date the debt was canceled and the amount of their insolvency when the debt was canceled mr schieber was retired and was receiving monthly payments under the pension_plan in the event of mr schieber’s death mrs schieber had a right to receive the monthly payments other than the right to receive the monthly payments the schiebers could not access the value in the plan they could not convert their interest in the plan to a lump-sum cash amount sell the interest assign the interest borrow against the interest or borrow from the plan we therefore hold that the schiebers’ interest in the pension_plan is not an asset for the purposes of determining whether they were insolvent and the amount of their insolvency see id findings_of_fact the parties have agreed to a stipulation of facts we adopt as our findings_of_fact the statements in the stipulation of facts other findings_of_fact are based on documentary_evidence stipulated as admissible by the parties the pension_plan mr schieber worked as a police officer for the city of bakersfield california for years he participated in a defined benefit pension_plan through calpers on date he retired at retirement he was entitled to monthly distributions from the pension_plan he started receiving monthly payments from the pension_plan in the pension_plan withheld federal_income_tax from the payments therefore the payments were net of federal_income_tax withholding if mr schieber had died mrs schieber would have been entitled to receive the monthly payments until her death the schiebers could not convert their interest in the pension_plan into a lump-sum cash amount assign the interest sell the interest borrow against the interest or borrow from the plan 5our findings_of_fact are based on the preponderance_of_the_evidence therefore it is not necessary to determine which party bears the burden_of_proof 131_tc_185 the monthly distribution amount increased approximately per year because of cost_of_living_adjustments the annual increase took place each may for through the amounts of the monthly distributions were period date through date date through date date through date date through date date through date date through date date through date date through date monthly payment dollar_figure big_number big_number big_number big_number big_number big_number big_number the cancellation of debt on date the schiebers were not in bankruptcy during on date mr schieber wa sec_65 years old and mrs schieber wa sec_61 years old on date the fair_market_value of the assets owned by the schiebers other than the interest in the pension_plan was dollar_figure as the parties have stipulated one of the schiebers’ assets was a property pincite8 stockdale highway bakersfield california which had a value of dollar_figure the stockdale highway property was not the schiebers’ primary residence on date the schiebers’ liabilities totaled dollar_figure as the parties have stipulated among the liabilities was dollar_figure of debt secured_by the stockdale highway property the lender or one of the lenders of this dollar_figure debt was gmac mortgage on date gmac mortgage canceled dollar_figure of the schiebers’ debt that was secured_by stockdale highway property the dollar_figure of canceled debt consisted of dollar_figure of principal and dollar_figure of interest tax reporting the schiebers filed a federal_income_tax return for using form_1040 u s individual_income_tax_return on this return they did not report the dollar_figure of interest canceled by gmac mortgage because they never deducted it and therefore it is not includable in gross_income under sec_108 as to the dollar_figure of principal that was canceled the schiebers reported that they were 6the record does not reveal whether the dollar_figure was the entire debt held by gmac mortgage against the stockdale highway property or merely a portion we know only that dollar_figure is the amount of debt canceled by gmac mortgage that was secured_by the property 7without rounding the numbers to the nearest dollar the calculation is dollar_figure dollar_figure dollar_figure sec_108 provides that no income is realized from cancellation of debt to the extent that payment of the liability would have given rise to a deduction insolvent when this amount was canceled that the amount of their insolvency was dollar_figure and that therefore dollar_figure of the dollar_figure of canceled debt was excludable from income they reported that the remainder of the dollar_figure ie dollar_figure was includable in their income the notice_of_deficiency and the positions of the parties in the notice_of_deficiency the irs determined that the dollar_figure interest component of the gmac mortgage debt_cancellation was canceled-debt income however the irs has conceded that the dollar_figure is not includable in income under sec_108 therefore we need not resolve the question of whether the schiebers realized canceled-debt income from the cancellation of the dollar_figure interest component in the notice_of_deficiency the irs determined that the entire dollar_figure principal component of the gmac mortgage debt_cancellation was canceled-debt income after the schiebers filed their petition the schiebers and the irs executed a stipulation of facts executed a stipulation of settled issues which contains concessions and moved that the case be decided without trial under rule the court granted the rule motion 9the record does not reveal how the schiebers calculated the dollar_figure the irs contends that the schiebers’ interest in the pension_plan should be considered an asset for the purpose of the insolvency exclusion in the event the court considers their interest in the pension_plan to be an asset the schiebers concede that they were not insolvent immediately before the cancellation of the gmac mortgage debt and that they would be required to include the entire dollar_figure in their income the schiebers contend that their interest in the pension_plan should not be considered an asset for the purpose of the insolvency_exception without the pension_plan the schiebers’ assets are stipulated to have been worth dollar_figure their total debts are stipulated to have been dollar_figure thus without their interest in the pension_plan as an asset they would be insolvent in the amount of dollar_figure and would be entitled to exclude dollar_figure of the dollar_figure from their income the irs does not dispute that dollar_figure would be the amount of the exclusion in the event that the schiebers’ interest in the pension_plan is not considered an asset the schiebers originally reported on their return that the exclusion for insolvency was dollar_figure but their position now is that it is dollar_figure the parties’ positions are summarized below item value of assets other than interest in plan value of interest in plan liabilities amount of insolvency before dollar_figure in debt principal was canceled portion of dollar_figure that should be excluded from income portion of dollar_figure that should be included in income if the interest in the pension_plan is considered an asset dollar_figure not stipulated big_number not insolventa if the interest in the pension_plan is not considered an asset dollar_figure not stipulated big_number big_number big_number big_number big_number athe parties are in agreement that the schiebers were not insolvent if the interest in the pension_plan is considered an asset this agreement implicitly assumes that the value of the plan if it is considered an asset exceeds dollar_figure bdollar_figure is the difference between dollar_figure and dollar_figure as explained below we agree with the schiebers that their interest in the pension_plan is not an asset for the purpose of the insolvency exclusion therefore they are entitled to exclude dollar_figure of the dollar_figure of canceled principal from their income the irs concedes that the schiebers are not liable for the section-6662 penalty therefore we need not consider the issue of the schiebers’ liability for that penalty opinion sec_108 provides that a taxpayer is insolvent if immediately before the cancellation of debt the taxpayer’s liabilities exceeded the fair_market_value of the taxpayer’s assets the word assets is not defined by the internal_revenue_code 116_tc_87 n in carlson v commissioner t c pincite we held that an asset exempt from creditors could still be an asset under sec_108 because even an asset exempt from creditors can give the taxpayer the ability to pay an immediate tax on income from the canceled debt by contrast the schiebers contend that they could not use their interest in the pension_plan to immediately pay a tax_liability because they were entitled only to monthly payments under the plan and could not convert their interest in the plan to a lump-sum cash amount sell the interest assign the interest borrow against the interest or borrow from the plan we first determine whether we should assume that this description of their rights under the plan is correct we conclude that it is appropriate to do so the irs does not dispute the schiebers’ claim that they cannot access the value of the plan beyond collecting their monthly payments in its answering brief the irs explicitly chooses to dispute the relevancy of the claim not its accuracy it argues that the schiebers’ right to receive monthly payments causes their interest in the plan to be considered an asset in its view the lack of any other rights does not matter we conclude that the irs has waived any dispute over the correctness of the schiebers’ description of their rights under the plandollar_figure thus we consider it established that the schiebers’ interest in the pension_plan entitles them only to monthly payments the interest cannot be converted to a lump-sum cash amount the interest cannot be sold the interest cannot be assigned the interest cannot be borrowed against and the schiebers cannot borrow from the plan 10although the irs does not dispute the correctness of the schiebers’ description of their rights under the plan the preponderance_of_the_evidence supports their description the stipulation of facts states that mr schieber elected on a retirement form to receive benefits and that he chose the option under which his wife would receive the same level of monthly benefits if he died and the benefits would cease at the death of both of them furthermore the record includes a brochure that the parties have stipulated describes some of the characteristics of mr schieber’s pension_plan this extensive brochure does not suggest that the schiebers could convert an interest in the pension_plan to a lump- sum cash amount sell an interest in the plan assign an interest in the plan borrow against an interest in the plan or borrow from the plan additionally the schiebers’ description of their rights under the plan is consistent with provisions of the california laws they cite specifically cal gov’t code sec west supp which provides that an election to receive benefits under a calpers plan becomes irrevocable days after the first benefit check is received and cal gov’t code sec west which provides that an interest in a calpers retirement account cannot be assigned as noted in the paragraph above the irs contends the schiebers’ interest in the pension_plan should be considered an asset because they can use their monthly payments to pay liabilities but the test in carlson v commissioner t c pincite is whether the asset gives the taxpayer the ability to pay an immediate tax on income from the canceled debt--not to pay the tax gradually over time in carlson we held that a commercial fishing license could be an asset because the license could be used in combination with other assets to immediately pay the income_tax on canceled-debt income id by contrast the schiebers’ interest in the pension_plan cannot be used to immediately pay the income_tax on canceled- debt income therefore we hold that the schiebers’ interest in the pension_plan is not an asset within the meaning of sec_108dollar_figure in reaching our holding we have considered all arguments made and to the extent not mentioned we conclude that they are moot irrelevant or without merit 11the irs contends that shepherd v commissioner tcmemo_2012_212 a nonprecedential case supports its view that the schiebers’ interest in the calpers pension_plan is an asset the taxpayer in shepherd was a township employee who had a pension with the new jersey public employees retirement_system id slip op pincite the court found that he could borrow from his pension against his accumulated_contributions id pincite it held that the amount that he could borrow was an asset under sec_108 id pincite the schiebers by contrast could not borrow from the pension shepherd is therefore distinguishable to reflect the foregoing decision will be entered under rule


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi br 6-plr-100586-02 date date re revised schedule of ruling amounts legend taxpayer state plant location commission docket a b c d e f g h i j k l m n o p q r dear this letter responds to the request of taxpayer dated date submitted by your authorized representative for a revised schedule of ruling amounts pursuant to sec_1_468a-3 of the income_tax regulations the request for revised schedule of ruling amounts is the result of the commission decreasing the plr-100586-02 decommissioning costs to be included in taxpayer’s cost of service for ratemaking purposes taxpayer was previously granted a schedule of ruling amounts on a information was submitted pursuant to sec_1_468a-3 we understand the facts as presented by taxpayer to be as follows in b c investor-owned utilities organized taxpayer as a utility company under state law on d the plant began commercial operation under a temporary operating license the plant received a full-term operating license on e this license was to expire on f but has since been extended to g taxpayer sells all of the electrical power generated by the plant to the c utility owners the method of decommissioning the plant is the prompt removal dismantling the cost of which is based on a site-specific decommissioning study on h commission issued docket accepting as filed a settlement agreement including a revised decommissioning funding schedule submitted pursuant to the proposed sale of plant and dated i the settlement agreement estimated the cost of decommissioning the plant at j this amount escalated at an annual rate of k percent results in a future decommissioning cost of l the funding_period and level_funding limitation period extends m as elected in the original schedule of ruling amounts issued with respect to this plant the qualifying percentage is calculated pursuant to sec_1_468a-8 of the regulations the estimated period for which the qualified nuclear decommissioning fund fund is to be in effect is n the estimated_useful_life of the plant is o therefore the qualifying percentage is p percent no proceedings are currently pending before the commission that may result in an increase or decrease in the amount of decommissioning costs to be included in taxpayer’s cost of service for ratemaking purposes on q taxpayer entered into an agreement to sell its interest in the plant to an unrelated party on the basis of the expected date of sale taxpayer has agreed to limit the revised schedule of ruling amounts to the years r sec_468a of the code provides that a taxpayer may elect to deduct the amount of payments made to a qualified decommissioning fund however sec_468a limits the amount_paid into such fund for any taxable_year to the lesser_of the amount of nuclear decommissioning costs allocable to this fund which is included in the taxpayer’s cost of service for ratemaking purposes for the tax_year or the ruling_amount applicable to this year sec_468a of the code provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any_tax year is defined under sec_468a as the amount which the secretary plr-100586-02 determines to be necessary to fund that portion of nuclear decommissioning costs which bears the same ratio to the total nuclear power plant as the period for which the nuclear decommissioning fund is in effect bears to the estimated_useful_life of the plant this term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level_funding taking into account such discount rates as the secretary deems appropriate sec_468a of the code provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of the tax_year if the payment is made on account of this tax_year and is made within ½ months after the close of the tax_year additionally a taxpayer that files for a schedule of ruling amounts and receives such schedule of ruling amounts after the ½ month deadline for making a payment to a nuclear decommissioning fund must make such payment to the fund within days after the date that the taxpayer receives the schedule of ruling amounts for the tax_year sec_1_468a-1 of the regulations provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under sec_468a of the code an eligible_taxpayer as defined under sec_1_468a-1 of the regulations is a taxpayer that has a qualifying interest in among other things a direct ownership_interest including an interest as a tenant in common or joint tenant sec_1_468a-2 of the regulations provides that the maximum amount of cash payments made or deemed made to a nuclear decommissioning fund during any_tax year shall not exceed the lesser_of i the cost of service amount applicable to the nuclear decommissioning fund for such tax_year or ii the ruling_amount applicable to the nuclear decommissioning fund for such tax_year if the amount of cash payments made or deemed made to a nuclear decommissioning fund during any_tax year exceeds the limitation of paragraph b the excess is not deductible by the electing taxpayer in addition under sec_1_468a-5 there are rules which provide that the internal_revenue_service may disqualify a nuclear decommissioning fund if the amount of cash payments made or deemed made to a nuclear decommissioning fund during any_tax year exceeds the limitation of paragraph b sec_1_468a-3 of the regulations provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the tax years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund sec_1_468a-3 of the regulations provides that to the extent consistent with the principles and provisions of this section each schedule of ruling amounts shall be based on the reasonable assumptions and determinations used by the applicable public_utility commission in establishing or approving the amount of decommissioning plr-100586-02 costs to be included in the cost of service for ratemaking purposes under sec_1_468a-3 the internal_revenue_service shall provide a schedule of ruling amounts identical to the schedule proposed by the taxpayer but no such schedule shall be provided by the service unless the taxpayer’s proposed schedule is consistent with the principles and provisions of this section sec_1_468a-3 of the regulations provides that in general the ruling_amount for any_tax year in the level_funding limitation period shall not be less than the ruling_amount for any earlier tax_year under sec_1_468a-3 the level_funding limitation period begins on the first day of the tax_year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes sec_1_468a-3 of the regulations provides that in general the total estimated cost of decommissioning a nuclear power plant is the reasonably estimated cost of decommissioning used by the applicable public_utility commission in establishing or approving the amount of these costs to be included in cost of service for ratemaking purposes sec_1_468a-3 of the regulations provides that a taxpayer’s share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning such plant multiplied by the taxpayer’s qualifying interest in the plant under sec_1_468a-3 the qualifying percentage for any nuclear decommissioning fund is equal to a fraction the numerator of which is the number of tax years in the estimated period for which the nuclear decommissioning fund is to be in effect and the denominator of which is the number of tax years in the estimated_useful_life of the applicable plant sec_1_468a-3 of the regulations provides that the internal_revenue_service shall not provide a taxpayer with a schedule of ruling amounts for any nuclear decommissioning fund unless the public_utility commission that establishes or approves the rates for electric energy generated by the plant has determined the amount of decommissioning costs to be included in the taxpayer’s cost of service for ratemaking purposes and has disclosed the after-tax rate of return and any other assumptions and determinations used in establishing or approving the amount sec_1_468a-8 of the regulations provides that the estimated period for which the nuclear decommissioning fund is in effect and the estimated_useful_life of the nuclear power plant for purposes of calculating the qualifying percentage under sec_1 468a- d ends on the earlier of the last day of the tax_year in which it is estimated that decommissioning will be begin or the last day of the tax_year that includes the expiration date of the nuclear regulatory commission operating license as in effect on date without regard to any extensions or amendments thereto sec_1_468a-6 provides that if a transferor does not file a request for a revised schedule of ruling amounts on or before the deemed payment deadline for the plr-100586-02 taxable_year of the transferor in which the disposition of its interest in the nuclear power plant occurs that is the date that is two and one-half months after the close of that year the transferor’s ruling_amount with respect to that plant for that year will be the ruling_amount contained in the transferor’s current schedule of ruling amounts with respect to that plant for that taxable_year multiplied by a fraction the numerator of which is the number of days in that taxable_year that precede the date of distribution and the denominator of which is the number of days in that taxable_year we have examined the representations and the data submitted by the taxpayer in relation to the requirements set forth in the code and the regulations based solely upon these representations of the facts we reach the following conclusions the taxpayer has a qualifying interest in the plant prior to the sale and is therefore an eligible_taxpayer under sec_1_468a-1 of the regulations the commission has permitted the amount of decommissioning costs to be included in the taxpayer's cost of service for ratemaking purposes as required by sec_1_468a-3 of the regulations the taxpayer has calculated the total decommissioning costs under sec_1_468a-3 of the regulations the taxpayer has determined that p percent is the qualifying percentage as calculated under sec_1_468a-8 of the regulations based on the above determinations we conclude that the taxpayer's proposed schedule of ruling amounts with regard to the commission satisfies the requirements of sec_468a of the code approved schedule of ruling amounts approval of the schedule of ruling amounts is contingent on there being no change in the facts and circumstances known or assumed at the time this ruling i sec_1 the amount for any year shall be adjusted as necessary for the year of disposition of the plant pursuant to sec_1_468a-6 plr-100586-02 issued if any of the events described in sec_1_468a-3 of the regulations occur in future years the taxpayer must request a review and revision of the schedule of ruling amounts generally the taxpayer is required to file such a request on or before the deemed payment deadline date for the first taxable_year in which the rates reflecting such action became effective when no such event occurs the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the tenth taxable_year following the close of the tax_year in which the most recent schedule of ruling amounts was received the approved schedule of ruling amounts is relevant only to those payments made to the fund payments allocable to any funds other than the fund cannot qualify for purposes of the deduction under the provisions of sec_468a of the code as stated above payments made to the fund can qualify only to the extent they are made while taxpayer is the owner of the plant and only to the extent that they do not exceed the lesser_of the decommissioning costs applicable to the fund or the ruling amounts applicable to the fund in the taxable_year this letter_ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that this ruling may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to your authorized legal representatives pursuant to sec_1_468a-7 of the regulations a copy of this letter must be attached with the required election statement to the taxpayer's federal_income_tax return for each taxable_year in which the taxpayer claims a deduction for payments made to the fund sincerely yours peter c friedman senior technician reviewer branch office of assistant chief_counsel passthroughs and special industries enclosure copy


department of the treasury waudoavenec’ tax_exempt_and_government_entities_division date f loor contact person identification_number telephone number p t by tiitinn cir rere tons ay fie ---oe sol s003 -2o y9yl - cd o g yy o y oo dollar_figure o0 oo y yy oly employer_identification_number ' legend b c d e fh m n o x dear sir or madam we have considered the ruling requests dated date and date submitted on behalf of m a private_foundation its three independent directors d e and f the independent directors and c the fourth director these parties request rulings under sec_501 sec_4941 and sec_4945 of the internal_revenue_code in connection with the proposed settlement the settlement of a lawsuit brought against the estate of b the estate by c facts m was formed in under the nonprofit corporation statute of the state of n mis exempt from federal_income_tax as an organization described in sec_501 of the code and is also classified as a private_foundation under sec_509 m carries out its exempt purposes by making grants to public_charities the independent directors are all residents of n and were business colleagues and friends of b the founder of m who died in november -2- in b executed his last will and testament the will’ after b died the will was admitted to probate in a court of the state of n the probate_court consistent with b’s direction the probate_court appointed a certain bank as the personal representative and executor of the estate the personal representative in the will b made specific bequests to numerous individuals ranging in amount from dollar_figure x to dollar_figurex c received a bequest of dollar_figurex and no other_property b left the residue of his estate estimated to total over dollar_figurex to m aside from being b's long-time friend and employee c served for many years as an employee and as the assistant secretary and assistant treasurer of o another nonoperating private_foundation which was established by b’s parents b his brother his sister-in-law and his nieces and nephews served as directors of o for many years in aprit c timely filed a claim and accompanying complaint the claim against the estate in the probate_court alleging among other things that b had breached a promise to provide retirement benefits to her through his will and that b had failed to compensate her for services which she rendered to him during his lifetime damages of dollar_figurex from the estate plus punitive and treble_damages interest attorneys’ fees and costs a few days later the personal representative denied c’s claim in total and in june the estate filed an answer in the probate_court denying liability for the claim in the claim c seeks compensatory after extended negotiations conducted with the assistance of a neutral mediator c and the estate have executed a conditional settlement agreement the settlement agreement the estate and m through the independent directors have carefully evaluated and considered the assertions by c and evidence submitted during discovery in support of her claim and have determined that the amount that the estate proposes to pay c in connection with the settlement is fair adequate and reasonable the grounds thereof are explained below a neutral mediator has stated in his report to the probate_court that in his opinion the settlement is a fair and reasonable compromise of a genuinely disputed action the mediator devotes nearly one-third of his legal practice to the mediation and compromise of lawsuits serving as mediator in over big_number cases he has never acted as counsel for the estate c m or any of the independent directors for over thirty years c provided personal and business services to both b and o in b hired c to serve as financial assistant and bookkeeper to manage his business investments and affairs over the years c’s duties steadily increased she served as program and office manager assistant secretary and assistant treasurer for o she managed the organization’s day-to-day operations consulted with its board and other officers and provided oversight with respect to investment funds after over thirty years_of_service c retired from o in in these capacities aside from the above business functions c performed a variety of personal services for b she managed his household and personal finances this included the hiring and supervision of household employees- including housekeepers cooks and gardeners- and the payment of b's bills further when b became il which was frequent during his final years c would employ and assist b’s home nursing staff she continued to serve b’s business and -3- personal needs even after her retirement from o during several periods when b was severely ill over the years c resided at his home to be available hours a day seven days a week this included b's final illness from may through november in addition c has served as a director and as the secretary of m since in these capacities she has conducted most of the day-to-day work of m including evaluating grant proposals communicating with applicants and grantees balancing the checkbook and maintaining corporate records she did not receive any compensation from m for these services although c continues to serve as an m director and as its secretary she has not participated in any of m’s discussions of the lawsuit or of the settlement and she has not participated in m’s decision to consent to the settlement i over the years that c worked for b and o her annual salary gradually increased to the point where shortly before she retired from o at the end of her annual salary was approximately dollar_figurex at that time c received certain health benefits which were paid for partially by o and partially by b premiums after c retired from o b assumed responsibility for providing all of her health insurance benefits and continued to pay for her long-term care insurance b also paid the entire cost of c’s long-term care insurance during her employment c received smail gifts from b from time to time along with his other employees the total value of such gifts did not exceed dollar_figurex twice in the 1980's c purchased used cars from b at prices that the parties determined to be fair and reasonable because of her unique familiarity with b’s business affairs particularly his investments in oil and mineral_interests the personal representative hired c to assist in the administration of the estate after b’s death for these services the estate is paying her the annual equivalent of dollar_figurex which was roughly her annual salary from b at the time of his death over the course of her long employment b and c developed a close personal relationship c accompanied b to numerous civic social and charitable functions over the years the two also traveled together and spent two to eight weeks annually at the summer home of b’s family during these vacations c continued to perform her professional responsibilities as financial assistant and bookkeeper and she also managed the daily activities of the family household c asserts that in b proposed marriage to her and directed his attorney to prepare a prenuptial agreement although they did not marry the personal relationship between c and b remained close and c continued to perform a broad variety of personal services for b in her claim c has alleged that because of this relationship she accepted and relied upon b’s representations that he would provide for her retirement in his will c expected that her total retirement package would include a stipend equal to her annual salary less social_security payments as well as continued health benefits according to the claim and supporting materials b made numerous personal assurances to c that he would provide for her retirement through his will over the years c retained a financial planner who ‘met with her ard with’ b to disctiss her retiteémént among other issues b ret with the financial planner and c on two separate occasions and assured him that c need not concern herself with -4- a separate retirement_plan because b had personally established a fund that upon his death would supply sufficient funds to provide c income for the rest of her life accordingly c did not plan or establish any individual_retirement_plan for herself relying upon b’s representations through the years in recognition of c’s longstanding service and dedication to o its board_of directors approved a partial retirement benefit for her in that represented a relatively small portion of- her total salary upon her retirement o agreed to pay c a monthly stipend of dollar_figurex or approximately dollar_figure annually that stipend has been paid since her retirement from o at the end of according to her claim c did not question this arrangement or seek a greater retirement benefit because she understood that b personally would substantially supplement the monthly payment from o with a retirement fund that he had implemented or planned to implement on her behalf since c filed her claim with the probate_court the parties have engaged in discovery and extensive arm’s length negotiations regarding the lawsuit both the personal representative and m’s independent directors have carefully evaluated the merits of c’s allegations and the evidence she has supplied in support thereof ultimately to avoid the expense delay and uncertainty of protracted litigation the possibility of distracting publicity about m and b’s personal life and the potential for a significant adverse judgment the estate and m have determined that it is in m’s best interests for the estate to compromise and settle the lawsuit accordingly on date under the direction and guidance of a neutral mediator the parties reached the settlement which has been memorialized in the settlement agreement this agreement includes the following key provisions i ii ii the estate will pay to c a total net amount of dollar_figurex net of her attorneys’ fees which the estate will pay subject_to a cap of dollar_figurex and net of taxes which the estate will calculate and pay in addition to the dollar_figurex as of the effective date of the settiement agreement c will provide a full and complete release in favor of b the estate the personal representative m and the independent directors and c’s claim will be dismissed with prejudice the settlement is conditioned on the approval of the probate_court which was obtained on date and a favorable ruling from the irs that the settlement will not affect m’s exempt status under code sec_501 result in self-dealing under sec_4941 or constitute a taxable_expenditure under sec_4945 independent of the settlement agreement the personal representative has decided to continue to employ c through date as a full-time_employee of the estate at her present rate of compensation after date c will continue on a part-time basis at a reduced_rate of pay until date the personal representative has determined that c’s continued services are necessary for the administration and winding up of b's various financial and business interests in particular c has extensive experience with b’s oil and mineral holdings which span several states she is also familiar with b’s other real_estate fo -5- interests and loans made by b that are secured_by real_estate interests in the western united_states the personal representative presently is attempting to collect on these debts or attach new properties as security and c’s assistance has been and will remain vital in these endeavors in addition b's business office remains open and c has continued to manage certain interests such as properties b had leased to various tenants on the estate’s behaif in a meeting on date the independent directors of m unanimously c did not attend or participate in the meeting the independent directors have been agreed that the settlement is fair and reasonable and that the settlement is in the best interests of m guided in the evaluation of the settlement by m's legai counsel who has served as attorney for both m and the estate and has recommended that the estate and m agree to the settlement further m and the estate have taken into account the guidance of the neutral mediator who also recommended that all of the parties agree to the settlement rulings requested m and the independent directors request the following rulings the settlement and its implementation will not adversely affect m’s exemption from federal_income_tax under sec_501 c of the code the settlement and its implementation will not constitute self-deating by m under sec_4941 of the code the settlement and its implementation will not constitute self-dealing by m that would result in personal liability to the independent directors under sec_4941 of the code the settlement and its implementation will not constitute taxable_expenditures by m under sec_4945 of the code and the settlement and its implementation will not constitute taxable_expenditures by m that would result in personal liability to the independent directors under sec_4945 of the code law sec_501 of the code provides for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable educational scientific or other specified exempt purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual and which does not engage in proscribed legislative or political activities sec_1_501_c_3_-1 of the income_tax regulations states that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of the purposes specified in code section p30 c an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_a_-1 defines the words private_shareholder_or_individual in code sec_501 as referring to persons havinga_ personal and private interest in the activities of the organization sec_1_501_c_3_-1 of the regulations provides that an organization is not organized or operated exclusively for one or more exempt purposes under code sec_501 unless it serves a public rather a private interest thus it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests revrul_69_383 1969_2_cb_113 holds that the sec_501 tax exempt status of a hospital will not be jeopardized where after arm's length negotiations it enters into an agreement with a hospital-based radiologist to compensate him on the basis of a fixed percentage of the department's income the rationale for the ruling is as follows the parties had negotiated the agreement on an arm’s length basis the radiologist had no control_over the hospital itself the amount of compensation was reasonable in terms of the responsibilities and activities assumed and further the amount was not excessive when compared to the amounts received by other radiologists in comparable circumstances sec_4941 and sec_4941 of the code impose excise_taxes upon any act of self-dealing between a private_foundation and any of its disqualified persons the taxes are to be paid_by any disqualified_person other than a foundation_manager acting only as such who participates in the act of self-dealing sec_4941 and sec_4941 of the code impose excise_taxes on a foundation_manager who participates in an act of self-dealing between the private_foundation and a disqualified_person where the foundation_manager knows that such act is an act of self-dealing under sec_4941 sec_4946 of the code states that the term disqualified_person includes a foundation_manager within the meaning of subsection b sec_4946 provides that the term foundation manager’ means with respect to a private_foundation an officer director or trustee of the foundation or an individual having similar powers or responsibilities sec_4941 d d of the code provides that the term self-dealing means any direct or indirect payment of compensation or payment or reimbursement of expenses by a private_foundation to a disqualified_person sec_4941 provides that self--dealing also means the transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_53_4941_d_-1 of the foundation and similar excise_taxes regulations provides that for purposes of code sec_4941 the term self-dealing includes any direct or indirect transaction described in sec_53 d -1 of the regulations sec_53 d -1 of the regulations provides that the term indirect self-dealing shall not include a transaction with respect to a private foundation's interest or expectancy in property whether or not encumbered held by an estate or revocable_trust including a_trust which has become irrevocable on a grantor’s death regardless of when title to the property vests under local law if - - i the administrator or executor of an estate or trustee of a revocable_trust either- ii iii iv v a possesses a power of sale with respect to the property b has the power to reallocate the property to another beneficiary or c is required to sell the property under the terms of any option subject_to which the property was acquired by the estate or revocable_trust such transaction is approved by the probate_court having jurisdiction over the estate or by another court having jurisdiction over the estate_or_trust or over the private_foundation such transaction occurs before the estate is considered terminated for federal_income_tax purposes pursuant to paragraph a of sec_1_641_b_-3 of this chapter or in the case of a revocable_trust before it is considered subject_to code sec_4947 the estate_or_trust receives an amount which equals or exceeds the fair_market_value of the foundation's interest or expectancy in such property at the time of the transaction taking into account the terms of any option subject_to which the property was acquired by the estate_or_trust and with respect to transactions occurring after date the transaction either a results in the foundation receiving an interest or expectancy at least as liquid as the one it gave up b results in the foundation receiving an asset related to the active carrying out of its exempt purposes or c is required under the terms of any option which is binding on the estate_or_trust 23h sec_4945 and sec_4945 of the code impose excise_taxes to be paid_by a private_foundation that makes a taxable_expenditure as defined in sec_4945 sec_4945 and sec_4945 of the code impose excise_taxes to be paid_by a foundation_manager who agrees to the foundation's making of an expenditure knowing that it is a taxable_expenditure unless such agreement is not willful and is due to reasonable_cause sec_4945 of the code defines the term taxable_expenditure to mean any amount_paid or incurred by a private_foundation for any purpose other than one specified in sec_170 the latter section states purposes that substantially coincide with those stated in sec_501 sec_53_4945-6 of the regulations provides that expenditures to acquire investments and reasonable expenses thereof entered into for the purpose of obtaining income or funds to be used in furtherance of purposes described in sec_170 ordinarily will not be treated as taxable_expenditures under code sec_4945 analysis the settlement helps ensure m's continued operation in furtherance of exempt purposes under sec_501 of the code as represented by m with respect to the investments described in sec_53_4945-6 of the regulations above as with the compensation arrangement at issue in revrul_69_383 the settlement has been reached after arm’s length negotiations involving c and the personal representative of the estate although c and officer of m she has recused herself from all discussions relating to the lawsuit and the settlement by m and has not participated in m’s approval of the settlement the personal representative m through the independent directors the neutral mediator and the probate_court have all concluded that the settlement is fair and reasonable in light of the potential for an adverse judgment the likelihood of extended and expensive litigation and possible harm to the charitable mission reputation and purposes of m also the amount of the settlement represents a very insignificant sum in comparison to the amount that the estate will still be able to distribute to m therefore it is clear that the settlement will not result in the inurement of m’s net_earnings to the benefit of c is a director we aiso note that the settlement will allow the estate to convey the residue of b’s assets to m more quickly and will in turn enable m to make significant grants in furtherance of its charitable purposes and to perform other exempt_activities the foregoing demonstrates that the settlement expedites the carrying out of m’s exempt purposes and as such should not jeopardize m's tax exempt status under sec_501 of the code the estate administration exception to the self-dealing rules is described in sec_53 d -1 b of the regulations and includes five specific requirements inasmuch as the settlement satisfies all five requirements based on m’s representations neither m nor any of the independent directors will engage in an act of self-dealing under sec_4941 of the code by entering into the settlement and consenting’ to’its implementation by thé estate p34 as a director and officer of m c is a foundation_manager of m and is therefore a disqualified_person sec_4941 of the cade imposes taxes upon any act of self-dealing between a private_foundation and any of its disqualified persons sec_4941 defines the term self-dealing to include any direct or indirect sale_or_exchange or leasing of property between a private_foundation and a disqualified_person or any direct or indirect transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private foundation- neither the code nor regulations specifically define the term indirect self-dealing’ however the case law and other authorities establish that an estate’s assets that will pass to a private_foundation may be treated as assets of the foundation for purposes of sec_4941 therefore any sale exchange or other transfer of such assets to a disqualified_person may constitute indirect self-dealing see 87_tc_1016 and 572_fsupp_9 because m holds a residuary interest in the assets of the estate we must review the settlement herein of c’s lawsuit against the estate to ensure that it does not contravene the self-dealing provisions of the code pursuant to the estate administration exception of sec_53 d -1 b of the regulations a transaction with respect to a private foundation's interest or expectancy in property held by an estate does not constitute indirect self-dealing if five specific conditions are met in the rockefeller and reis cases cited above the estate administration exception did not apply because one or more of the requisite conditions had not been met in contrast based on m’s representations the settlement herein satisfies each of the five conditions as explained below accordingly its implementation will not result in indirect self-dealing under sec_4944 of the code the executor of the estate has the power to realiocate the property of the estate to another beneficiary the executor or personal representative herein of the estate possesses the power under item paragraph d of b’s will to compromise settle and pay or receive payment for any claim for or against the estate without obtaining court approval moreover the relevant n statute grants the personal representative of an unsupervised estate the authority to satisfy and settle claims by virtue of the personal representative’s authority to settle all claims against the estate it has the power to reallocate the property of the estate to another beneficiary thereby satisfying the second of the three alternative tests of sec_53 d -1 b i of the regulations the settlement has been approved by the probate_court with jurisdiction over the estate on date the personal representative and c jointly filed a petition with the probate_court seeking approval of the terms of the settlement notice of this petition was provided to the attorney_general of n the attorney_general did not object to the petition on date the probate_court held a hearing regarding the petition which was attended by the personal representative and c in an order dated date the probate_court approved the terms of the settlement accordingly the requirement of sec_53 d -1 b ii of the regulations has been met inasmuch as the assets that b bequeathed to m have to date been held by the estate m has not been able to use those assets to further its exempt purposes service approval of the settlement wilt enable it to be finalized and m will receive funds which it can use to carry out its exempt purposes consequently the settlement satisfies the first of the three alternative tests of sec_53 d -1 b v of the regulations based on the foregoing analysis the settlement satisfies the requirements of the estate - administration exception set forth in sec_53 d -1 b of the regulations and therefore does not constitute an act of self-dealing under sec_4941 of the code sec_4941 of the code imposes taxes upon a foundation_manager of a private_foundation who knowingly participates in an act of self-dealing between the foundation and a disqualified_person as directors of m the independent directors are foundation managers as that term is defined by sec_4946 for the reasons stated above based on m’s representations the settlement satisfies the requirements of the estate administration exception of sec_53_4941_d_-1 of the regulations and thus does not constitute an act of self-dealing accordingly the independent directors have not participated in any act of self- dealing by m and are not subject_to taxation under sec_4941 sec_4945 of the code imposes a tax upon any taxable_expenditure which is defined under sec_4945 to mean any amount_paid or incurred by a private_foundation for any of several identified purposes m has not yet received any assets from the estate and the settlement amount will be paid_by the estate and not by m in light of the fact that the settlement has been reached while the estate’s assets are held by the personal representative m is not liable for any taxable_expenditure under sec_4945 sec_4945 of the code defines the term taxable_expenditure to mean an amount_paid or incurred by a private_foundation for other than the exempt purposes set forth in sec_170 sec_53_4945-6 of the regulations provide that expenditures and related expenses to acquire investments entered into for the purpose of obtaining income or funds to be used in furtherance of purposes described in sec_170 b ordinarily will not be treated as taxable_expenditures under sec_4945 the exact disposition of the residue of the estate is presently in dispute because of c’s claim in order to resolve that dispute the personal representative has agreed to the settlement as a result of the settlement the estate will avoid incurring substantial additional attorneys’ fees and court costs but more importantly the settlement will allow the residue of the estate to pass to m and will enable m to obtain income and funds which will be used to make grants for charitable purposes as described in sec_170 accordingly the participation by the estate and m in the settlement should be deemed a cost of acquiring income and assets to be used in furtherance of m's exempt purposes and therefore not a taxable_expenditure sec_4945 of the code imposes excise_taxes to be paid_by a foundation_manager who knowingly agrees to the foundation’s making of a taxable_expenditure based on m’s representations that the settlement costs including estate legal fees are fair and reasonable ‘and for the reasons set forth above the settlement is not a taxable_expenditure by m 2p the settlement will occur before the estate is considered terminated for federal_income_tax purposes the personal representative has not yet distributed the estate’s assets and no tax clearances have been received accordingly the estate has not yet been terminated for federal estate_tax purposes and the requirement of sec_53 d -1 b iii of the regulations is satisfied - the estate is receiving an amount which equals or exceeds the fair_market_value of m's interest or expectancy in such property at the time of the transaction in her lawsuit c has sought over dollar_figurex in damages fees and costs from the estate the estate and m through the independent directors have evaluated her claims carefully and thoroughly aside from analyzing the merits of the action evidence furnished by c and independent investigation and interviews by the estate and its attorneys the estate and m have considered the exorbitant costs substantial delay and overall uncertainty of protracted litigation of the lawsuit the risk of adverse publicity for m and for b personally from such litigation and the potential for a significant adverse judgment that would diminish markedly the assets that m would ultimately receive from the estate after careful consideration of all these factors and arm’s length negotiations with c the estate has approved the settlement similarly m’s independent directors have unanimously concluded that the settlement is in m's best interests and that the amount to be received by c under the settlement is equal to the fair_market_value of her claims against the estate’s assets the attorney serving as counsel for both m and the estate has assisted in the negotiation of the settlement and based upon the information above has recommended that m and the estate agree to the settlement further the parties have taken their dispute to mediation and the neutral mediator has recommended that the parties agree to the settlement the recommendations of the mediator and counsel as buttressed by the approval of the probate_court reflect their views that the settlement is in the best interests of the estate and m this leads to the conclusion that the fair_market_value of m's interest in the estate following the settlement is at least as great as that it would receive absent this resolution of c's lawsuit as required by sec_53 d -1 b iv of the regulations the settlement will result in the foundation receiving an interest at least as liquid as the one it gave up and will result in m receiving an asset related to the active carrying out of its exempt purposes upon entering into the settlement m will receive an interest which is more liquid than until the settlement the possibility that c would prevail on her claim has what it is giving up created a risk that m’s interests in the residue of the estate could be reduced significantly accordingly the precise value of m’s interest in the estate has been uncertain if the settlement is approved by the service then m will finally be free to receive the entire residue of the estate approximately dollar_figurex without the risk of substantial loss in litigation this interest will be more liquid than m’s present_interest because the assets will be unencumbered by c’s claim and free of the potential for reduction by the costs of litigation or through an adverse judgment consequently the independent directors have not agreed to any taxable_expenditure by m and are not subject_to taxation under sec_4945 rulings based on m's representations and the applicable law we are able to rule as follows the settlement and its implementation will not adversely affect m’s exemption from federal_income_tax under sec_501 of the code the settlement and its implementation will not constitute self-dealing under sec_4941 of the code the settlement and its implementation will not constitute self-dealing by m that would result in personal liability to the independent directors under sec_4941 of the code the settlement and its implementation will not constitute taxable_expenditures by m under sec_4945 of the code the settlement and its implementation will not constitute taxable_expenditures by m that would result in personal liability to the independent directors under sec_4945 of the code any changes that may have a bearing upon m's exempt status should be reported to the ohio tax exempt and government entities te_ge customer service office the mailing address is internal_revenue_service te_ge customer service p o box cincinnati oh the telephone number there is a toll free number this ruling is limited to the applicability of the provisions of sec_501 sec_4941 and sec_4945 of the code and does not purport to rule on any facts that were not represented in this ruling fair_market_value or fair and reasonable costs is proper further we have not determined whether the methodology you are using to determine pursuant to a power_of_attorney on file in this office we are sending a copy of this letter to your authorized representative we are also sending a copy of this ruling to the ohio te_ge customer service office because this letter could help resolve any questions about m’s exempt status it should be kept with m’s permanent records if there are any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter vo this ruling is directed only to m and c d e and f the parties that requested the ruling sec_6110 of the code provides that it may not be used or cited as precedent thank you for your cooperation sincerely sreto back gerald v sack manager exempt_organizations technical group dy


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi plr-120511-02 date date legend taxpayer partners a date date state year plr-120511-02 this letter responds to a letter dated date and subsequent correspondence requesting relief under sec_301_9100-1 through of the procedure and administration regulations for an extension of time in which to make an election under sec_754 of the internal_revenue_code facts according to the information submitted taxpayer is a limited_partnership formed under the laws of state on date a a partner of taxpayer died on date due to a misunderstanding between taxpayer’s multiple professional tax_return_preparers when taxpayer filed its partnership return for year which includes date taxpayer failed to make an election under sec_754 election to adjust the basis of partnership property it is represented that partnership acted reasonably and in good_faith that granting relief will not prejudice the interests of the government and that partnership is not using hindsight in making the election law and analysis under sec_754 a partnership may elect to adjust the basis of partnership property where there is a distribution_of_property or a transfer of a partnership_interest the election applies to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year for which the election is filed and all subsequent years sec_1_754-1 of the income_tax regulations provides that an election under sec_754 is made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed no later than the time for filing for the taxable_year including extensions under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose deadline is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin plr-120511-02 sec_301_9100-2 and sec_301_9100-3 provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result taxpayer is granted an extension of time of sixty days following the date of this letter to make a sec_754 election effective year the election should be made in a written_statement filed with the applicable service_center for association with taxpayer's partnership tax_return a copy of this letter should be attached to the statement filed a copy of this letter is enclosed for that purpose except as specifically set forth above we express no opinion concerning the federal_income_tax consequences of the transactions described above under any other provision of the code specifically we express no opinion as to whether taxpayer is a partnership for federal tax purposes 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 with this office we are sending the original of this letter to you taxpayer’s authorized representative and a copy of this letter to taxpayer sincerely yours heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes