t c no united_states tax_court bankamerica corporation as successor_in_interest to continental bank corporation as successor_in_interest to continental illinois corporation petitioner v commissioner of internal revenue respondent docket no filed date p had deficiencies in its federal_income_tax for year sec_1 and in year p carried back an amount of investment_tax_credit to year sec_1 and reducing the this court has issued five opinions under this docket number each captioned continental illinois corp v commissioner tcmemo_1988_318 tcmemo_1989_468 tcmemo_1989_636 94_tc_165 and tcmemo_1991_66 relating to the tax_liability of petitioner's predecessor for the tax years through portions of the decisions in tcmemo_1988_318 tcmemo_1989_636 and tcmemo_1991_66 were affirmed in part and reversed in part and remanded to this court in 998_f2d_513 7th cir cert_denied 510_us_1041 and a decision was entered in accordance with the opinion of the court_of_appeals for the seventh circuit petitioner has filed a timely motion to redetermine interest amount of its deficiencies in year a net_operating_loss arose which was carried back to year the carryback of the year loss displaced a year foreign_tax_credit which was then carried back to year sec_1 and displacing the investment_tax_credit originally taken in those years r computed interest under sec_6601 i r c from the end of year to the due_date of the return for year on deficiency amounts for year sec_1 and calculated after the effect of the year loss without reducing the deficiencies by the amounts of itc taken from year to year p filed a timely motion under sec_7481 i r c to redetermine interest held p has made overpayments of interest for year sec_1 and because r should have taken the investment_tax_credit amounts into account in calculating interest accruing from the end of year until the due_date of the return for year on deficiency amounts reduced by the investment_tax_credit carried back roger j jones and jeffrey b frishman for petitioner pamela v gibson and richard g goldman for respondent supplemental opinion tannenwald judge a decision was entered in this case on date pursuant to a stipulated computation in accordance with the opinion of the court_of_appeals for the seventh circuit in 998_f2d_513 7th cir cert_denied 510_us_1041 on date petitioner filed a timely motion under sec_7481 c and rule to redetermine interest for the unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable years in issue and all rule references are to the tax_court rules_of_practice and procedure and tax years alleging that respondent has erroneously calculated such interest the issue for decision is whether respondent has failed to take into account the carryback of a investment_tax_credit itc and consequently overcharged petitioner for interest which accrued before the effect of a net_operating_loss nol_carryback background in respondent determined deficiencies against petitioner's predecessor in interest for the tax years through petitioner's predecessor challenged these deficiencies in this court which issued the following five opinions under this same docket number each captioned continental illinois corp v commissioner tcmemo_1988_318 tcmemo_1989_468 tcmemo_1989_636 94_tc_165 and tcmemo_1991_66 decision was entered on date the decision and was based on rule_155_computations the computations which took into account certain amounts of an itc carried back from portions of this court's decision as reflected in tcmemo_1988_318 tcmemo_1989_636 and tcmemo_1991_66 were appealed by the parties to the court_of_appeals for the seventh circuit the court_of_appeals for the seventh circuit affirmed in part and reversed in part and remanded the case to this court in 998_f2d_513 issued on date following this remand the parties filed with the court on date stipulated computations the computations covering the years to the computations did not include the amounts of the itc that were included in the computations this court's decision based on the computations was entered on date and became final within the meaning of sec_7481 a on date the decision as part of that decision it was decided that there was an overpayment for the taxable_year in the amount of dollar_figure and a deficiency for the taxable_year in the amount of dollar_figure the decision document indicated that it incorporated herein the facts recited in the respondent's computation as the findings of the court petitioner's tax_liability for the taxable years at issue with the effect and timing of various credit and net_operating_loss nol carrybacks reflecting the decision is described in more detail as follows tax_year petitioner had a tax_liability for the tax_year of dollar_figure before taking into account any credit carrybacks between date and date petitioner made that section provides for a 30-day instead of a 90-day period for a decision of this court to become final where there has been a remand by the court_of_appeals payments totaling dollar_figure against this tax_liability producing a deficiency of dollar_figure in there arose a foreign_tax_credit ftc in the amount of dollar_figure and an itc in the amount of dollar_figure in that year petitioner applied dollar_figure of the ftc as well as some of the itc to its tax_liability and carried dollar_figure of the ftc and dollar_figure of the itc back to for interest purposes petitioner received the benefit of this carryback as of date sec_6601 taking into account a refund petitioner received in the amount of dollar_figure for petitioner had as of date a tax_liability of dollar_figure in there arose an nol dollar_figure of which was carried back to petitioner's tax_year pursuant to sec_172 eliminating petitioner's tax_liability the elimination of the tax_liability had the effect of releasing the ftc and itc which had arisen in to be used in other sec_346 of the tax equity and fiscal responsibility act of tefra publaw_97_248 96_stat_324 amended sec_6601 effective for interest accruing after date to change the date on which a taxpayer receives the benefit of a carryback for interest purposes from the last day of the tax_year in which the carryback arose to the due_date for the return for that year sec_172 provides that an nol for any taxable_year shall be carried back to each of the taxable years preceding the loss_year sec_172 provides that the entire amount of the nol shall be carried back first to the earliest year possible years petitioner carried back dollar_figure of the ftc to which along with other credits from work incentive credits and new jobs credits in the amount of dollar_figure satisfied its tax_liability for because of itc limitation rules found in sec_46 and the itc originally carried back to could no longer be used since there was now as of after application of the ftc no tax_liability for against which it could be applied and was thus displaced and subsequently carried over to a year not at issue as a result of the nol's causing the release and carryback of the ftc to and the consequent release of the itc there was as of date the due_date for the return an overpayment of dollar_figure for petitioner's tax_year for sec_46 and limits available itc to dollar_figure plu sec_50 percent of tax remaining after the application of the ftc allowable for that year the dollar_figure limit was taken up with itc that arose and was used in and that is otherwise not at issue also under sec_38 effective for carrybacks from tax years after date amounts of ftc must be applied before any amounts of itc see supra note the itc at this point no longer affected petitioner's substantive tax_liability for tax_year petitioner had a tax_liability of dollar_figure for the tax_year not reflecting the effect of any carrybacks from subsequent years between date and date petitioner made payments totaling dollar_figure against this liability leaving a deficiency of dollar_figure in there arose an ftc and an itc as discussed above none of the ftc was carried back to and dollar_figure of the itc was carried back thus as of date petitioner had a tax_liability of dollar_figure in there arose as discussed above an nol which was carried back to eliminating tax_liability for and releasing the ftc and itc which had arisen in that year of the released ftc dollar_figure was carried back to because of the effect of the carryback of this ftc petitioner was precluded by sec_46 from using the itc carried back from which was then carried forward to a year not at issue when adjusted for additional payments and credits of dollar_figure petitioner had a tax_liability for as of date of dollar_figure the deficiencies and interest amounts involved were assessed for both years by respondent and fully paid_by petitioner in this liability reflects an itc that arose in and was used in early shortly after the decision became final petitioner contacted respondent regarding the issue of the inclusion of the amounts of itc discussions between petitioner and respondent continued throughout after which petitioner timely filed a motion under rule to redetermine the interest flowing from the stipulated computations with respect to the and tax years discussion for the tax_year respondent has computed interest on a deficiency of dollar_figure from date to date for the tax_year respondent has computed interest on a deficiency of dollar_figure from date to date respondent has not given effect to amounts of itc which were carried back during the period through because these amounts of itc were ultimately displaced and not used for the years at issue petitioner claims that respondent has overcharged it for interest by not taking into account the amounts of the itc with the effect of charging petitioner interest on higher deficiency amounts petitioner's position is that respondent must in plain terms give it credit for the itc which there is an unexplained difference of dollar_figure in this figure it is elsewhere listed as dollar_figure we use the figure from the stipulated computations reduced its deficiency to dollar_figure during the period date to date and reduced its deficiency to dollar_figure during the same period and charge it interest on those lesser deficiency amounts during that period petitioner's claim is based on the notion that respondent had use of the money represented by the itc payment during the interim period from date to date and cannot now charge petitioner for_the_use_of that money petitioner alleges that the amounts of itc which were included in the rule_155_computations that were prepared in before a decision was rendered by the court_of_appeals for the seventh circuit were erroneously left out of the computationsdollar_figure due to the effects of the subsequent carryback of the nol from the inclusion or exclusion of the amounts of itc does not alter the underlying net tax_liability for either taxable_year petitioner does not contest in any way its tax_liability for the deficiencies as reflected in the decision sec_7481 provides jurisdiction over interest determinations -- notwithstanding subsection a if -- an assessment has been made by the secretary under sec_6215 which includes interest as imposed by this title see appendix and discussion infra page the taxpayer has paid the entire amount of the deficiency plus interest claimed by the secretary and within year after the date the decision of the tax_court becomes final under subsection a the taxpayer files a petition in the tax_court for a determination that the amount of interest claimed by the secretary exceeds the amount of interest imposed by this title then the tax_court may reopen the case solely to determine whether the taxpayer has made an overpayment of such interest and the amount of any such overpayment see also rule which implements sec_7481 note to rule t c 97_tc_453 there is no dispute that as to both tax years the three requirements of sec_7481 have been met first the entire amount of the deficiency plus interest has been paid sec_7481 54_f3d_432 7th cir affg an order of this court second a timely petition was filed sec_7481 third a deficiency which includes interest has been assessed in respect of each year sec_7481 asciutto v commissioner tcmemo_1992_564 affd 26_f3d_108 9th cir in this connection even though an overpayment was ultimately found for there was a deficiency for the period during which interest accrued which is the subject of this dispute in addition where we have jurisdiction to determine an overpayment as we did in the original deficiency proceeding in this case we also have jurisdiction over the interest on that overpayment 85_tc_445 under these circumstances the interest issue before us in respect of is within our jurisdictiondollar_figure there is also some question as to the exact nature of the relief petitioner is requesting for the statute only grants this court jurisdiction to determine an overpayment of interest on a deficiency petitioner alleges that respondent has on the whole underassessed interest on the deficiency however petitioner also contends that as part of the interest calculation which resulted in an underassessment with respect to the tax_year respondent has overcharged interest on the deficiency during the period between its initial use of the carryback of the itc and the occurrence of the superseding nol under these circumstances we are satisfied that we have jurisdiction to determine whether there has been an overpayment of interest during the specific interim perioddollar_figure the three requirements of sec_7481 having been satisfied we turn our attention to the basic question involved herein ie the extent to which the itc for which was omitted from the computation should be taken into account we note that respondent does not contest our jurisdiction as to in reaching this conclusion we note respondent's indication on brief that respondent will make any computational adjustments that are a consequence of our decision whether they result in interest due to petitioner or respondent as a payment for purpose of determining interest due the parties have locked horns on four elements upon which the resolution of this question depends respondent contends that the decision has become final and that petitioner's motion seeks to modify that decision contrary to the established principle that this court does not have jurisdiction to take such action in the absence of a showing of fraud on the court or lack of jurisdiction in respect of the decision which elements are concededly not present herein petitioner asserts that since it seeks no change in the amounts of the deficiencies for and set forth in the decision it is not seeking to modify a final_decision but only the underlying figures set forth in the computations for the limited purpose of determining interest due respondent also argues that the relief petitioner is requesting involves a change in the numbers set forth in the computations including specific line entries and that such changes would require the court to re-open the record to admit new facts a procedure that constitutes a prohibited attempt to introduce a new_matter in a rule proceeding respondent contends that even if we find that we have jurisdiction petitioner is bound by the computations which it signed and that any modification of those computations is accordingly unwarranted in so doing respondent denies that there was a mutual mistake by the parties based upon the omission from the computations of the itc which had been included in the computations petitioner asserts that this omission constituted a mutual mistake and that therefore it should not be bound by those computations respondent asserts that in any event the computations reflected the correct ordering of the carrybacks by petitioner and that petitioner's use of the itc to reflect payment is not justified as a matter of law because the itc amounts were made unavailable by the nol and the ftc petitioner counters that the fact that the later events prevented the application of the itc against its tax_liability for deficiencies does not preclude its ability for the purpose of computing interest due to continue to treat them as payment for the periods when they were used ie between the effective dates of the credits involved and the dates of occurrence of the later events we deal with each of these elements in turn initially we note that the existence of a final_decision does not tie our hands in this case we recognize that we may not modify a final_decision absent a showing of fraud or lack of jurisdiction 86_tc_1319 affd 859_f2d_115 9th cir however sec_7481 specifically carves out an exception to the rule on the finality of our decisions indeed a prerequisite for invoking sec_7481 is that the decision be final aldrich v commissioner tcmemo_1993_290 thus as long as we do not change the substance of the final_decision we are free to act under sec_7481 stauffacher v commissioner supra cited by respondent is clearly distinguishable in that case the taxpayer sought a change in the amount of deficiencies although the taxpayer was apparently requesting that this be done only for the purpose of computing interest petitioner herein is not seeking a change in the amounts of the deficiencies for any purpose we do not think that the fact that the decision specifically incorporated the computations see supra p requires a different conclusion under the circumstances herein such action does not elevate the computations from a position of providing a basis for the decision to the position of an integral part of the decision itself respondent also seeks refuge in the rule that petitioner may not raise a new issue in a rule proceeding 79_tc_933 but even if the issue of the proper application of the itc as it affects interest liability were never raised before it is not a new issue within the meaning of rule since in the instant case the proper application of the itc only affects interest we had no jurisdiction to decide the issue during the main deficiency proceeding 107_tc_249 thus petitioner cannot be accused of raising a new issue that it could not have brought up before moreover this is not a rule proceeding and respondent's argument on this point reveals a misunderstanding of the nature of the relief petitioner is requesting and a misapprehension of the difference between rules and the purpose of a computation under rule is to show the correct amount of the deficiency liability or overpayment to be entered as the decision rule a if there is disagreement between the parties the court will determine the correct computation and argument on that point is confined strictly to consideration of the correct computation of the deficiency liability or overpayment resulting from the findings and conclusions made by the court rule c not only does rule not contemplate that a computation thereunder should reflect interest amounts but contrary to respondent's arguments on brief the rule does not allow arguments as to any other issues beyond the issues litigated in respect of the ultimate bottom-line deficiency liability or overpayment for the years at issue rule d on the other hand specifically contemplates bona_fide factual dispute s which would have to be addressed by an evidentiary hearing this rule implies that this court will if necessary accept new facts specifically in the context of a final_decision for the purpose of redetermining interest additionally respondent has never contested the existence of the amounts of itc nor has respondent disputed the accuracy of the amounts set forth in petitioner's motion the record herein contains all the evidence needed to decide the ultimate issue before us thus respondent's assertion of the need for new facts is unfounded as we view the situation in respect of the procedural elements involved herein petitioner is simply seeking to flesh out the computations so as to provide the foundation for a proper calculation of its liability for interest without in any way changing its liabilities for the deficiencies although petitioner's efforts reflect changes in some of the numbers in the computations those changes do no more than offset each other this is clearly reflected in the appendix to this opinion which shows that in each year petitioner first adds in the itc credits and then subtracts an identical amount in view of the foregoing we are satisfied that neither the rule as to the finality of our decisions nor the principle that a new issue may not be raised in a rule proceeding precludes us from addressing the substance of petitioner's motion respondent also objects to any change in the computations on the grounds that the computations were based on a stipulation of settlement between petitioner and respondent and petitioner cannot now seek to be relieved of its stipulation according to respondent petitioner cut a deal and is now stuck with it according to petitioner the amounts of itc in discussion were included in the computations but as a result of mutual inadvertence then left out of the computationsdollar_figure it is clear that we may reopen an otherwise valid settlement agreement based on the existence of mutual mistake 332_us_625 108_tc_320 we may also relieve a party of a stipulation where justice requires cf rule e 85_tc_359 shaw v commissioner tcmemo_1991_372 n on the other hand unilateral mistake is generally not a ground for reforming a settlement or stipulation 90_tc_315 see markin v commissioner tcmemo_1989_665 it is also clear that the mere fact that a decision which has become final is based on a stipulation does not bar the application of sec_7481 in 97_tc_453 the underlying issues had been resolved on the basis of a stipulated decision while the court rejected the we note that the court_of_appeals for the seventh circuit did not address any issue or otherwise take any_action in respect of the application of carrybacks in the computations taxpayer's attempt to construct a different settlement it did redetermine the amount of interest owed as recalculated by respondent which was lower than the amount which had been assessed and paid we must therefore determine whether the omission of the amounts of itc from the computations was a result of unilateral or mutual mistake in respondent's initial notice of objection to petitioner's motion respondent conceded that the itc amounts were inadvertently left out of the computations respondent agrees that on the basis of information now available respondent would have agreed to the computations petitioner now advocates had the matter been raised in when the computation on remand was being prepared in a supplemental notice of objection to petitioner's motion and on brief respondent recants this concession because upon further consideration respondent contends that the computations correctly reflect the application of payments and credits to the deficiencies determined therein thus respondent does not deny that a mistake was originally made but rather contends that the mistake led to what respondent now believes is the correct result and therefore is not a mistake on respondent's part as a consequence respondent seeks to enforce the computations as submitted on the ground that only a unilateral mistake was involved stipulations are treated under general principles of contract law 87_tc_1451 if a contract is based on a mutual mistake a defense to reformation or rescission is not that the contract with the mistake is more beneficial to the defending party similarly it is no defense to petitioner's motion for respondent to decide that the outcome of the case with the stipulation based on a mutual mistake is more favorable to respondent than the outcome petitioner proposes respondent cannot claim prejudice by petitioner's proposed treatment of the interim interest respondent having included the itc amounts in question in the computations dorchester indus inc v commissioner supra and petitioner having raised the issue with respondent shortly after discovering the error see williston contracts sec pincite n 3d ed finally as we discuss below while it is uncontested that the computations correctly reflect payments so as to determine tax_liability for the deficiencies they do not correctly reflect payments so as to determine the proper interest liability according to respondent if a change_of heart takes place that is enough to eliminate the existence of a mutual mistake even though in point of fact the change_of heart proves to be incorrect respondent is in effect saying that even if petitioner's contention as to the substantive law is correct respondent's changed position remains unassailable we think respondent's position creates a catch-22 situation and is incongruous to say the least we conclude that in the interest of justice petitioner should be relieved from the effects of the stipulated computations for the narrow purpose of redetermining interest for the and tax years during the interim period at issue cf rule e 90_tc_630 893_f2d_69 4th cir affg tcmemo_1989_2 applying rule e to a settlement agreement in this context we find it irrelevant whether the error as to the carryback of the itc was due to the carelessness of either party in this case the failure of petitioner to protect its interest by pointing out to respondent at the time the computations were constructed that the amounts of the itc had been omitted as we stated in 92_tc_776 the circumstances of this case do not warrant withholding relief from a mistake the mere fact that the party seeking relief did not exercise reasonable care does not preclude reformation restatement contract sec_2d sec comment a sec p reformation provides a result that both parties agreed to and prevents an unintended and unexpected windfall we now turn to the proper computation of interest for purposes of determining whether or not petitioner has actually made an overpayment under sec_6601 which deals with the correct timing and application of loss and credit carrybacksdollar_figure the parties agree that through the interplay of sec_46 and sec_172 the itc was displaced as of date for purposes of determining petitioner's ultimate tax_liability respondent however contends that this displacement also means that the itc may not be taken into account in sec_6601 provides income_tax reduced by carryback or adjustment for certain unused deductions -- net_operating_loss or capital_loss_carryback --if the amount of any_tax imposed by subtitle a is reduced by reason of a carryback of a net_operating_loss or net_capital_loss such reduction in tax shall not affect the computation of interest under this section for the period ending with the filing_date for the taxable_year in which the net_operating_loss or net_capital_loss arises certain credit carrybacks -- a in general --if any credit allowed for any taxable_year is increased by reason of a credit_carryback such increase shall not affect the computation of interest under this section for the period ending with the filing_date for the taxable_year in which the credit_carryback arises or with respect to any portion of a credit_carryback from a taxable_year attributable to a net_operating_loss_carryback capital_loss_carryback or other credit_carryback from a subsequent taxable_year such increase shall not affect the computation of interest under this section for the period ending with the filing_date for such subsequent taxable_year b credit_carryback defined --for purposes of this paragraph the term credit_carryback has the meaning given such term by sec_6511 referring to the carryback of business credits including the itc under sec_39 determining interest liability during the period date to date we disagree in 338_us_561 the supreme court held that the carryback of an nol to abate a deficiency does not abate the interest accrued on that deficiency up until the date the nol arises absent a clear legislative expression to the contrary the use of money principle will apply to the accrual of interest on a deficiency id pincite the use of money principle is reflected in sec_6601 sec_6601 provides for interest to be charged on a deficiency sec_6601 provides that interest is not affected by a carryback before the filing_date of the year in which the loss or credit arisesdollar_figure that is the party who has the use of the money pays interest up until the event which causes the party no longer to have use of that money in general interest liability is determined under sec_6601 synchronically looking at the period during which interest accrues without reference to future events such as loss or credit carrybacks this general principle evident from the statute itself is also clearly set forth in respondent's own rulings sec_6601 mentions specifically net capital losses nol's and itc's but is silent as to ftc's see infra note for example in revrul_66_317 1966_2_cb_510 the taxpayer claimed an itc in year in year an nol arose which was carried back to year eliminating taxable_income and tax_liability for year and thereby displacing the itc originally claimed the ruling holds that the taxpayer was not required to pay interest from year to year on that portion of the tax that had been originally offset by the itc that was displaced by the nol in revrul_71_534 1971_2_cb_414 the taxpayer incurred an nol for year which was carried back to year eliminating taxable_income against which an ftc had been claimed in year as a result the ftc was carried back to year for which year a refund was claimed the ruling holds that interest was due to the taxpayer on the refund from the first day after the close of year because the significant event that gave rise to the year overpayment was the year noldollar_figure in revrul_82_172 1982_2_cb_397 the taxpayer had an unused itc in year that it carried back to year in year the taxpayer incurred an nol which it carried back to year eliminating all income and resultant tax_liability against which the itc could be applied and resulting in a refund for year the displaced itc was carried to year resulting in an overpayment_of_tax for year the ruling holds that the see infra note significant event that gave rise to the year refund and the year overpayment was the year nol and that the taxpayer was entitled to interest on both amounts only after the last day of year consistent with revrul_66_317 supra the ruling also holds that the taxpayer did not have to pay interest on the amount of its tax_liability originally satisfied by the itc from year to year but then replaced by the nol the ruling specifically notes that the obligation to pay must be considered sequentially revrul_82_172 1982_2_cb_397 according to respondent the use-of-money principle illustrated in the revenue rulings only applies where there is a fixed liability in this case respondent's position is that because of the course of the litigation the final liability for and did not become fixed until after the nol arose which by way of carryback eliminated the use of any amounts of itc to reduce that liability or reduce interim interest charged respondent's analysis is fundamentally flawed while it is true that petitioner's final liability was fixed by the decision of this court that decision like all tax_court decisions relates back to the time the liability arose that is the effect of a decision of this court is that a deficiency or overpayment is found to exist in the amount determined by this court for all purposes including interest there is no question that the itc in question qualified as a payment of the tax as initially shown on the returns certainly the itc is a payment of the tax as ultimately determined by this court the fact that the ultimate decision by this court as to petitioner's tax_liability was delayed by the litigation process is irrelevant it is clear that these rulings reinforce petitioner's position and the application herein of the general_rule of manning v seeley tube box co supra and sec_6601 that the underlying objective is to determine in a given situation whose money it is and how long the other party had use of it revrul_82_172 1982_2_cb_397 if respondent had use of petitioner's money even in the form of a credit during the relevant period then respondent must take account of that money in computing interest on any deficiency see also revrul_85_ 1985_1_cb_366 tech adv mem date tech adv mem date tech adv mem date dollar_figure there are two exceptions to this general_rule see g_c_m big_number date the first exception occurs in the case where there is clear legislative expression indicating that the a lthough the petitioners are not entitled to rely upon unpublished private rulings which were not issued specifically to them such rulings do reveal the interpretation put upon the statute by the agency charged with the responsibility of administering the revenue laws 369_us_672 fn refs omitted underlying principle of sec_6601 should not apply manning v seeley tube box co u s pincite neither party contends that such an exception applies to the facts of this casedollar_figure the second exception occurs when the later event relates back to the beginning of the interest period in which case interest is calculated from the beginning taking the change into account this exception can be illustrated by 562_f2d_1201 which respondent cites in support of the argument that interest on petitioner's deficiency not be reduced by the amounts of itc used between and in that case the taxpayer but see 35_fedclaims_520 which holds that sec_6601 does not apply to ftc's and abated interest on a deficiency eliminated by the carryback of an ftc ftc carryovers shall be deemed taxes paid_or_accrued in the years to which they are carried back or forward sec_904 sec_6611 provides that notwithstanding the provisions of sec_904 interest on an overpayment attributable to an ftc accrues not from the date deemed paid but from the date the taxes were actually paid significantly however sec_6601 with regard to underpayments lacks any analogous provision as to the treatment of ftc's the court in fluor interpreted this silence as the clear legislative expression required by 338_us_561 to suspend the otherwise general use of money principle and not charge the taxpayer interest on the deficiency eliminated by the carryback of the ftc while we recognize that there is a lack of statutory clarity in the interplay between sec_904 sec_6601 and sec_6611 we are not confronted herein with comparable lack of clarity which would cause us to characterize such lack of clarity as a clear legislative expression for purposes of manning v seeley tube box co supra originally took ftc's in and in an nol arose which was carried back and displaced the ftc's from and the taxpayer then decided to deduct the foreign taxes instead of taking them in the form of a credit in and the court held that the taxpayer owed interest as if ftc's had not been invoked in the first place but rather as if the taxes had been deducted initially because the later decision to change from a credit to a deduction related back to the time the credits or deductions arose at the beginning of the interest period general dynamics corp v united_states supra is clearly distinguishable in the instant case petitioner has not attempted to deduct items previously reflected in a credit or to change the nature of a previously claimed credit nor has it claimed any new deductions against its or income here a credit was replaced not with a deduction but with another credit in revrul_66_317 1966_2_cb_510 the replacement of a credit with a loss did not produce an interim interest liability we are unable to see how petitioner's replacement of a credit with a credit itc for ftc could produce such a liability herein it is clear that the general use-of-money principle enunciated in manning v seeley tube box co supra reflected in sec_6601 and illustrated in respondent's rulings applies to the facts of this case for the application of that principle for the period in dispute the later event is the nol which arose in and which was carried back to which displaced more credits back to sec_6601 provides specifically if the amount of any_tax is reduced by reason of a carryback of a net_operating_loss such reduction in tax shall not affect the computation of interest under this section for the period ending with the filing_date for the taxable_year in which the net_operating_loss arises thus applying the statute the interest computation is not changed by the nol before date before that date interest is computed on the deficiencies as they existed on date reflecting the itc carried back from as if the nol had not occurred interest should then properly be charged based on the deficiency determined sequentially by succeeding events that is as to the tax_year for the period date to date interest is to be computed based on the deficiency amount of dollar_figure which reflects the carryback from of an itc in the amount of dollar_figure and an ftc in the amount of dollar_figure as to the tax_year for the period date to date interest is to be computed based on the deficiency amount of dollar_figure which reflects the carryback from of an itc in the amount of dollar_figure it should be pointed out that under this analysis there is no danger of petitioner's receiving a double benefit for the - - - - itc in the end after taking into account the effects of the nol petitioner's ultimate tax_liability was reduced by the itc only once namely in in addition the itc reduced petitioner's liability for interest on any deficiency from the point at which it was paid first for the and tax years from date to date and then for the tax_year from date onward there is no overlap of periods to which the itc was applied for purposes of interest or liability for deficiencies to reflect the foregoing an appropriate order will be issued - - - - appendix tax_court docket no motion to redetermine interest on deficiency tax_liability tax_year petitioner's sec_7481 interest computation nov stipulation difference big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number tax_court docket no motion to redetermine interest on deficiency tax_liability tax_year determination of overassessment for restricted interest tax_liability without credit carrybacks tax assessed and paid deficiency without allowance for carrybacks tax_liability after consideration of carryback from to foreign_tax_credit carryback investment_tax_credit carryback total credit_carryback from to unexplained difference included in stipulation tax_liability after consideration of carryback from to tax assessed and paid total payments tentative allowance from to net payments deficiency after consideration of credit_carryback from to tax_liability after consideration of carryback from to current_year investment_tax_credit freed up unexplained difference included in stipulation foreign_tax_credit carryback investment_tax_credit carryback freed up work incentive tax_credit carryback jobs tax_credit carryback total credit_carryback from to tax_liability after consideration of carryback from to net payments overpayment after consideration of credit_carryback from to determination of overassessment tax_liability tax_liability without credit carrybacks current_year investment_tax_credit freed up foreign_tax_credit carryback investment_tax_credit carryback freed up work incentive tax_credit carryback jobs tax_credit carryback total credit_carryback tax_liability after consideration of credit_carryback from and tax assessed and paid total payments tentative allowance from to net payments overpayment after consideration of credit_carryback from and as reflected in the tax_court decision dated date determination of deficiency to be paid for restricted interest tax_liability without credit carrybacks tax assessed and paid deficiency without allowance for carrybacks tax_liability after consideration of carryback from to investment_tax_credit carryback total credit_carryback from to tax_liability after consideration of carryback from to tax assessed and paid deficiency after consideration of credit_carryback from to tax_liability after consideration of carryback from to current_year investment_tax_credit freed up foreign_tax_credit carryback investment_tax_credit carryback freed up total credit_carryback from to tax_liability after consideration of carryback from to tax assessed and paid tax assessed subsequent to tax_court decision total assessment overassessment after consideration of credit_carryback from to tax assessed subsequent to tax_court decision but not paid tax_deficiency before taking into account assessment as reflected in the tax_court decision dated date payments and credits applied after the tax_court decision deficiency after consideration of carryback from and and payments subsequent to the date tax_court decision determination of deficiency tax_liability tax_liability without credit carrybacks current_year investment_tax_credit freed up foreign_tax_credit carryback investment_tax_credit carryback freed up total credit_carryback tax_liability after consideration of credit_carryback from and tax assessed and paid tax assessed and paid without consideration of events subsequent to tax_court decision tax_deficiency before taking into account assessment as reflected in the tax_court decision dated date payments and credits applied after the tax_court decision deficiency after consideration of carryback from and and payments subsequent to the date tax_court decision - - - - petitioner's sec_7481 interest computation nov stipulation difference big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number


department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b04 plr-152039-06 date october internal_revenue_service number release date index number ----------------------------------------------------------- ----------------------------------- ------------------------------------ ----------------- ------------------------------------ -------------------------------------- ------------------------------------------ ------------------------------------ ----------------------------------- ------------------------------------------ -------------------------------------------- legend legend trust three date decedent trust state date date date trust one trust two spouse date brother son son son date date ------------------------ ------------------- ---------------------------- ----------------------------------------------------------- ------------- -------------------------- ------------------- ----------------- ---------------------- ---------------------- ----------------- ---------------- ---------------------- ------------------- ---------------------- ------------------- ---------------------- ------------------------------------------ ------------------------------------ plr-152039-06 state court state statute -------------------------------------------- ------------------------------ subtrust one ------------------------------- subtrust two subtrust three ------------------------------ state statute -------------------------------------------- state statute -------------------------------------------- dear ------------ this responds to your letter dated date submitted on your behalf by your authorized representative concerning the income estate gift and generation-skipping_transfer gst tax consequences of the proposed division and modification of trust three facts the facts and representations submitted are as follows on date decedent created trust a revocable_trust the terms of which are governed by the laws of state an amendment in total to trust was executed on date a date prior to date decedent was under a mental_disability to amend the terms of trust as amended continuously from date until the date of his death on date the executor of decedent’s estate timely filed a united_states estate and generation-skipping_transfer_tax return form_706 in accordance with the requirements of sec_26_2601-1 of the generation-skipping_transfer_tax regulations the executor filed with form_706 a certification from a qualified physician stating that decedent was mentally incompetent at all times on and after date and did not regain competence to modify or revoke the terms of the revocable_trust prior to his death the internal_revenue_service service issued an estate_tax closing letter for decedent’s estate on date the value of the trust property was included in decedent’s gross_estate upon decedent’s death pursuant to the terms of the instrument trust was divided into three trusts trust one trust two and trust three trust three is the subject of this ruling_request it is represented that there have been no actual or constructive additions to trust three for gst tax purposes after date distributions from trust three were made to spouse until her death on date the current_distribution provisions of trust three are as follows article dollar_figure of trust provides that the trustee shall distribute so much of the net_income of trust three among all the grandchildren and the issue of the grandchildren of decedent living at the date of each distribution in amounts and at times as the trustee in plr-152039-06 his sole discretion shall determine without regard to equality of distribution any net_income not so applied shall be accumulated and periodically added to principal if no grandchild or issue of a grandchild is living on the date of any such distribution then distribution shall be made to the then living issue of decedent in such amounts as the trustee in his sole discretion shall determine if no issue of decedent is living on the date of any such distribution then distribution shall be made to the then living issue of brother in such amounts as the trustee in his sole discretion shall determine article dollar_figure of trust provides that in the event any beneficiary of trust three then entitled to income under the provisions of article dollar_figure shall be in need of funds for his or her reasonable health support maintenance and education the trustee shall pay to or apply for the benefit of any one or more of such beneficiaries so much of the principal of the trust estate as the trustee shall determine necessary or proper for such purpose article dollar_figure of trust provides that the discretionary power to sprinkle income or to invade the principal of trust three to or for a beneficiary who is then acting as a trustee shall be exercised by the trustee or trustees other than the trustee for whose benefit such discretionary distribution of income and or principal may be made article of trust provides that trust three shall terminate twenty-one years after the death of the last to die of certain named individuals upon the termination of trust three the balance of the trust estate shall be distributed on the principle of representation to the then living issue of decedent and if none to the then living issue of brother article y of trust provides that upon any division or partial or final distribution of the trust estate the trustee has the power to partition allot and distribute the trust estate in undivided interests or in_kind or in money or partly in any of them at such valuations and according to such method or procedure as the trustee shall determine article dollar_figure of trust provides that upon the death of decedent brother son son and son will become co-trustees of trust three article dollar_figure further provides that if only three of the individuals are living willing and able to act then the three individuals will act as co-trustees and if only two of the individuals are living willing and able to act then the two individuals will act as co-trustees and if only one of the individuals is living willing and able to act then he will act as the sole trustee on date brother resigned as a co-trustee pursuant to article no successor co-trustee was appointed to succeed brother currently son son and son remain as co-trustees on date the trustees of trust three petitioned state court pursuant to state statute for an order to divide and modify trust three the trustees seek to modify trust three in order to divide the trust into three separate equal subtrusts one for plr-152039-06 the benefit of the issue of son one for the benefit of the issue of son and one for the benefit of the issue of son provide that each of son son and son may serve as sole trustee of the subtrust created for the benefit of his respective issue and provide for the appointment and removal of successor trustees the original terms of trust three will apply to each separate subtrust with the following modifications or additions article dollar_figure shall be added to trust to provide that the trustee shall divide trust three into three equal and separate subtrusts and administer those separate subtrusts as follows a one of the separate subtrusts shall be administered for the primary benefit of the descendants of son subtrust one one for the primary benefit of the descendants of son subtrust two and one for the primary benefit of the descendants of son subtrust three b with respect to each son’s subtrust the trustee of each respective trust shall distribute so much of the net_income of the trust estate among all the descendants of the respective son living at the date of each such distribution in such amounts and at such times as the trustee in his sole discretion shall determine without regard to equality of distribution any net_income not so paid or applied shall be accumulated and periodically added to the principal of that subtrust in the event that at any time during the existence of a son’s subtrust any beneficiary then entitled to income shall be in need of funds for his or her reasonable health support maintenance and education the trustee shall pay to or apply for the benefit of any one or more of such qualified beneficiaries so much of the principal of that son’s subtrust as the trustee shall determine necessary or proper for such purposes if at any time during the existence of a son’s subtrust there should be no then living descendant of the respective son the trustee shall distribute so much of the net_income of that son’s subtrust to that son in such amounts and in such manner as the trustee shall determine any net_income not so paid or applied shall be accumulated and periodically added to the principal of that subtrust in addition if the trustee determines that the son shall be in need of funds for his reasonable health support maintenance and education the trustee shall pay to or apply for the benefit of that son so much of the principal of the son’s subtrust as the trustee shall determine necessary or proper for such purposes a son’s subtrust shall terminate upon the first to occur of the termination_date provided in article or the date on which neither the respective son nor any descendant of son is then living if a son’s subtrust terminates upon the termination_date provided in article then despite the distribution provisions in article the balance of that son’s subtrust shall be distributed c d e plr-152039-06 on the principle of representation to that son’s then living issue if a son’s subtrust terminates on the date on which neither that son nor any descendant of that son is then living the balance of that son’s subtrust shall be distributed as follows if at any time prior to the termination_date provided in article neither a son nor any descendant of that son is then living that son’s subtrust shall terminate and its remaining assets shall be added equally to the other son’s subtrusts or if only one exists all to that subtrust if at any time prior to the termination of all the trusts created under document as provided in article there should be no then living descendant of decedent the trustee shall distribute so much of the net_income of the last remaining son’s subtrust among the then living descendants of brother in such amounts and at such times as the trustee in his sole discretion shall determine without regard to equality of distribution any net_income not so paid or applied shall be accumulated and periodically applied to the principal of that last remaining son’s subtrust in addition if the trustee determines that any descendant of brother shall be in need of funds for his or her reasonable health support maintenance and education the trustee shall pay to or apply for the benefit of one or more such qualified beneficiaries so much of the principal of the last remaining son’s subtrust as the trustee shall determine necessary or proper for such purposes f the trustee may partition allot and distribute the assets of trust three in undivided interests or in_kind or partly in money and partly in_kind and the trustee may sell such assets as the trustee deems proper to make such division the trustee may also distribute a disproportionate share of any assets to a particular subtrust provided however that the fair_market_value of all assets distributed to a subtrust must equal the fair_market_value of the proportionate interest that subtrust is entitled to receive in all of the assets available for distribution at that time the aggregate income_tax basis of the assets distributed to each of the separate subtrusts shall be reasonably equal to the aggregate income_tax basis of the assets distributed to the others article dollar_figure will be added to trust to provide for the appointment and removal of trustees for each son’s subtrust subject_to the restrictions on trustee discretion contained in added article as follows a son will be the sole trustee of subtrust one son will be the sole trustee of subtrust two and son will be the sole trustee of subtrust three a son of decedent may appoint an additional person or persons as a co-trustee of that son’s subtrust he may also remove without cause any additional co-trustee so appointed if a co-trustee including the respective son ceases plr-152039-06 to serve the remaining co-trustee or co-trustees may continue to serve and the co-trustee who ceased to serve need not be replaced thereafter any complete vacancy in the trusteeship of a son’s subtrust shall be filled by the respective son for which the subtrust is named if he is then living and has legal capacity or if not by that son’s descendants b whenever any son of decedent dies or becomes incapacitated his descendants shall have the right with respect to that son’s subtrust to appoint a trustee to succeed the respective son to remove without cause any co-trustee appointed by the respective son and to remove without cause any trustee previously appointed by the descendants the right to appoint and remove without cause is exercisable by simple majority vote in descending generational orders and a later generation shall only exercise this right if there are no surviving members of the prior generation the removal of an acting trustee shall not occur more often than once during any twelve month period any trustee may resign at any time in such event a successor shall be selected as provided if all such successors fail to qualify or cease to act or if no successor trustee is effectively appointed pursuant to the foregoing provisions a successor trustee shall be appointed by a court of competent jurisdiction upon the petition of the resigning trustee or any beneficiary of the trust article dollar_figure will be added to trust to restrict the discretion of the trustee in certain circumstances as follows each individual co-trustee shall be disqualified from exercising any discretionary power to make distributions of income or principal to or for the benefit of himself or herself as a beneficiary instead all such discretionary powers shall vest solely in and be exercisable by the other co-trustees any individual serving as sole trustee who has the power to make discretionary distributions of income or principal for his or her own benefit may exercise that power in his or her favor only for his or her health education support or maintenance within the meaning of sec_2041 and sec_2514 of the internal_revenue_code a special co-trustee may be appointed for the limited purpose of making any other discretionary distributions to the regular trustee in his or her capacity as a beneficiary that are otherwise permitted under the provisions of trust any special co-trustee cannot be a_related_or_subordinate_party within the meaning of sec_672 of the internal_revenue_code with respect to the regular trustee each individual trustee or co-trustee shall be disqualified from exercising any discretion given to the trustee to benefit directly or indirectly someone he or she is obligated to support instead all such discretionary powers shall vest solely in and be exercisable by the other co-trustees and if there is none a c d e a b c plr-152039-06 d special co-trustee may be appointed by the then acting regular trustee for this limited purpose any special co-trustee cannot be a_related_or_subordinate_party within the meaning of sec_672 of the internal_revenue_code with respect to the regular trustee in addition income or principal of the trust shall not be used to discharge in whole or in part any person’s legal_obligation under the laws of the state of that person’s domicile to support or educate any beneficiary of the trust any trustee or co-trustee who is appointed by any beneficiary either alone or in conjunction with other beneficiaries and is a_related_or_subordinate_party within the meaning of sec_672 of the internal_revenue_code with respect to that beneficiary shall be subject_to the same disqualifications or restrictions contained in subparagraphs a through c above with respect to that beneficiary and or persons whom that beneficiary is obligated to support in the same manner and with like effect as if that beneficiary were acting as the trustee or co-trustee state statute provides that on petition by a trustee or beneficiary a court may divide a_trust into two or more separate trusts if the court determines that dividing the trust will not defeat or substantially impair the accomplishment of the purposes or interests of the beneficiaries state statute provides that the trustee has the power to effect distribution_of_property and money in divided or undivided interests and to adjust resulting differences in valuation a distribution_in_kind may be made pro_rata or non pro_rata and may be made pursuant to any written_agreement providing for a non pro_rata division of aggregate value of the community_property assets or quasi-community_property assets or both state statute provides in part that if a_trust instrument confers absolute sole or uncontrolled discretion on a trustee the trustee shall act in accordance with fiduciary principles and shall not act in bad faith or in disregard of the purposes of the trust moreover notwithstanding the use of terms like absolute sole or uncontrolled by a settlor or a testator a person who is a beneficiary of a_trust that permits the person either individually or as trustee or cotrustee to make discretionary distributions of income or principal to or for the benefit of himself or herself pursuant to a standard shall exercise that power reasonably and in accordance with the standard state statute further provides that unless a settlor or a testator clearly indicates that a broader power is intended by express reference to this subdivision a person who is a beneficiary of a_trust that permits the person as trustee or cotrustee to make discretionary distributions of income or principal to or for the benefit of himself or herself may exercise that power in his or her favor only for his or her health education support or maintenance within the meaning of sec_2041 and sec_2514 of the internal_revenue_code plr-152039-06 state court has determined that the state law requirements for modifying the trust have been met and that dividing trust three into separate trusts will not defeat or substantially impair the accomplishment of the purposes of the trust or the interests of the beneficiaries accordingly state court has granted the trustees’ petition to divide and modify the provisions of trust three as requested conditioned on receiving a favorable ruling on the income estate gift and gst tax issues from the service you have requested the following rulings the division and modification of trust three will not cause trust three or the successor subtrusts to lose their exempt status under b a of the tax_reform_act_of_1986 and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the modification of trust three will not cause any beneficiary to be treated as having a general_power_of_appointment with respect to any portion of a subtrust within the meaning of sec_2041 the division and modification of trust three will not cause any portion of the assets of the trust to be includible in the gross_estate of any beneficiary of the successor subtrusts under sec_2035 sec_2036 sec_2037 or sec_2038 the distributions to and allocations among the new subtrusts will not create a transfer of property that is subject_to federal gift_tax under sec_2501 the exercise of discretionary distribution powers by a trustee beneficiary under the modified provisions of trust three will not cause any beneficiary of subtrust one subtrust two or subtrust three to be deemed to exercise a general_power_of_appointment under sec_2514 the division of trust three will not be considered a distribution under sec_661 or sec_1_661_a_-2 of the income_tax regulations the three successor subtrusts will be treated as separate taxpayers for federal_income_tax purposes pursuant to sec_643 no gain_or_loss will be recognized for purposes of sec_61 or sec_1001 as a result of the division of trust three pursuant to sec_1015 the basis of the assets of the successor subtrusts will be the same after the division of trust three as the basis of those assets before the division pursuant to sec_1223 the holding periods of the assets in the successor subtrusts will include the holding periods of those assets in trust three ruling sec_2601 of the internal_revenue_code imposes a tax on every generation-skipping_transfer gst which is defined under sec_2611 as a taxable_distribution a taxable_termination or a direct_skip under of the tax_reform_act_of_1986 the act gst tax is generally applicable plr-152039-06 to gsts made after date however under b a of the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer under a_trust that was irrevocable on date except to the extent the transfer is made out of corpus added to the trust by an actual or constructive_addition after date under b c of the act and sec_26_2601-1 if an individual is under a mental_disability to change the disposition of his or her property continuously from date until the date of his or her death the gst tax provisions do not apply to any gst a under a_trust to the extent such trust consists of property or the proceeds of property the value of which was included in the individual’s gross_estate or b which is a direct_skip other than a direct_skip from a_trust that occurs by reason of the individual’s death sec_26_2601-1 defines mental_disability as mental incompetence to execute an instrument governing the disposition of the individual’s property whether or not there was an adjudication of incompetence and regardless of whether there has been an appointment of a guardian fiduciary or other person charged with either the care of the individual or the individual’s property sec_26_2601-1 provides that if there has not been a court adjudication that the decedent was mentally incompetent on or before date the executor must file with form_706 either - a certification from a qualified physician stating that the decedent was - i mentally incompetent at all times on and after date and ii did not regain competence to modify or revoke the terms of the trust or will prior to his or her death or sufficient other evidence demonstrating that the decedent was mentally incompetent at all times on and after date as well as a statement explaining why no certification is available from a physician and any judgment or decree relating to the decedent’s incompetency that was made after date sec_26_2601-1 provides that such items will be considered relevant but not determinative in establishing the decedent’s state of competency sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 will not cause the trust to lose its exempt status these rules are applicable only for purposes of determining whether an exempt trust retains exempt status for gst tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the gst tax if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation plr-152039-06 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 a modification of an exempt trust will result in a shift in a beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst or the creation of a new gst sec_26_2601-1 example provides as follows in grantor established an irrevocable_trust for the benefit of his two children a and b and their issue under the terms of the trust the trustee has the discretion to distribute income and principal to a b and their issue in such amounts as the trustee deems appropriate on the death of the last to die of a and b the trust principal is to be distributed to the living issue of a and b per stirpes in the appropriate local court approved the division of the trust into two equal trusts one for the benefit of a and a's issue and one for the benefit of b and b's issue the trust for a and a's issue provides that the trustee has the discretion to distribute trust income and principal to a and a's issue in such amounts as the trustee deems appropriate on a's death the trust principal is to be distributed equally to a's issue per stirpes if a dies with no living descendants the principal will be added to the trust for b and b's issue the trust for b and b's issue is identical except for the beneficiaries and terminates at b's death at which time the trust principal is to be distributed equally to b's issue per stirpes if b dies with no living descendants principal will be added to the trust for a and a's issue the division of the trust into two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the division in addition the division does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust therefore the two partitioned trusts resulting from the division will not be subject_to the provisions of chapter sec_26_2601-1 example provides as follows in grantor established an irrevocable_trust for the benefit of grantor’s issue naming a bank and five other individuals as trustees in the appropriate local court approves a modification of the trust that decreases the number of trustees which results in lower administrative costs the modification pertains to the administration of the trust and 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 in addition 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 therefore the trust will not be subject_to the provisions of chapter in the present case it is represented that trust three is exempt from gst tax under sec_26_2601-1 because the estate of decedent met the requirements sec_26_2601-1 for establishing decedent’s mental_disability to change the plr-152039-06 disposition of his property continuously from date until the date of his death further no additions actual or constructive have been made to trust three after that date with regard to the proposed modifications of trust three we conclude the proposed division of trust three into the three separate son’s subtrusts and the modification of trust three in order to provide for the trust’s division is similar to the facts in example of sec_26_2601-1 the modification of trust three to provide procedures for the appointment and removal of successor trustees procedures which were not otherwise provided under the original terms of trust three is viewed as pertaining to the administration of the trust comparable to the administrative modification in example of sec_26_2601-1 the modification of trust three to limit the discretion of the trustees in some circumstances is consistent with the original terms of trust three and state law we further determine that all of the proposed modifications i will not result in a shift of any beneficial_interest in trust three to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons holding the beneficial interests prior to the division and ii will not extend the time for vesting of any beneficial_interest beyond the period provided for under trust three accordingly based upon the facts submitted and the representations made we rule that the division and modification of trust three as provided will not cause trust three subtrust one subtrust two or subtrust three to lose its status as exempt from the application of the federal gst by reason of the effective date rule contained in b of the act and sec_26_2601-1 and the application of sec_26_2601-1 ruling sec_2 - 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_2035 provides that if the decedent made a transfer by trust or otherwise of an interest in any property or relinquished a power with respect to any property during the 3-year period ending on the date of the decedent's death and the value of such property or an interest therein would have been included in the decedent's gross_estate under sec_2036 sec_2037 sec_2038 or sec_2042 if such transferred interest or relinquished power had been retained by the decedent on the date of the decedent's death then the value of the gross_estate shall include the value of any property or interest therein that would have been so included plr-152039-06 sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for adequate_and_full_consideration in money_or_money's_worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2037 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time after date made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise if possession or enjoyment of the property can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property but in the case of a transfer made before date only if such reversionary_interest arose by the express terms of the instrument of transfer and the value of such reversionary_interest immediately before the death of the decedent exceed sec_5 percent of the value of such property sec_2038 provides that the value of the decedent's gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power to alter amend revoke or terminate or where any such power is relinquished during the 3-year period on the date of the decedent's death sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power_of_appointment by a disposition that is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent's gross_estate under sec_2035 to inclusive sec_2041 provides that a general_power_of_appointment is a power that is exercisable in favor of the decedent the decedent's_estate the decedent's creditors or the creditors of the decedent's_estate however a power to consume invade or appropriate property for the benefit of the decedent that is limited by an ascertainable plr-152039-06 standard relating to the health education support or maintenance of the decedent shall not be deemed a general_power_of_appointment sec_20_2041-1 of the estate_tax regulations provides in part that a donee may have a power_of_appointment if he has the power to remove or discharge a trustee and appoint himself for example if under the terms of the instrument the trustee or his successor has the power to appoint the principal of the trust for the benefit of individuals including himself and the decedent has the unrestricted power to remove or discharge the trustee at any time and appoint any other person including himself the decedent is considered as having a power_of_appointment however the mere power of management investment custody of assets or the power to allocate receipts and disbursements as between income and principal exercisable in a fiduciary capacity whereby the holder has no power to enlarge or shift any of the beneficial interests therein except as an incidental consequence of the discharge of the fiduciary duties is not a power_of_appointment sec_2501 imposes a tax on the transfer of property by gift by an individual sec_2511 provides that the tax imposed by sec_2501 applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2514 provides that a general_power_of_appointment is a power that is exercisable in favor of the individual possessing the power the possessor his estate his creditors or the creditors of his estate however a power to consume invade or appropriate property for the benefit of the possessor that is limited by an ascertainable_standard relating to the health education support or maintenance of the possessor shall not be deemed a general_power_of_appointment sec_25_2514-1 of the gift_tax regulations provides in part that a donee may have a power_of_appointment if he has the power to remove or discharge a trustee and appoint himself for example if under the terms of the instrument the trustee or his successor has the power to appoint the principal of the trust for the benefit of individuals including himself and a another person has the unrestricted power to remove or discharge the trustee at any time and appoint any other person including himself a is considered as having a power_of_appointment however the mere power of management investment custody of assets or the power to allocate receipts and disbursements as between income and principal exercisable in a fiduciary capacity whereby the holder has no power to enlarge or shift any of the beneficial interests therein except as an incidental consequence of the discharge of the fiduciary duties is not a power_of_appointment revrul_95_58 1995_2_cb_191 holds that a decedent grantor's reservation of an unqualified power to remove a trustee and to appoint an individual or corporate successor trustee that is not related or subordinate to the decedent within the meaning plr-152039-06 of sec_672 is not considered a reservation of the trustee's discretionary powers of distribution over the property transferred by the decedent grantor to the trust accordingly the trust corpus is not included in the decedent's gross_estate under sec_2036 or sec_2038 the ruling notes that the eighth circuit in 973_f2d_1409 8th cir concluded that the decedent had not retained dominion and control_over assets transferred to a_trust by reason of his power to remove and replace the trustee with a party that was not related or subordinate to the decedent accordingly the court held that under sec_25 c the decedent made a completed_gift when he created the trust and transferred assets to it sec_672 defines the term related_or_subordinate_party to mean any nonadverse_party who is the grantor’s spouse if living with the grantor or any one of the following the grantor’s father mother issue brother or sister an employee of the grantor a corporation or any employee of a corporation in which the stock holdings of the grantor and the trust are significant from the viewpoint of voting control a subordinate employee of a corporation in which the grantor is an executive under the proposed modification of trust three any trustee or co-trustee is restricted from exercising any discretionary authority to make distributions of income or principal to or for the benefit of himself or someone he or she is obligated to support unless the authority is pursuant to an ascertainable_standard furthermore if a beneficiary either alone or in conjunction with other beneficiaries appoints a trustee or co-trustee and that beneficiary is a_related_or_subordinate_party within the meaning of sec_672 with respect to such trustee or co-trustee then such trustee or co-trustee so appointed is restricted from exercising its full discretionary authority to make distributions of income or principal with respect to that beneficiary or beneficiaries or any person whom that beneficiary is obligated to support in the same manner and with like effect as if that beneficiary were acting as the trustee or co-trustee given the restrictions on the trustee’s authority to make discretionary distributions the removal and appointment powers given to the sons of decedent and the sons’ descendants are not the equivalent of the power referred to in the examples in sec_20_2041-1 and sec_25_2514-1 the discretionary authority of any trustee appointed by a son of decedent or the sons’ descendants is restricted so that a trustee will never have unlimited discretion to appoint property i to or for the benefit of himself or herself or someone he or she is obligated to support ii to or for the benefit of a beneficiary appointing such trustee either alone or in conjunction with other beneficiaries or iii to or for the benefit of a person such a beneficiary described in ii is obligated to support instead such discretionary authority either will be i limited to an ascertainable_standard ii exercised by the remaining trustees that have no similar restriction or iii exercised by a special trustee that is not related or subordinate to any beneficiary and who is appointed for the sole purpose of making such discretionary distributions accordingly based on the facts submitted and the representations made we rule that the modification to trust three and the division of trust three into the son’s subtrusts plr-152039-06 a will not cause any beneficiary of a subtrust to be treated as having or exercising a general_power_of_appointment with respect to any portion of the subtrust within the meaning of sec_2041 b will not cause any portion of a subtrust to be includible in the gross_estate of any beneficiary of any subtrust for federal estate_tax purposes under sec_2035 sec_2036 sec_2037 or sec_2038 c will not create a transfer of property that is subject_to federal gift_tax under sec_2501 and d will not cause any trustee beneficiary who exercises a discretionary distribution power under the modified provisions of trust to be deemed to exercise a general_power_of_appointment under sec_2514 ruling sec_661 provides that in any taxable_year a deduction is allowed in computing the taxable_income of a_trust other than a_trust to which subpart b applies for the sum of the amount of income for such taxable_year required to be distributed currently and any other_amounts_properly_paid_or_credited_or_required_to_be_distributed for such taxable_year sec_1_661_a_-2 of the income_tax regulations provides that gain_or_loss is realized by the trust or estate or the other beneficiaries by reason of a distribution_of_property in_kind if the distribution is in satisfaction of a right to receive a distribution of a specific dollar amount of specific property other than that distributed or of income as defined under sec_643 and the applicable regulations if income is required to be distributed currently sec_662 provides that there shall be included in the gross_income of a beneficiary to whom an amount specified in sec_661 is paid credited or required to be distributed by an estate_or_trust described in sec_661 the sum of the following amounts the amount of income_for_the_taxable_year_required_to_be_distributed_currently to such beneficiary whether distributed or not and all other_amounts properly paid credited or required to be distributed to such beneficiary for the taxable_year based solely on the facts and representations submitted we rule that the partition of trust three to create son 1’s subtrust son 2’s subtrust and son 3’s subtrust is not a distribution under sec_661 or sec_1_661_a_-2 ruling sec_643 provides that for purposes of subchapter_j under regulations prescribed by the secretary two or more trusts shall be treated as one trust if such trusts have substantially the same grantor or grantors and substantially the same primary plr-152039-06 beneficiary or beneficiaries and a principal purpose of such trusts is the avoidance of the tax_imposed_by_chapter_1 son 1’s subtrust son 2’s subtrust and son 3’s subtrust will each have different beneficiaries therefore based solely on the facts and representations submitted we rule that son 1’s subtrust son 2’s subtrust and son 3’s subtrust will be treated as separate taxpayers for income_tax purposes rulings and sec_61 provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1001 states that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained revrul_56_437 1956_2_cb_507 provides that a partition of jointly owned property is not a sale_or_other_disposition of property where the co-owners of the joint property sever their joint_interests but do not acquire a new or additional interest as a result of the transaction in revrul_69_486 1969_2_cb_159 a non-pro rata distribution of trust property was made in_kind by the trustee although the trust instrument and local law did not convey authority to the trustee to make a non-pro rata distribution_of_property in_kind the distribution was a result of a mutual agreement between the trustee and the beneficiaries because neither the trust instrument nor local law conveyed authority to the trustee to make a non-pro rata distribution revrul_69_486 held that the transaction was equivalent to a pro_rata distribution followed by an exchange between the beneficiaries an exchange that required recognition of gain under sec_1001 plr-152039-06 499_us_554 concerns the issue of when a sale_or_exchange has taken place that results in realization of gain_or_loss under sec_1001 in cottage savings a financial_institution exchanged its interests in one group of residential mortgage loans for another lender's interests in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution the supreme court of the united_states in cottage savings concluded that sec_1_1001-1 reasonably interprets sec_1001 and stated that an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent cottage savings u s pincite the court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans cottage savings u s pincite sec_1015 provides that if property is acquired by a transfer in trust other than a transfer in trust by gift bequest or devise the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on such transfer sec_1_1015-2 provides that in the case of property acquired after date by transfer in trust other than by transfer in trust by gift bequest or devise the basis_of_property so acquired is the same as it would be in the hands of the grantor increased by the amount of gain or decreased by the amount of loss recognized to the grantor on the transfer under the law applicable to the year in which the transfer was made in addition the principles in sec_1_1015-1 concerning the uniform basis are applicable in determining the basis_of_property where more than one person acquires an interest in property by transfer in trust sec_1_1015-1 provides that property acquired by gift has a single uniform basis although more than one person may acquire an interest in the property the uniform basis of the property remains fixed subject_to proper adjustment for items under sec_1016 and sec_1017 sec_1223 provides that in determining the period for which the taxpayer has held property however acquired there shall be included in the period for which such property was held by any other person if the property has the same basis in the taxpayer's hands as it would have in the hands of that other person in the present case it is consistent with the supreme court's opinion in cottage savings to find that the interests of the beneficiaries of the subtrusts will not differ materially from the interests of the beneficiaries in trust three under the proposed division the beneficiaries are severing their joint_interests in trust three however because state plr-152039-06 law and the terms of the trust authorize non pro_rata divisions the proposed division into the separate subtrusts with substantially identical terms and provisions will not result in the beneficiaries acquiring any new or additional interests therefore the division of trust three is not a sale_or_other_disposition of property under revproc_56_437 and does not result in a material difference in the legal entitlements enjoyed by the beneficiaries under cottage savings accordingly no gain_or_loss is recognized on the division of trust three for purposes of sec_61 or sec_1001 additionally because sec_1001 does not apply to the division of trust three under sec_1015 the basis of the assets will be the same after the division as the basis of those assets before the division furthermore pursuant to sec_1223 the holding periods of the assets in the hands of separate trusts will include the holding periods of the assets in the hands of trust three 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 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative james f hogan senior technician reviewer passthroughs and special industries sincerely