department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date uniform issue list contact person identification_number telephone number employer_identification_number u u w u o n legend - o i l l ‘ dear this letter supersedes our letter to you dated date in response to your ruling_request dated date which was subsequently revised and superseded by your letters dated date date and date requesting rulings related to a proposed reorganization and transfer of assets in the manner and for the purposes described below facts you are exempt from federal_income_tax under sec_501 of the internal_revenue_code code and are classified as other than a private_foundation your primary activities consist of the development of d e and the dissemination of b information all for the benefit of the general_public you conduct activities through a global network of controlled organizations though your principal business location is in the united_states you own or control several foreign subsidiaries which have significant foreign operations in light of growing industry challenges to your manner of operation and the effect of such challenges on your ability to continue to serve your public b mission you have decided to restructure by transferring e and other activities to for-profit subsidiaries you will keep your core charitable and public educational activities and retain ownership and management of the shares of the e businesses and associated businesses you state the following reasons for the restructuring the new structure will allow you to preserve and increase the value of the e activity to the benefit of your remaining activities restructuring will enable you to use the stock of the for-profit subsidiaries as acquisition currency instead of cash or debt to acquire other entities as part of a geographic and product line expansion strategy restructuring will enable you to attract prospective partners by making it possible to offer a non-controlling equity_investment in a for-profit corporation furthermore by creating a for-profit subsidiary you will be able to attract and retain key employees with an equity-based compensation system under the plan of restructuring you plan to form one or more domestic stock corporations of the stock of henceforth dsub you will transfer assets to dsub in exchange for dsub and possibly debt issued by dsub the assets to be transferred will include physical assets contracts and u s employees associated with the e activities comprising f as well as research and certain other activities associated with f you will then transfer and debt of dsub to newco a wholly-owned for-profit subsidiary in exchange for class a common_stock of newco none of the assets to be transferred by you would be subject_to acquisition_indebtedness as defined in sec_514 of the code of the stock in addition you will form a new foreign_corporation or use an existing foreign_corporation henceforth fsub you plan to transfer assets to fsub in exchange for of the common and preferred_stock nonqualified_preferred_stock within the meaning of sec_351 of the code of fsub the transferred assets will include stock of foreign subsidiaries and intangibles such as trademarks trade names intellectual_property and goodwill it is anticipated that fsub common_stock will be issued in exchange for approximately of the value of the assets transferred to fsub and fsub nonqualified_preferred_stock will be issued in exchange for approximately stock of fsub to newco in exchange for class a common_stock of newco fsub will transfer some of the assets received from you to newco of the value of such assets you will subsequently transfer of the newco will authorize either one or two classes of common_stock for issuance if two classes are issued - class a and class b - class a will be a high-vote stock whose majority shareholder will be you through majority ownership of newco’s class a stock you will have voting control_over it and thus indirect control_over dsub and fsub if issued class b stock would be low-vote in nature potential shareholders of class b stock may include you employees and external investors you could own some of the class b stock as part of the normal capitalization process between parent and subsidiary entities while employees could own some of the class b stock as part of an equity compensation plan stock could be issued to certain investors in return for capital private_placement institutional investors and strategic investors any capital raised in this process will serve as funds for future growth of newco future sales of the subsidiary stock to investors would be at fair_market_value as determined by a highly-qualified investment banking firm subsidiary there are no plans to reduce your ownership of shares in newco whether there are one or two classes of stock to less than a majority interest if only one class of stock is issued you will be the majority owner and will control the likely investors could include in addition the class b your board_of trustees will continue to serve three-year terms and consist of three classes whose terms expire in succeeding years all or a majority of the initial members of newco’s board_of directors will consist of all the trustees of your board_of trustees for at least one year to assure continuity thereafter newco’s board_of directors will consist of directors elected annually by your board selected from its own ranks or elsewhere as it determines to be appropriate except that the chair of your board and your chief_executive_officer will automatically be members of newco’s board after the restructuring newco will conduct the e activities in a manner not materially different than the manner in which those activities were conducted by you you will continue to educate the public on b and engage in education and outreach programs conduct research make grants to outside organizations and programs that support your exempt purposes and act as a b resource in addition you will continue to set international independent d and be the coordinating body to bring together the expertise and interested parties required to develop new d currently d and d-related products and services are distributed to the public by an unrelated party p under a services agreement with you under that agreement p collects purchase fees from customers and remits the entire amounts collected to you distribution fee the agreement provides that you and p intend for p to serve as an independent_contractor and that nothing in the agreement shall give p any right ownership or interest in any d or d-related products after the restructuring you will enter into a distribution arrangement with newco that is similar to your arrangement with p specifically you will contract with newco to distribute d and d-related products and services to customers of newco’s activities newco will collect the fees from its customers for distributing the d and transfer those amounts without offset or compensation to you in return you pay p a rulings requested you have requested the following rulings your transfer of the assets and liabilities related to the e activities ultimately to newco in the manner described above the restructuring will not jeopardize your tax-exempt status as an organization described in sec_501 of the code after the restructuring you will continue to be an organization described in sec_501 of the code your proposed transfer of assets and liabilities ultimately to newco will not result in any unrelated_business_taxable_income within the meaning of sections of the code notwithstanding the foregoing you are not requesting a ruling on the question of whether ordinary_income recognized by virtue of sec_1245 and sec_1250 if any as a result of the transfer of assets and liabilities is unrelated_business_income under sec_511 through the income derived by you from the p agreement and from newco from the distribution of d to the public constitutes substantially related_income and is treated as if derived directly from the individual purchaser of the educational materials ie the d for purposes of sec_509 of the code after the restructuring you will be recognized as a public charity within the meaning of sec_509 of the code law sec_501 of the code exempts from federal_income_tax organizations described in sec_501 sec_501 of the code describes organizations organized and operated exclusively for charitable scientific testing for public safety literary educational and other specified exempt purposes sec_509 of the code defines the term private_foundation as a domestic or foreign organization described in sec_501 other than an organizations described in sec_509 or sec_509 of the code in pertinent part describes an organization which a normally receives more than one-third of its support in each taxable_year from any combination of i gifts grants contributions or membership fees and ii gross_receipts from admissions sales of merchandise performance of services or furnishing of facilities in an activity which is not an unrelated_trade_or_business within the meaning of sec_513 not including such receipts from any person or from any bureau or similar agency of a governmental_unit in any taxable_year to the extent such receipts exceed the greater of dollar_figure or percent of the organization’s support in such taxable_year and b normally receive not more than one-third of its support in each taxable_year from gross_investment_income sec_511 of the code imposes a tax on the unrelated_business_taxable_income of every organization described in sec_501 sec_512 of the code defines unrelated_business_taxable_income as the gross_income derived by any organization from any unrelated_trade_or_business regularly carried on by it less the allowable deductions directly attributable to such business activity with certain modifications sec_512 of the code excludes from unrelated_business_taxable_income all royalties whether measured by production or by gross or taxable_income_from_the_property and all deductions directly connected with such income sec_512 of the code excludes from unrelated_business_taxable_income all gains or losses from the sale exchange or other_disposition of property other than a stock_in_trade or other_property of a kind which would properly be includible in inventory if on hand at the close of the taxable_year or b property_held_primarily_for_sale to customers in the ordinary course of the trade_or_business sec_512 of the code provides in pertinent part that if an organization the controlling_organization receives or accrues directly or indirectly any royalty from another entity which it controls the controlled organization notwithstanding sec_512 the controlling_organization shall include such royalty as an item_of_gross_income derived from an unrelated_trade_or_business to the extent such payment reduces the net_unrelated_income of the controlled_entity or increases any net_unrelated_loss of the controlled_entity corporation sec_512 defines control as ownership by vote or value of more than percent of the stock in such corporation in the case of a in the case of an controlled_entity which is not exempt from tax under sec_501 sec_512 of the code defines the term net_unrelated_income as the portion of such entity’s taxable_income which would be unrelated_business_taxable_income if such entity were exempt under sec_501 and had the same exempt purposes as the controlling entity sec_513 of the code defines unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of the organization for funds or the use it makes of the profits derived to the exercise of the organization's exempt purposes or functions sec_1_501_c_3_-1 of the income_tax regulations regulations provides that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in that section sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if which accomplish one or more exempt purposes specified in sec_501 c it engages primarily in activities sec_1_501_c_3_-1 of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_a_-1 of the regulations defines the term private_shareholder_or_individual as a person having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 of the regulations defines the term educational as including the instruction of the public on subjects useful to the individual and beneficial to the community sec_1_513-1 of the regulations states that the determination of whether a trade_or_business is substantially related to an organization’s exempt_purpose necessitates an examination of the relationship between the business activities that generate the particular income in question and the accomplishment of the organization's exempt purposes sec_1_513-1 of the regulations provides that a trade_or_business is related to exempt purposes only where the conduct of the business activity has causal relationship to the achievement of exempt purposes other than through the production_of_income and it is substantially related for purposes of sec_513 only if the causal relationship is a substantial one thus for the conduct_of_a_trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes revrul_75_387 1975_2_cb_216 concerns a blood bank that is recognized as exempt from federal_income_tax under sec_501 of the code the blood bank’s principal source of support is receipts from the sale of blood the blood bank enters into agreements with the hospitals it supplies with blood whereby the hospitals are responsible for collecting charges from the patients and reimbursing the blood bank under the agreements all blood furnished to the hospitals remains the property of the blood bank until used the receipts collected by the blood bank for blood furnished to any patient do not exceed dollar_figure or one percent of the blood bank’s support for any taxable_year the blood sales receipts remitted from each participating hospital greatly exceed dollar_figure or one percent of the blood bank’s support the blood bank's blood sales receipts exceed one third of the blood bank’s support and it receives not more than one- third of its support in any taxable_year from gross_investment_income the ruling states that since the blood bank retains both legal_title to the blood and control_over the hospitals regarding its return or redirection at any time prior to use an agency relationship is created between the hospitals and the blood bank therefore amounts paid to the hospitals are treated as though they have been paid to the blood bank directly and each patient is considered a separate payor for purposes of the dollar_figure or one percent of support limitation provide for in sec_509 analysis issue whether your transfer of assets and liabilities related to the e activities ultimately to newco in the manner described above would jeopardize your tax-exempt status as an organization described in sec_501 of the code percent of the common and preferred_stock of fsub in return for the percent of the stock and debt of dsub in return for transferring assets to the facts presented do not reveal that the proposed transfer of assets and liabilities would inure to the benefit of any member trustee or officer of you or to any private individual in violation of sec_1_501_c_3_-1 of the regulations your restructuring transactions appear reasonable and in furtherance of legitimate purposes in return for transferring assets to dsub you will receive fsub you will receive transfer of its dsub stock and debt and fsub stock to newco you will receive and retain a majority interest in newco furthermore newco will be carrying on the same e activities in substantially the same manner as previously carried on by you activities that correspond to an exempt_purpose under sec_501 of the code your intended use of newco stock as part of an equity-based compensation system for your employees will not necessarily result in inurement of your net_earnings within the meaning of sec_1_501_c_3_-1 an exempt_organization may cause shares of its taxable subsidiary to be issued as part of a reasonable_compensation package therefore the transfer of the assets and liabilities related to the e activities to newco would not jeopardize your exempt status as an organization described in sec_501 issue whether you will continue to be an organization described in sec_501 of the code after the restructuring following the restructuring your activities will consist of developing d and promoting b through public educational activities organizations formed to establish and promote b through the development of d are entitled to exemption as educational organizations within the meaning of sec_501 of the code and sec_1_501_c_3_-1 of the regulations furthermore you will not only continue to conduct public educational activities but likely will expand those activities dedicated to educating the general_public on international b issues therefore after the restructuring you will continue to meet the operational_test of sec_1 c -1 c by engaging primarily in activities which accomplish one or more exempt purposes issue whether the transfer of assets and liabilities related to the e activities ultimately to newco would result in any unrelated_business_taxable_income within the meaning of sec_512 of the code your proposed transfer of assets and liabilities ultimately to newco will not result in any unrelated_business_taxable_income within the meaning of sections of the code notwithstanding the foregoing you are not requesting a ruling on the question of whether ordinary_income recognized by virtue of sec_1245 and sec_1250 if any as a result of the transfer of assets and liabilities is unrelated_business_income under sec_511 through issue whether amounts received by you under service agreements with p and newco for the sale fulfillment and distribution services for d and d-related products and services will be treated as gross_receipts received directly from the purchaser of the d or d-related product or service rather than from p or newco for purposes of the dollar_figure or one percent limitation under sec_509 of the code under the services agreement between you and p p provides sales fulfillment and distribution services for d and d-related products and services p pays you the gross_sales of d and d- related products and services minus a fee for services after the restructuring newco will distribute d to customers of its e activities under an arrangement that is substantially_similar to that between p and you the agreement provides that p and you intend to create an independent_contractor relationship and that nothing in the agreement shall give p any right ownership or interest in any d or d-related products the arrangement is similar to that between the blood bank and hospitals described in revrul_75_387 1975_2_cb_216 p and newco are acting as agents of you therefore amounts paid to p and newco for d and d-related products and services will be treated as though paid directly to you and each purchaser of d or d-related products and services will be considered a separate payor for purposes of the dollar_figure or one percent support limitation under sec_509 of the code issue whether after the restructuring you will be recognized as a public charity within the meaning of sec_509 of the code under rev procs and the eo determinations office issues determination letters on reclassification of public charity status after your restructuring occurs you may request a determination_letter regarding your current public charity status from eo determinations based on your support over the five most recently completed tax years therefore we decline to rule on this issue rulings based on the information submitted we rule as follows the transfer of assets and liabilities related to the e activities from you to newco in the course of restructuring will not jeopardize your tax-exempt status as an organization described in sec_501 of the code after the restructuring you will continue to be an organization described in sec_501 of the code the proposed transfer of assets and liabilities ultimately to newco will not result in any unrelated_business_taxable_income within the meaning of sections of the code we are not ruling on the question of whether ordinary_income recognized by virtue of sec_1245 and sec_1250 of the code if any as a result of the transfer of assets and liabilities is unrelated_business_income under sec_511 through amounts received by you under service agreements with p and newco for the sale fulfillment and distribution services for d and d-related products and services will be treated as gross_receipts received directly from the purchaser of the d or d-related product or service rather than from p or newco for purposes of the dollar_figure or one percent limitation under sec_509 of the code this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling is based on the understanding there will be no material changes in the facts upon which it is based any changes that may have a bearing upon your tax status should be reported to the service this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because this letter could help resolve any future questions about tax consequences of your activities you should keep a copy of this ruling in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney and declaration of representative currently on file with the service we are sending a copy of this letter to your authorized representative sincerely ronald j shoemaker manager exempt_organizations technical group enclosure notice


t c summary opinion united_states tax_court peter f maureen l speltz petitioners v commissioner of internal revenue respondent docket no 5851-04s filed date thomas b copeland for petitioners melissa j hedtke for respondent kroupa judge this case was heard pursuant to the provisions of section of the internal_revenue_code in effect at the time the petition was filed the decision to be 1all section references are to the internal_revenue_code in effect for the years at issue unless otherwise indicated and rule references are to the tax_court rules_of_practice and procedure entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined deficiencies in petitioners’ federal income taxes of dollar_figure for and dollar_figure for the issues for decision are whether petitioners husband and wife had an employer- employee relationship we find that they did whether petitioners may exclude from gross_income medical benefits of dollar_figure in and dollar_figure in paid_by an employer-spouse to an employee-spouse we find that they may whether petitioners may deduct from gross_income medical benefits of dollar_figure in and dollar_figure in paid_by an employer-spouse to an employee-spouse we find that they may background some of the facts have been stipulated and are so found the stipulation of facts and the accompanying exhibits are incorporated by this reference petitioners resided in rollingstone minnesota at the time they filed the petition maureen speltz petitioner maureen speltz mrs speltz has operated a sole_proprietorship daycare business in petitioners’ home since mrs speltz has an elementary education degree and she has been 2all monetary amounts have been rounded to the nearest dollar licensed by the state of minnesota to run the daycare business since mrs speltz cared for up to children daily during the years at issue mrs speltz has managed the daycare since through the years at issue mrs speltz established the daycare’s rules policies and hours of operation she established a daycare business checking account and credit card account in her name and purchased a professional pre-school curriculum that she has used to instruct the children in addition mrs speltz drafted all parental contracts addressed parental complaints negotiated daycare rates collected payment administered bookkeeping handled state of minnesota regulatory personnel utilized the services of mr speltz and taught the curriculum in comparison mr speltz while integral to the daycare had a limited and narrowly defined role during and mr speltz assisted mrs speltz by monitoring the children from approximately p m until p m and by performing other maintenance-type tasks mr speltz’s part-time role was designed specifically to fit a medical reimbursement plan that mrs speltz established with the help of a tax adviser medical reimbursement insurance plan mrs speltz established an employer-provided accident_and_health_plan for employees with the help of a tax adviser in 3the curriculum was a pre-kindergarten program designed to teach children colors letters and numbers mrs speltz executed three documents in an employment contract a salary redirection document and a client data sheet the employment contract described mr speltz’s job duties mrs speltz and mr speltz signed the contract mr speltz’s duties were described as childcare lawn care chopping firewood and repairing toys and sundry items mr speltz was also required to work an average of hours weekly in return for a medical reimbursement benefit limited to dollar_figure per year medical benefits according to the contract included deductibles insurance premiums and medical costs not covered by insurance the employee salary redirection document provided that dollar_figure per month would be directed to a flexible_spending_account on mr speltz’s behalf to pay for mr speltz’s insured and uninsured healthcare costs mr speltz signed the employee salary redirection document as an employee and mrs speltz as his employer in addition mrs speltz signed a client data sheet requiring mr speltz to work a minimum of hours a week and a minimum of months a year the client data sheet also stated that mr speltz’s medical reimbursement was limited to dollar_figure per year mrs speltz relied upon an internal_revenue_service coordinated_issue_paper entitled health insurance deductibility for self-employed individuals dated date and revrul_71_588 1971_2_cb_91 in setting up the plan each document permits under certain circumstances a sole-proprietor employer-spouse to deduct medical benefits provided to an employee-spouse and the employee-spouse to exclude those same benefits from his or her gross_income mr speltz mr speltz has provided childcare services and other general services for the daycare since and has been reimbursed under the daycare’s accident_and_health_plan for a limited amount of medical_care expenses and insurance premiums as compensation_for his services mr speltz also worked full time during the years at issue as a machinist for fastenal company inc fastenal mr speltz’s hours at fastenal were from approximately a m until approximately p m mr speltz had medical and dental insurance through fastenal mr speltz’s spouse and dependents were eligible to receive benefits mr speltz also had a snow removal and lawncare service during and mr speltz began working for the daycare when he returned home from his full-time job on weekdays around p m and he 4internal revenue service coordinated issue papers and revenue rulings are generally not entitled to deference in this court see 117_tc_159 see also n ind pub serv co v commissioner 105_tc_341 affd 115_f3d_506 7th cir worked until at least p m when the daycare closed mr speltz cared for all the children if mrs speltz was absent usually when mrs speltz had doctor or dentist appointments for a short_period of time mr speltz cared for a small boy whose mother had to work very early from a m until a m generally however mrs speltz directed mr speltz to monitor and care for about five or six older children when he arrived home mr speltz monitored the children indoors and whenever possible outdoors where the children could be active playing kickball soccer and basketball and sledding on the vast stretch of property that petitioners maintained according to state of minnesota daycare standards sometimes mr speltz took the children on nature walks along the creek running through petitioners’ property mr speltz also took the children for rides in a trailer connected to his tractor and he often took them across the many acres of petitioners’ farm to collect firewood that mr speltz chopped to heat petitioners’ home in addition mr speltz spent time repairing the children’s toys cleaning and organizing the daycare areas mr speltz also performed tasks benefiting petitioners personally including picking up mail groceries chopping 5when the children were split into two groups mrs speltz watched the younger children whose care involved diapering toilet training and playing with toys 6firewood was the only source of heat in their home firewood and transporting the wood by tractor from their distant farmhouse to their home if mr speltz took the older children in the trailer when he picked up the firewood he might spend up to hours returning because he drove the children around the property during the snowy minnesotan winter months mr speltz plowed petitioners’ driveway and shoveled snow from the walkway to petitioners’ house mr speltz did this several times daily on blustery days as mrs speltz’s clients were usually mothers carrying small children who dropped them off and picked them up at several times during the day mr speltz sometimes left his full-time job to do this mrs speltz directed that mr speltz perform only childcare and maintenance tasks and she made contemporaneous notes detailing his activities mr speltz’s assistance was integral to mrs speltz’s daycare business moreover as the nature of mr speltz’s daycare-related work varied little he required minimal instruction though petitioners derived a personal benefit from some of mr speltz’s activities mr speltz would not have spent the amount of time or devoted the degree of care to those activities were there no daycare business training mrs speltz directed mr speltz to take classes in nutrition and general childcare because the state of minnesota and county in which petitioners resided required daycare personnel to have this training mr speltz’s training consisted of about hours of child-nutrition training and about hours of child-behavioral guidance mrs speltz substantiated that mr speltz worked dollar_figure hours in and hours in an average of dollar_figure hours a week in and dollar_figure hours a week in license mrs speltz had a state of minnesota issued daycare license from through date mrs speltz’s license listed her name only in date the state issued the license in mrs speltz’s and mr speltz’s names mr speltz did not apply for the license and took no part in interviews or inspections required to obtain the license the state of minnesota listed mrs speltz’s and mr speltz’s names most likely because they were listed as co-owners of the home where mrs speltz maintained the daycare the license issued in date omitted mr speltz’s name and listed only mrs speltz’s name tax returns petitioners reported daycare income and expenses on schedules c profit or loss from business of their joint federal_income_tax returns for and listing their principal business as child care petitioners deducted dollar_figure as an employee benefit program expense in including dollar_figure for health insurance premiums petitioners deducted dollar_figure as an employee benefit program expense in including dollar_figure for health insurance premiums respondent disallowed petitioners’ claimed employee benefit program expense deductions because respondent found petitioners failed to establish that the amounts were ordinary and necessary business_expenses or that mr speltz was a bona_fide employee of the daycare respondent mailed petitioners a deficiency_notice on date and petitioners timely filed a petition discussion we are presented with two issues the excludability of medical premiums and reimbursements from petitioners’ gross_income and the deductibility of those same amounts from the daycare business income regarding the excludability issue we must determine whether petitioners entered into a valid arrangement for the payment of health benefits under sec_105 and whether mr speltz was a bona_fide employee of the daycare regarding the deductibility issue we must determine whether the deduction amount was an ordinary and necessary business_expense of the daycare respondent makes a number of alternative arguments to disallow the deductions and exclusions respondent argues that petitioners’ sec_105 plan was improper and or failed on its own terms that mr speltz was not a bona_fide employee of the daycare and that the expenses were not ordinary and necessary business_expenses petitioners counter that the medical premiums and reimbursements should be excluded from mr speltz’s gross_income because petitioners set up a proper sec_105 plan for daycare employees and that mr speltz was a bona_fide employee petitioners also contend that the medical premiums and reimbursements are deductible from the daycare business income because they were ordinary and necessary business_expenses of the daycare we first address the burden_of_proof i burden_of_proof the commissioner’s determinations are presumptively correct and the taxpayers bear the burden of proving that the commissioner’s determinations are erroneous rule a see 290_us_111 taxpayers also bear the burden of proving that they are entitled to the claimed deductions 503_us_79 292_us_435 a taxpayer’s burden however may shift to the commissioner if the taxpayer introduces credible_evidence complete with the necessary substantiation and documentation see sec_7491 116_tc_438 to shift the burden the taxpayer must also have complied with requirements to cooperate with the commissioner’s reasonable requests for witnesses information documents meetings and interviews sec_7491 the taxpayer has the burden to prove the requirements have been met snyder v commissioner tcmemo_2001_255 citing h conf rept pincite 1998_3_cb_747 petitioners reasonably complied with respondent’s requests for information documents and meetings petitioners also produced credible_evidence to establish that mr speltz worked a sufficient number of hours and the nature of the activities he performed accordingly we find that sec_7491 shifts the burden_of_proof to respondent respondent therefore bears the burden of proving that petitioners are not entitled to exclude or deduct mr speltz’s reimbursements for insurance premiums and medical_expenses ii excludability of medical premiums and reimbursements gross_income generally includes all income from whatever source derived sec_61 this section has been interpreted 7petitioners conceded that some of the hours mrs speltz noted were personal and could not be counted mrs speltz subtracted those hours from the tabulation of the hours mr speltz spent performing daycare-related tasks broadly to encompass all gains except those specifically excluded by congress see 348_us_426 consistent with this rule payments by an employer to an employee through accident_and_health_insurance for personal injuries or sickness are generally included in gross_income sec_105 an exception exists however employees may exclude from gross_income employer-paid reimbursements for medical_care expenses see sec_105 sec_106 sec_213 schmidt v commissioner tcmemo_2003_325 see also revrul_71_588 1971_2_cb_91 sanctioning payments from an employer-spouse to an employee-spouse we must therefore determine whether the exception applies and whether petitioners may exclude benefits from income to qualify for excludability benefits must be received under a proper plan notice or knowledge of the plan must be reasonably available to those covered and there must be a bona 8we are aware that revenue rulings are not binding on this court or other federal courts 119_tc_157 111_tc_243 the public has a right however to rely on positions taken by the commissioner in published guidance 109_tc_133 ndollar_figure affd 165_f3d_822 11th cir am campaign acad v commissioner 92_tc_1053 89_tc_765 see also revproc_89_14 sec 1989_1_cb_814 taxpayers may rely on published revenue rulings in determining the tax treatment of their own transactions fide employee see sec_105 e and a 48_tc_629 affd 394_f2d_494 1st cir tschetter v commissioner tcmemo_2003_326 there need not be a written plan or enforceable employee rights under the plan so long as the participant has notice or knowledge of the plan sec_1_105-5 income_tax regs respondent argues that mr speltz’s medical premiums and reimbursements should not be excluded from petitioners’ income because there was no proper plan under sec_105 alternatively if there was a proper plan respondent argues that notice or knowledge of the plan was not reasonably available to mr speltz respondent also argues that mr speltz did not meet his contractual obligations under the client data sheet to work hours each week finally respondent argues that mr speltz was not an employee of the daycare we address each argument in turn whether there was a proper plan sec_105 and the underlying regulations provide guidelines as to what constitutes an accident_and_health_plan see sec_105 sec_1_105-5 income_tax regs a plan may be nonfunded or funded insured or uninsured it may cover one or more employees and different plans may exist for different classes of employees see sec_105 wigutow v commissioner tcmemo_1983_620 the regulation contemplates a plan for the benefit of a single employee sec_1_105-5 income_tax regs so long as the participant has notice or knowledge of the plan there is no requirement that it be in writing or that an employee’s rights under the plan be enforceable see wigutow v commissioner supra the daycare accident_and_health_plan is detailed in mrs speltz’s client data sheet which states that the medical benefits plan would be effective in date that employees were eligible to receive up to dollar_figure a year in reimbursements and that employees had to work a minimum of hours a week to be eligible to receive benefits on these facts we find that the daycare established a proper accident_and_health_plan whether mr speltz had notice or knowledge of the plan respondent also argues that notice or knowledge of the plan was not reasonably available to mr speltz we disagree mr speltz signed a document indicating that his salary would be in the form of reimbursements for insurance premiums and medical_expenses up to dollar_figure a year he credibly testified that he had knowledge of the accident_and_health_plan and most importantly mr speltz used the plan see id a taxpayer’s signing the document declaring the plan is evidence that the taxpayer had knowledge of the plan see also 500_f2d_148 8th cir the court is the exclusive judge of the credibility of the witnesses in making its factual findings affg tcmemo_1973_130 we therefore find that mr speltz had notice and knowledge of the plan whether mr speltz met the hourly requirement respondent also argues that mr speltz worked less than the minimal hour requirement and consequently failed to fulfill his contractual obligations under the accident_and_health_plan more specifically respondent cites mrs speltz’s client data sheet which states that employees are to work a minimum of hours a week and a minimum of months a year respondent interprets the term minimum as requiring mr speltz to work hours every week rather than an average of hours a week interpreting the client data sheet as respondent contends to require mr speltz to work hours every week would render the month a year minimum requirement superfluous--mr speltz would by definition have to work months a year moreover petitioners’ employment contract requires employees to work an average of hours a week not a minimum of hours we find that mrs speltz intended employees to work an average of hours a week interpreting the client data sheet in this manner produces consistency among the client data sheet the employment contract petitioners’ stated intent that mr speltz work an average of hours a week and that petitioners documented that mr speltz worked an average of hours a week accordingly mr speltz fulfilled his contractual obligations under the accident_and_health_plan we next determine whether mr speltz was a bona_fide employee of the daycare whether mr speltz was an employee whether an employer-employee relationship exists is a factual question see 862_f2d_751 9th cir affg 89_tc_225 478_f2d_575 8th cir 63_tc_621 see also haeder v commissioner tcmemo_2001_7 courts typically apply a common_law agency test to determine whether an employer-employee relationship exists see eg 503_us_318 490_us_730 92_tc_351 affd 907_f2d_1173 d c cir moreover where a family relationship is involved close scrutiny is required to determine whether a bona_fide employer-employee relationship existed and whether payments were made on account of the employer-employee relationship or on account of the family relationship see 48_tc_439 haeder v commissioner supra shelley v commissioner tcmemo_1994_432 martens v commissioner tcmemo_1990_42 affd without published opinion 934_f2d_319 4th cir jenkins v commissioner tcmemo_1988_292 affd without published opinion 880_f2d_414 6th cir furmanski v commissioner tcmemo_1974_47 because we shifted the burden under sec_7491 respondent has the burden to prove that mr speltz was not a bona_fide employee of the daycare during the years at issue in determining whether a hired person is an employee under the general common_law of agency we consider several non- exclusive factors see nationwide mut ins co v darden supra nlrb v united ins co 390_us_254 89_tc_225 affd 862_f2d_751 9th cir inevitably cases turn on the particular facts of each case and no one factor is controlling see profl executive leasing inc v commissioner supra the fundamental test of whether an employer-employee relationship exists is whether the hiring party has the right to 9courts have looked to factors including the hiring party’s right to control the employee the skill required the source of the instrumentalities and tools the location of the work the duration of the relationship between the parties whether the hiring party has the right to assign additional projects to the hired party the extent of the hired party’s discretion over when and how long to work the method of payment the hired party’s role in hiring and paying assistants whether the work is part of the regular business of the hiring party whether the hiring party is in business provides employee_benefits and the tax treatment of the hired party see 490_us_730 control the activities of the individual whose status is in issue see profl executive leasing inc v commissioner supra 349_f2d_644 9th cir packard v commissioner supra pincite weber v commissioner 103_tc_378 affd 60_f3d_1104 4th cir see also 311_f2d_341 9th cir sec_31_3401_c_-1 sec_31_3121_d_-1 employment_tax regs we consider this factor first mr speltz was contractually obligated to work for the daycare and he credibly testified that he understood mrs speltz had the right to control his activities see charles schneider co v commissioner f 2d pincite when mr speltz arrived home mrs speltz generally split the children into two groups directing which children mr speltz cared for and where he cared for them mrs speltz also controlled the amount of compensation mr speltz received and she had the contractual right to discharge mr speltz further mr speltz did not require repetitious instruction his tasks were limited and consistent see 117_tc_263 the employer need not supervise every detail of the work environment or set the employee’s hours to control the employee citing 823_f2d_337 9th cir weber v commissioner supra pincite the degree of control necessary to find employee status varies with the nature of the services provided mrs speltz provided a sufficient level of direction and control for mr speltz to perform his required duties under the circumstances we find on the record that mrs speltz had the right to control mr speltz in addition to the control factor other factors support petitioners’ employer-employee characterization for instance mrs speltz’s calendar notations during the years at issue confirm that mr speltz consistently worked for the daycare she paid mr speltz in employee_benefits mr speltz’s work was integral to the daycare’s operation mr speltz was trained to work in childcare and petitioners’ employment contract evidences petitioners’ intent to create an employer-employment arrangement see generally 490_us_730 moreover this case is distinguishable from cases finding that no employer-employee relationship existed among family members usually where the taxpayers failed to substantiate the services provided see eg shelley v commissioner supra taxpayer did not document any services the taxpayer’s spouse performed martens v commissioner supra little to no records substantiated the services provided petitioners substantiated the tasks mr speltz performed in detail we also find haeder v commissioner supra which respondent cited distinguishable in haeder the court found no employer- employee relationship existed between two spouses where one spouse had a legal practice at home and the other spouse assisted with secretarial clerical bookkeeping and cleaning services haeder v commissioner tcmemo_2001_7 in haeder the taxpayer-attorney admitted that the law practice had few clients during the years at issue and required little assistance moreover only the taxpayer-attorney testified and the court found that testimony vague generalized and conclusory nor did the taxpayers document the spouse’s purported work activities or the time spent working id our case is therefore distinguishable from haeder while the record in haeder was devoid of credible_evidence that an employer-employee relationship existed petitioners submitted credible_evidence and testimony concerning the nature of mr speltz’s activities and mrs speltz’s direction of those activities finally we have applied close scrutiny to the facts and find that the daycare payments were made on account of the employer-employee relationship and not on account of the family relationship see 48_tc_439 haeder v commissioner supra shelley v commissioner tcmemo_1994_432 martens v commissioner tcmemo_1990_42 mr speltz’s activities were essential to the daycare business operations accordingly we find that payments made under the daycare’s medical benefits plan in the form of reimbursements are excludable from petitioners’ gross_income under sec_105 iii deductibility of medical premiums and reimbursements we next determine whether mrs speltz may deduct the medical cost of insurance premiums and medical reimbursements paid on mr speltz’s behalf from daycare business income petitioners may deduct medical costs attributable to mr speltz if they substantiated the amount deducted and established that the amounts were ordinary and necessary and reasonable in amountdollar_figure whether payments to mr speltz were ordinary and necessary business_expenses respondent argues that petitioners’ employee benefit program expense should be disallowed because petitioners deducted in part personal expenses which are not ordinary and necessary business_expenses and are therefore not deductible petitioners aver that the amounts deducted were ordinary and necessary business_expenses and that the personal characteristics of the activities mr speltz performed should not supplant the predominant business_purpose of those activities taxpayers may deduct all ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on a trade 10we previously determined that an employer-employee relationship existed or business including a reasonable allowance for salaries or other compensation_for_personal_services actually rendered sec_162 an expense is considered ordinary if commonly or frequently incurred in the trade_or_business of the taxpayer 308_us_488 an expense is necessary if it is appropriate or helpful in carrying on a taxpayer’s trade_or_business 320_us_467 welch v helvering u s pincite ordinary and necessary business_expenses include payments to employees for sickness hospitalization medical expense or a similar benefit plan sec_162 sec_213 sec_1_162-10 income_tax regs the test for deductibility in the case of compensation payments is whether they are reasonable in amount and are in fact payments purely for services see cardwell v commissioner tcmemo_1982_453 citing 380_f2d_786 9th cir sec_1_162-7 income_tax regs expenses must also be directly or proximately related to the taxpayer’s trade_or_business deputy v du pont supra pincite sec_1_162-1 income_tax regs while taxpayers may generally deduct ordinary and necessary expenses paid_or_incurred in carrying_on_a_trade_or_business taxpayers may not deduct personal living or family_expenses see sec_162 sec_262 see also 86_tc_458 66_tc_515 affd 591_f2d_1273 9th cir moreover where there is a mixture of business and personal aspects some discretion is permitted to determine which considerations predominate and whether any part of the expenditure may qualify for a deduction see feldman v commissioner supra pincite 82_tc_538 the distinction between business_expenses and personal expenses is based on a weighing and balancing of the facts and circumstances in each case sharon v commissioner supra pincite a weighing and balancing of the facts is required to give the business and personal characteristics their proper order of importance we agree with respondent that the hours mr speltz spent picking up mail and groceries and those spent transporting firewood without children are not sufficiently business oriented to warrant an expense deduction nonetheless mr speltz completed a substantial number of hours of business-oriented services for the daycare that mrs speltz credibly substantiated we therefore find that the medical expense deductions attributable to mr speltz’s business-oriented activities were ordinary and necessary business_expenses of the daycare whether the payments were reasonable in amount we must also determine whether the amounts paid to mr speltz as compensation were reasonable in amount mr speltz was paid dollar_figure in and dollar_figure in whether amounts paid as wages are reasonable_compensation for services rendered is a question of fact to be decided on the basis of the facts and circumstances of each case see 95_tc_525 affd 965_f2d_1038 11th cir further there are no fixed rules or exact standards for determining what constitutes reasonable_compensation see 228_f2d_637 10th cir affg tcmemo_1954_221 with these rules in mind we determine whether the compensation mr speltz received for business-related services was reasonable in amount mrs speltz recorded that mr speltz worked dollar_figure hours in and hours in during those years mr speltz received medical benefits of dollar_figure and dollar_figure respectively mr speltz therefore received approximately dollar_figure an hour in dollar_figure and dollar_figure an hour in dollar_figure mr speltz’s hourly rate is comparatively low considering the dollar_figure an hour that mrs speltz testified she would have had to pay a daycare substitute eliminating even half of mr speltz’s hours would produce a not unreasonable amount of compensation at dollar_figure an hour in dollar_figure and dollar_figure an hour in dollar_figure even assuming arguendo therefore that half the hours mrs speltz logged for mr speltz were personal and disallowable we would nonetheless still find the compensation provided mr speltz in the years at issue reasonable in amount iv whether petitioners may deduct insurance premiums in the alternative respondent argues that the insurance premium component of mr speltz’s reimbursements is not deductible under sec_162 on the contrary petitioner contends that sec_162 applies only to self-employed individuals and that because the deductions are attributable to mr speltz an employee sec_162 does not applydollar_figure we agree under sec_162 a self-employed taxpayer may deduct the cost of medical insurance premiums under certain conditions a self-employed taxpayer may not deduct the cost of medical insurance premiums however if the self-employed taxpayer is eligible to participate in a subsidized health plan of another employer of the taxpayer or of a spouse’s employer sec_162 mrs speltz is self-employed she deducted on the daycare schedules c the cost of medical insurance premiums_paid for mr speltz under the daycare’s accident_and_health_plan for employees and she was eligible to receive medical benefits through mr speltz’s subsidized health plan with fastenal his full-time employer while sec_162 applies to mrs speltz because she is self-employed sec_162 does not apply to mr speltz see sec_162 sec_401 because the premiums were paid for medical insurance for mr speltz the limits of sec_11the deduction amounts of dollar_figure in and dollar_figure in constituted medical dental and cancer insurance premiums the full amounts deducted were dollar_figure in and dollar_figure in l and sec_162 do not apply accordingly petitioners are entitled to deduct their expenses for medical insurance premiums for mr speltz in reaching our holding we have considered all arguments made and to the extent not mentioned we conclude that they are moot irrelevant or without merit to reflect the foregoing and the concessions of the parties decision will be entered for petitioners


internal_revenue_service number release date index number -------------------------------------- ------------------------------- ------------------ ----------------------------- -------------------------------------- department of the treasury washington dc person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-108076-08 date date x ----------------------------------------- ---------------------------------------- y ----------------------------------------- ---------------------------------------------- state -------------- d1 d2 d3 d4 d5 d6 --------------------------- ------- --------------------- ----------------------- ----------------------- ----------------------- dear ---------------- this letter responds to a letter dated date on behalf of x from x's authorized representative requesting inadvertent termination relief under sec_1362 of the internal_revenue_code facts plr-108076-08 according to the information submitted x was incorporated under the laws of state on d1 x acquired y in d2 and has owned all of the stock of y at all times since d3 x timely filed a form_2553 election by a small_business_corporation effective d3 and x timely filed form_8869 to elect qualified_subchapter_s_subsidiary qsub status for y effective d3 on d4 x’s shareholders adopted resolutions approving the creation of a class of nonvoting_stock to be issued through a stock_dividend and amended x’s articles of incorporation to increase the number of authorized shares on d5 x issued additional shares of nonvoting_stock through a stock_dividend however the person who was responsible for filing the amended articles of incorporation with the state did not file the amendment as required by state law this amendment was later filed on d6 accordingly it is not clear what rights would be conferred upon the holders of the issued but unauthorized stock under state law during the period between d3 and d6 from d3 onward x represents that it filed its tax returns as if it were an s_corporation including the results of y’s operations in the returns this includes allocating its items of income loss deduction and credit to all of its shareholders proportionately to each share of x’s issued common_stock regardless of whether a share was authorized or unauthorized x also represents that the amount of tax paid during this period was the same as if its shareholders had held the stock in x regardless of whether a share was authorized or unauthorized in addition x and its shareholders represent that assuming x’s issuance of unauthorized shares of its common_stock caused a second class of stock in x the termination of x’s s_corporation_election and qsub election was inadvertent and was not motivated by tax_avoidance or retroactive tax planning x and its shareholders agree to make any adjustments consistent with the treatment of x as an s_corporation that the secretary may require x requests a ruling that the termination of its s_corporation_election and qsub election was inadvertent within the meaning of sec_1362 the termination of the s_corporation_election and qsub election is waived x will be recognized as an s_corporation continuously from d3 and y will be recognized as a qsub continuously from d3 law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 defines a qsub as any domestic_corporation which is not an ineligible_corporation as defined in sec_1361 if i percent of the stock of such corporation is held by the s_corporation and ii the s_corporation elects to treat such corporation as a qsub plr-108076-08 sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not among other requirements have more than one class of stock sec_1_1361-1 of the income_tax regulations provides that a corporation is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds differences in voting rights among shares of stock of a corporation are disregarded in determining whether a corporation has more than one class of stock sec_1_1361-1 of the regulations provides that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state law and binding agreements relating to distribution and liquidation proceeds sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect to be an s_corporation sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that any termination under sec_1362 shall be effective on and after the date of cessation sec_1362 provides in part that if an election under sec_1362 or sec_1361 by any corporation was terminated under sec_1362 the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation or a qsub and the corporation for which the termination occurred and each person who was a shareholder in such corporation at any time during the period specified pursuant to sec_1362 agrees to make adjustments consistent with the treatment of the corporation as an s_corporation or a qsub as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such termination such corporation shall be treated as an s_corporation or a qsub during the period specified by the secretary conclusion based solely on the facts submitted and representations made we conclude that if any rights conferred by state law upon the issued but unauthorized stock of x differ in plr-108076-08 liquidation or distribution rights from the issued and authorized stock this would have resulted in a termination of x's s_corporation status on d5 due to the presence of a second class of stock and would have resulted in a termination of x’s election to treat y as a qsub we also conclude that such a termination of x's s_corporation_election and y’s qsub election would have been inadvertent terminations within the meaning of sec_1362 under the provisions of sec_1362 x will be treated as an s_corporation and y will be treated as a qsub from d3 and thereafter provided that apart from the inadvertent termination ruling above x's s_corporation_election was otherwise valid and has not otherwise terminated under sec_1362 accordingly from d3 the shareholders of x must include their pro_rata share of the separately_stated and non-separately stated computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 if x and its shareholders fail to treat x as described above this ruling will be null and void except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed regarding whether x is otherwise eligible to be an s_corporation 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 a power_of_attorney on file with this office a copy of this letter is being sent to x's authorized representative sincerely s david r haglund senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------------------------- --------------------------------------------------- ----------------------------- ------------------------ in re ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- -------------------------- telephone number -------------------- refer reply to cc psi b04 plr-139465-14 date date legend decedent spouse daughter trust bank bank attorney date date date x y ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------- dear ----------------- this letter responds to your authorized representative’s letter dated date requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to make a reverse qualified_terminable_interest_property qtip_election under sec_2652 of the internal_revenue_code and to make an election to treat a marital trust as two separate trusts under sec_26_2652-2 of the generation-skipping_transfer_tax regulations the facts submitted and representations made are as follows on date decedent established trust a revocable_trust decedent died on date at which time trust became irrevocable pursuant to decedent’s will after certain specific bequests the residue of decedent’s estate passed to trust plr-139465-14 the trust agreement provides that after the death of decedent x percent of the income of trust is payable to spouse and y percent of the income of trust is payable to daughter the x percent share is referred to as marital trust and the y percent share is referred to as daughter’s trust upon the death of the first of spouse and daughter all of the income from trust will be payable to the survivor of spouse or daughter upon the survivor’s death trust will terminate and the assets will be distributed outright to daughter’s children the grandchildren of decedent bank acted as executor of decedent’s estate and trustee of trust bank relied on attorney to prepare and provide advice regarding decedent’s form_706 united_states estate and generation-skipping_transfer_tax return on schedule m of the form_706 an election was made under sec_2056 to treat marital trust as qtip a schedule r was not attached to the form_706 thus the estate did not make a reverse_qtip_election and did not affirmatively allocate decedent’s generation-skipping_transfer gst tax exemption it is represented that decedent’s full gst_exemption was available at his death subsequent to the filing of decedent’s form_706 sec_26_2652-2 was issued this regulation provides a transitional rule that allows certain trusts subject_to a reverse_qtip_election to be treated as two separate trusts so that only a portion of the trust would be treated as subject_to the reverse_qtip_election and that portion would be treated as having a zero inclusion_ratio the deadline for making the election set forth in the transitional rule was date on date bank became the new trustee of trust and initiated a review of decedent’s form_706 in the course of this review bank learned that attorney failed to make a reverse_qtip_election under sec_2652 and determined that attorney failed to advise bank regarding the election under the transitional rule in sec_26_2652-2 to date no distributions subject_to gst tax have been made from trust you request an extension of time under sec_301_9100-1 and sec_301_9100-3 to make a reverse_qtip_election under sec_2652 with respect to marital trust you further request an extension of time under sec_301_9100-1 and sec_301_9100-3 to make an election to treat marital trust as two separate trusts pursuant to sec_26_2652-2 so that one trust has an inclusion_ratio of zero gst exempt qtip_trust and the other trust has an inclusion_ratio of one gst non-exempt qtip_trust for gst tax purposes the reverse_qtip_election would be treated as applying only to the gst exempt qtip_trust law and analysis sec_2601 imposes a tax on every generation-skipping_transfer a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the tax is the taxable_amount multiplied plr-139465-14 by the applicable_rate sec_2641 defines applicable_rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2631 in effect at the time of decedent’s death provided that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2632 in effect at the time of decedent’s death provides that any portion of an individual’s gst_exemption which has not been allocated within the time prescribed by sec_2632 shall be deemed to be allocated as follows- a first to property which is the subject of a direct_skip occurring at such individual’s death and b second to trusts with respect to which such individual is the transferor and from which a taxable_distribution or a taxable_termination might occur at or after such individual’s death sec_2632 in effect at the time of decedent’s death provides that the allocation under sec_2632 is made among the properties described in sec_2632 and the trusts described in sec_2632 in proportion to the respective amounts at the time of allocation of the nonexempt portions of such properties or trusts sec_2652 provides that in the case of any property with respect to which a deduction is allowed under sec_2056 regarding qtip the estate of the decedent may elect to treat all of the property in such trust for purposes of the gst tax provisions as if the qtip_election had not been made the election under sec_2652 is referred to as the reverse_qtip_election the consequence of a reverse_qtip_election is that the decedent remains for gst tax purposes the transferor of the qtip_trust for which the election is made as a result the decedent’s gst_exemption may be allocated to that qtip_trust sec_26_2652-2 provides that a reverse_qtip_election is not effective unless it is made with respect to all of the property in the trust to which the qtip_election applies sec_26_2652-2 provides that if a reverse_qtip_election is made with respect to a_trust prior to date and the gst_exemption has been allocated to that trust the transferor or the transferor’s executor may elect to treat the plr-139465-14 trust as two separate trusts one of which has a zero inclusion_ratio by reason of the transferor’s gst_exemption previously allocated to the trust the separate trust with the zero inclusion_ratio consists of that fractional share of the value of the entire trust equal to the value of the nontax_portion of the trust under sec_26_2642-4 the reverse_qtip_election is treated as applying only to the trust with the zero inclusion_ratio an election under this section is made by attaching a statement to a copy of the return on which the reverse_qtip_election was made under sec_2652 the statement is to be filed before date sec_2654 in effect at the time of decedent’s death provided that substantially separate and independent shares of different beneficiaries in a_trust shall be treated as separate trusts sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore decedent’s estate is granted an extension of time of days from the date of this letter to make a reverse_qtip_election pursuant to sec_2652 effective as of the date of decedent’s death with respect to marital trust the allocation of decedent’s gst_exemption made with respect to marital trust will be effective as of the date of decedent’s death decedent’s estate is also granted an extension of time of days from the date of this letter to make the election under sec_26_2652-2 to treat marital trust as two separate trusts one of which has a zero inclusion_ratio by reason of decedent’s gst_exemption allocated to the qtip_trust the other of which has an inclusion_ratio of one the reverse_qtip_election will be treated as applying only to the trust with the zero inclusion_ratio and decedent will be considered the transferor of this portion of marital trust plr-139465-14 the reverse_qtip_election should be made on a supplemental form_706 the election under sec_26_2652-2 should be made by completing the statement required in sec_26_2652-2 and attaching the statement to the supplemental form_706 the form_706 should be filed with the cincinnati service_center at the following address internal_revenue_service center cincinnati oh a copy of this letter should also be attached to the supplemental form_706 a copy is enclosed for this purpose in accordance with the power_of_attorney on file with this office we have sent a copy of this letter to your authorized representatives except as expressly provided herein we neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter 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 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely associate chief_counsel passthroughs and special industries _________________________ by karlene m lesho senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter cc


cca_2016042616112454 id uilc number release date from sent tuesday date pm to cc bcc subject third party contacts and classified information p a has now studied this issue and consulted with the attorney in te_ge counsel who provided the advice to exam for the benefit of everyone on this email here is the context eo is examining an organization which had a contract to provide services to a government agency the contract itself was classified information exam and te_ge counsel all had to get top secret security clearances to work on the case the revenue agents interviewed certain government officials about the contract the names of the individual government officials are part of the classified information no one can even acknowledge the existence of the contract in a non-secure setting the taxpayer by virtue of its own clearance and its participation in the contract knows who the individuals are all meetings with the taxpayer in which classified information is discussed are held in a secure location p a has concluded that sec_7602 is satisfied in this situation so long as the irs gave advance notice that third-party_contacts may be made and the irs can if asked provide those names to the taxpayer at the secure location it is not necessary for the irs to record the classified names on the third-party contact listing thus p a concurs with the advice provided by te_ge counsel ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ---------------


significant index number ax excuse ad government entities division department of the treasury internal_revenue_service washington d c aug tep ra lal re taxpayer dear this letter constitutes notice that approval has been granted for your request for a 5-year automatic_extension for amortizing the unfunded liabilities as of date for the above-named plan which are described in sec_431 and sec_431 of the internal_revenue_code code and sec_304 and sec_304 of the employee_retirement_income_security_act_of_1974 erisa this extension is effective with the plan_year beginning date this extension applies to the eligible amortization charge bases established as of date the extension of the amortization periods of the unfunded liabilities of the plan was granted in accordance with sec_431 of the code sec_431 of the code requires the secretary to extend the period of time required to amortize any unfunded_liability of a plan for a period of time not in excess of years if the plan submits an application meeting the criteria stated in sec_431 the plan has submitted the required information to meet the criteria in sec_431 including a certification from the plan’s actuary that i absent the extension under subparagraph a the plan would have an accumulated_funding_deficiency in the current plan_year or any of the succeeding plan years ii the plan_sponsor has adopted a plan to improve the plan's funding status iii the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period as extended and iv the notice required under paragraph a has been provided we have sent a copy of this letter to the and to the this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent if you require further assistance in this matter please contact i sincerely yours wortiwan- fe david m ziegler manager ep actuarial group


internal_revenue_service number release date index number ------------------------------------- ---------------------------------- ---------------------- -------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------------ telephone number ---------------------- refer reply to cc psi b04 plr-134574-14 date date re ----------------------------------------------------------- legend trust grantor son a b bank date date date date date year grandchild great-grandchild a great-grandchild b great-grandchild c great-grandchild d great-grandchild e great-great-grandchild a great-great-grandchild b great-great-grandchild c state court ---------------------------------------------------------------------------------- x ---------------------------------------------------------- -------------------------- ------------------------------- ------------------------ ------------------------- ---------------------- --------------------------- ------------------- -------------------- ------------------ ------------------ ------- -------------------------------- -------------------------- -------------------------------- ----------------- ----------------- ------------------- ----------------------------------- ----------------------------------- --------------------------- ------- --------------------------------------------------------- -- plr-134574-14 dear -------------- this letter responds to your letter dated date submitted by your authorized representative requesting generation-skipping_transfer gst tax rulings with respect to a court-approved settlement agreement the facts provided and representations are as follows grantor created and funded an irrevocable_trust trust on date trust was established for the primary benefit of grantor’s son son’s spouse son’s widow and his lineal_descendants the current beneficiaries of trust include grandchild grandchild’s children great- grandchildren a through e and great-grandchild b’s children great-great- grandchildren a through c article dollar_figure of trust provides that the trustees may in their sole discretion pay or expend income or corpus of the trust for the benefit of the trust beneficiaries for their maintenance support care and education income not distributed is to be added to corpus in determining the amount of income of principal to be distributed among the various beneficiaries the trustees shall consider also the income available to them respectively from other known available sources trust terminates upon the death of the last-to-die of son a and grandchild upon termination the trustees are to distribute the trust estate to the then living lineal_descendants of son per stirpes or if there are none to the then living descendants of b per stirpes trust does not contain any provision governing the management of distributions to minor beneficiaries bank is currently the sole corporate trustee of trust in year bank notified the beneficiaries that bank proposed to make distributions based on a distribution plan in which bank would distribute a certain percentage of trust to the current beneficiaries excluding great-great-grandchildren a and b further the plan did not include a requirement that bank inquire into the respective needs of the beneficiaries for maintenance support care and education and did not require bank to take into account existing income available to the current beneficiaries on date great-grandchild b great-great-grandchild a and great-great- grandchild b brought suit in court against bank as corporate trustee and grandchild great-grandchild a great-grandchild c great-grandchild d and great-grandchild e seeking an order from court to compel bank to comply with the terms of trust and not carry out the distribution plan further the plaintiffs alleged that bank has made distributions to some of the other defendants which were not for maintenance support care and education while bank denied a distribution request to cover great- grandchild b’s medical_expenses plaintiffs also alleged that bank made distributions to some of the defendants without considering the income available to the beneficiary from other sources in violation of trust plaintiffs claimed that these actions constitute a breach of fiduciary duty plaintiffs also requested to have bank removed as trustee plr-134574-14 in court the minor great-grandchildren c through e were represented by a guardian ad litem and the three great-great-grandchildren a through c were represented by their natural guardian all of the parties other than the guardian ad litem who is an attorney were represented by counsel in court on date bank and the trust beneficiaries including the guardian ad litem and the natural guardian of the great-great-grandchildren entered into a settlement agreement the settlement agreement provides for a specific accounting rules for trust distributions b mandatory annual distributions of x percent of the value of specific assets to be divided into six equal shares and distributed as follows one for grandchild and one for each of grandchild’s five children great-grandchildren a through e and their descendants valued annually c clarified rules governing additional discretionary distributions including documentation beneficiaries must provide in support of any application_for such distributions d the requirement that any distributions to minor beneficiaries be made to a uniform transfer to minors act utma account for the minor beneficiary’s benefit e mandatory quarterly meetings between the trustee and grandchild and any eligible_beneficiary and f various mutual releases specifically the specific accounting rules require that upon termination of trust any distribution of trust assets to an eligible_beneficiary shall be charged against the eligible beneficiary’s share of trust and if the eligible_beneficiary has no share against the shares of trust if any of the eligible beneficiary’s lineal_descendants no chargeback applies to any distributions made to any beneficiary pursuant to paragraph providing for mandatory trust distributions any beneficiary prior to date grandchild and any currently living or afterborn child of grandchild who is deceased and has no living lineal_descendants at the time of termination of trust eligible beneficiaries is defined in trust to include the beneficiaries named in article the mandatory trust distributions are to be paid on a prorated monthly basis if a beneficiary predeceases grandchild the distribution to which the deceased beneficiary would have been entitled will be paid to the deceased beneficiary’s then living lineal_descendants per stirpes the settlement agreement did not modify or limit the trustee’s discretionary authority to distribute corpus to a beneficiary as provided under trust the settlement agreement is made contingent upon bank receiving a favorable private_letter_ruling from the internal_revenue_service with regard to the requested gst tax rulings on date court approved the settlement agreement it is represented that no additions actual or constructive have been made to trust since date trust is governed by state law plr-134574-14 you have requested rulings that the execution and implementation of the settlement agreement will not cause a_trust to lose its status as exempt from the gst tax and b any gst tax to be imposed against trust or its beneficiaries law and analysis sec_2601 imposes a tax on every generation-skipping_transfer sec_2611 defines the term generation-skipping_transfer as a taxable_distribution a taxable_termination and a direct_skip under b a of the tax_reform_act_of_1986 and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the generation-skipping_transfer_tax provisions do not apply to any generation-skipping_transfer under a_trust as defined in sec_2652 that was irrevocable on date however this exemption does not apply if additions actual or constructive are made to the trust after date sec_26_2601-1 provides that any trust in existence on date will be considered an irrevocable_trust except as provided in sec_26 b ii b or c which relate to property includible in a grantor's gross_estate under sec_2038 and sec_2042 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 generation-skipping_transfer_tax under sec_26_2601-1 or hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status in general unless specifically provided otherwise the rules contained in sec_26_2601-1 are applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes unless specifically noted 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 gain for purposes of sec_1001 sec_26_2601-1 provides that a court-approved settlement of a bona_fide issue regarding the administration of the trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject_to the provisions of chapter if the settlement is the product of arm’s length negotiations and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement a settlement that results in a compromise between the positions of the litigating parties and reflects the parties’ assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes plr-134574-14 the trustees represent that trust was irrevocable on date and that there were no additions to trust after date the parties were represented by separate counsel and the minors were represented by their natural guardian or a guardian ad litem accordingly the settlement agreement is a product of arm’s length negotiations the settlement agreement requires specific accounting for mandatory distributions and mandatory regular meetings between bank and the beneficiaries the settlement agreement also provides that any distributions to a minor shall be made to a utma account and requires mandatory annual distributions of x percent of the value of specific assets of trust to be divided equally into six shares one each for grandchild and grandchildren a through e and their descendants the settlement agreement provides for mutual releases lastly the settlement agreement provides that bank continues to have the discretionary authority to distribute principal to the beneficiaries subject_to the chargeback provisions court approved the settlement we conclude that the settlement agreement and court order represent a compromise between the positions of the litigating parties and reflects the parties’ assessments of the relative strengths of their positions and therefore is within the range of reasonable outcomes accordingly based upon the facts provided and representations made we conclude that the settlement agreement will not cause a_trust to lose its status as exempt from the gst tax and b any gst tax to be imposed against trust or its beneficiaries 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 this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent plr-134574-14 pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer's representatives sincerely ________________________ lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si br - plr-101798-00 date date legend x state d1 this responds to your letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated under state law on d1 the shareholders of x intended that x elect to be treated as an s_corporation effective d1 however the election to be treated as an s_corporation was not timely filed law and analysis sec_1362 provides that a small_business_corporation can elect to be treated as an s_corporation sec_1362 provides when an s election becomes effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election was made if an election is made after the first two and one-half months of a corporation’s taxable_year then the corporation will generally not be treated as an s_corporation until the following taxable_year plr-101798-00 however sec_1362 provides that if no election is made pursuant to sec_1362 or if the election is made after the date prescribed for making such an election and the secretary determines reasonable_cause existed for the failure to timely make the election then the secretary can treat such an election as timely made for that taxable_year and effective as of the first day of that taxable_year in the present case x failed to timely elect s_corporation treatment effective d1 however x has established reasonable_cause for not making a timely election and is thus entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d1 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center 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 s requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely signed dianna k miosi dianna k miosi chief branch office of the assistant chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes