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 fip b04 plr-117966-14 date october legend taxpayer -------------- state -------- country ------------ lifeinsco -------------------------------------------- investco ----------------------------- owner --------------------------------------------- ownergroup ------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- investor --------------------------------------- individual1 ------------ individual2 ----------------- mgr1 -------------------- mgr2 ---------------- exec ------------- fund ----------------------------------------- plr-117966-14 busine sec_1 --------------- busine sec_2 -------------- -- dear ------------ this responds to a date letter from your authorized representative requesting a ruling that a proposed taxable investment transaction will not under the investor_control doctrine cause taxpayer to be treated as the owner of the separate_account assets related to two variable life_insurance contracts additional information was submitted in a letter dated date the rulings contained in this letter are based upon facts and representations submitted by taxpayer accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process facts universal variable life_insurance policies taxpayer a state1 limited_partnership is a calendar_year taxpayer on the cash_method_of_accounting owner is a general_partner and members of ownergroup are limited partners of taxpayer individual1 a member of ownergroup is the exec of taxpayer owner pays individual2 as a consultant lifeinsco is a country corporation that made a sec_953 election to be taxed as a domestic_corporation for federal_income_tax purposes taxpayer owns two lifeinsco universal variable life_insurance policies on the life of individual1 the lifeinsco segregated_asset accounts supporting these policies invest in insurance dedicated funds idfs the idfs invest in subaccount assets taxpayer allocated part of the premium it paid to lifeinsco to a new investco idf product investco offers this product to variable_annuity and variable life_insurance contracts only not to the general_public initially the investco idf will invest in five subaccounts including busine sec_1 and busine sec_2 limited_partnerships investco may increase or decrease the number of subaccounts in the investco idf but these investments will meet the diversification requirements of sec_817 and plr-117966-14 related regulations mgr1 is the lead portfolio manager for the investco idf and will manage the subaccount that invests in several busine sec_1 limited_partnerships other managers will manage the four other investco idf subaccounts mgr1 and the other four managers of the investco idf subaccounts will have sole discretion to make all investment decisions concerning their subaccounts independently uninfluenced by taxpayer taxpayer represents that the managers individuals and entities of all lifeinsco idfs are not related to or controlled by taxpayer or any or its affiliates investco fund owner is a general_partner and individual1’s family members and taxpayer are limited partners in investor a state limited_partnership investor may invest in a new investco fund fund to which it would provide seed capital in exchange investco will give investor an ownership_interest in fund and enter a related revenue sharing_agreement however when fund is offered for sale to the public investco’s initial ownership_interest will dilute to less than percent and it will be a passive investor with no control_over fund mgr2 will manage fund but will not manage any of the investco idf subaccounts prior to offering fund for sale to the public individual1 owner and mgr2 may have discussions that influence the structure and investment objectives of fund and they may have on-going general investor discussion with others at fund however these discussions will not have any influence on the lifeinsco idf the lifeinsco idf and fund may invest in some of the same stocks however taxpayer represents that the lifeinsco idf will not invest in fund and that the fund will be substantially different from any of the investco managed idf subaccounts representations the following representations are made with respect to investco idf except as otherwise permitted by sec_1_817-5 all of the beneficial interests in the investco idf are held directly or indirectly by one or more segregated_asset accounts of one or more insurance_companies and access to the investco idf is available exclusively through the purchase of a variable_contract within the meaning of sec_817 the life_insurance_companies whose segregated_asset accounts hold or will hold shares of the investco idf are life_insurance_companies within the meaning of plr-117966-14 sec_816 each segregated_asset_account that will hold shares of the investco idf will be a separate_account registered with the sec as a unit_investment_trust under the act or will be exempt from registration under the act each investco idf will satisfy the diversification requirements of sec_817 of the code and sec_1_817-5 of the regulations there is not and there will not be any arrangement plan contract or agreement between mgr1 or any other manager of the investco idf subaccounts and any contract holder regarding the availability of investco idf as a subaccount under the variable_contract or the specific assets to be held by the investco idf other than a variable_contract holder’s ability to allocate variable_contract premiums and transfer amounts in the insurance_company segregated_asset_account to and from the insurance_company subaccount corresponding to a particular idf all investment decisions concerning the investco idf will be made by mgr1 or another manager of the investco idf subaccounts the percentage of an investco idf’s assets invested in a particular subaccount will not be fixed in advance of any variable_contract holder's investment and will be subject_to change by mgr1 or another manager of the investco idf subaccounts at any time a variable_contract holder will not be able to direct an investco idf investment in any particular asset or recommend a particular investment or investment strategy and there will not be any agreement or plan between mgr1 or another manager of the investco idf subaccounts and a variable_contract holder regarding a particular investment of any investco idf subaccounts no variable_contract holder will be able to communicate directly or indirectly with mgr1 or another manager of the investco idf subaccounts concerning the selection quality or rate of return on any specific investment or group of investments held by the investco idf a variable_contract holder will not have any current knowledge of the investco idf’s specific assets a variable_contract holder will not have any legal equitable direct or indirect ownership_interest in any of the assets of the investco idf a variable_contract holder only will have a contractual claim against the insurance_company offering the variable_contract to receive cash from the insurance_company under the terms of his or her variable_contract plr-117966-14 all shares of each investco idf will be held directly or indirectly by segregated_asset accounts of life_insurance_companies that are held in connection with variable_contracts or other permitted holders described in sec_1 f and each investco idf therefore intends to qualify for the exception from federal excise_tax provided by sec_4982 unless a variable_contract holder is treated as a shareholder of the relevant investco idf pursuant to the investor_control requirements of revrul_81_225 1981_2_cb_12 revrul_82_54 1982_1_cb_11 revrul_2003_91 2003_2_cb_347 and revrul_2003_92 2003_2_cb_350 law in general the insurance_company that issues variable life_insurance or annuity_contracts not the policyholder is considered the owner of the underlying separate_account assets for federal_income_tax purposes therefore policyholders are not taxed on the investment gains of the separate_account assets that support their policies and increase in their cash_value the courts attribute ownership of property for tax purposes to the person other than the holder of legal_title who possesses the benefits and burdens or incidence of ownership in 281_us_376 50_sct_336 74_led_916 the supreme court summarized this principle stating taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed -- the actual benefit for which the tax is paid the service applied these general tax_ownership principles in a series of investor_control rulings the premise of the investor_control doctrine is that policyholders will be treated as the tax owners of the separate_account investment_assets if they possess significant control or other_benefits and burdens of contract ownership over the underlying assets even if the insurance_company retains possession of and legal_title to those assets or the assets are available to the general_public and not exclusively through the purchase of a life_insurance or annuity_contract as the owner of the underlying assets in the account the contract holders are taxed on the income of the assets supporting the contract see eg 435_us_561 309_us_331 revrul_77_85 1977_1_cb_12 revrul_80_274 1980_2_cb_27 revrul_81_225 1981_2_cb_12 and revrul_82_54 1982_1_cb_12 see also revproc_99_44 1999_2_cb_598 revrul_77_85 see also revrul_80_274 1980_2_cb_27 depositors policyholders own the certificates of deposit transferred to the insurance_company in exchange for an annuity_contracts because the insurance_company invests in certificates of deposit for a term designated by the depositors revrul_81_255 1981_2_cb_13 policyholders of certain variable_annuity contracts whose purchase payments were invested in publicly available mutual_fund shares would be treated as the owners of the mutual_fund shares but see revrul_82_54 1982_1_cb_11 policyholders do not have sufficient control_over individual investment decisions plr-117966-14 in revrul_2003_92 2003_2_cb_350 the service held that separate_account assets of variable_contracts may be invested only in insurance-dedicated hedge funds and funds- of-funds in revrul_2003_91 2003_2_cb_347 the service concluded that based on all the facts and circumstances the insurance_company not the contract holder owned the assets underlying a variable_contract the service considered the following factors there was no arrangement plan contract or agreement between the contract holder and the insurance_company or between the contract holder and the investment_advisor regarding the availability of a particular subaccount the investment strategy of any subaccount or the assets to be held by a particular subaccount contract holders could allocate premiums and transfer funds among available subaccounts but all investment decisions concerning the subaccounts were made by the insurance_company or the investment_advisor in their sole and absolute discretion the contract holder could not communicate directly or indirectly with any investment officer of the insurance_company or its affiliates or with the investment_advisor regarding the selection quality or rate of return of any specific investment or group of investments held in a subaccount the insurance_company in its sole and absolute discretion chose the investment_advisor and insurance company’s investment officers involved in the investment activities of the separate_account or of the subaccounts the contract holders could not communicate directly or indirectly with the insurance_company concerning the selection or substitution of an investment_advisor or the choice of any of the insurance company’s investment officers that are involved in the investment activities of the separate_account or of any of the subaccounts in 749_f2d_513 8th cir the 8th circuit considered a contract that gave the contract holders the right but not the obligation to purchase an annuity_contract under the contract the purchaser decided in which mutual funds offered by the insurer to invest and could change to another fund at any time the court decided that a contract was not a sec_72 annuity because the contract holders surrendered few of their ownership rights or control_over the assets of the when they may choose among three broad general investment strategies -- stocks bonds and money market instruments revrul_82_55 1982_1_cb_12 policyholders of annuity_contracts were not the owners of separate_account assets invested in a mutual_fund whose shares were no longer available to the public and revrul_2003_91 plr-117966-14 subaccount bore the entire investment risk could withdraw any or all of the investment upon seven days’ notice and might never annuitize the contract shortly after the christoffersen congress enacted sec_817 requiring that segregated_asset accounts supporting variable_contracts be adequately diversified as defined in treasury regulations describing sec_817 the conference agreement allows any diversified fund to be used as the basis of variable_contracts so long as all shares of the fund are owned by one or more segregated_asset accounts of insurance_companies but only if access to the fund is available exclusively through the purchase of a variable_contract from an insurance_company the fact that a similar fund is available to the public will not cause the segregated_asset fund to be treated as being publicly available in authorizing treasury to prescribe diversification standards the conferees intend that the standards be designed to deny annuity or life_insurance treatment for investments that are publicly available to investors and investments which are made in effect at the direction of the investor approximately two years after enactment of sec_817 the treasury_department issued proposed and temporary regulations prescribing the minimum level of diversification that must be met for an annuity or life_insurance_contract to be treated as a variable_contract within the meaning of sec_817 the preamble to the regulations stated as follows the temporary regulations do not provide guidance concerning the circumstances in which investor_control of the investments of a segregated_asset_account may cause the investor rather than the insurance_company to be treated as the owner of the assets in the account for example the temporary regulations provide that in appropriate cases a segregated_asset_account may include multiple sub-accounts but do not specify the extent to which policyholders may direct their investments to particular sub-accounts without being treated as owners of the underlying assets guidance on this and other issues will be provided in regulations or revenue rulings under sec_817 relating to the definition of variable_contracts sec_4982 imposes a tax on every regulated_investment_company for each calendar_year equal to percent of the excess if any of -- the required_distribution for such calendar_year over the distributed_amount for such calendar_year sec_4982 provides an exemption from such excise_tax as follows h_r conf_rep no 98th cong 2d sess vol c b 309p l deficit_reduction_act_of_1984 t d 1986_2_cb_97 fr date the text of the temporary regulations served as the text of proposed_regulations in the notice of proposed rule-making see lr-295-84 1986_2_cb_801 fr date the final regulations adopted with certain revisions not relevant here the text of the proposed_regulations plr-117966-14 this section shall not apply to any regulated_investment_company for any calendar_year if at all times during such calendar_year each shareholder in such company was either - a_trust described in sec_401 and exempt from tax under sec_501 or a segregated assets account of a life_insurance_company held in connection with variable_contracts as defined in sec_817 for purposes of the preceding sentence any shares attributable to an investment in the regulated_investment_company not exceeding dollar_figure made in connection with the organization of such company shall not be taken into account analysis the service treats the holders of a variable life_insurance_policy or variable_annuity contract as the owners of the underlying assets for federal_income_tax purposes if they possess sufficient incidents_of_ownership over the assets supporting the policy or contract accordingly they lose the tax benefits of the insurance_or_annuity_contract and are currently taxed on income generated by the separate_account assets whether the contract holder possesses sufficient incidents_of_ownership over the assets of the separate_account depends on all the relevant facts and circumstances the segregated_asset accounts supporting taxpayer’s lifeinsco universal variable life_insurance policies invest only in idfs also the facts and circumstances indicate that taxpayer did not possess significant control_over the investco idf assets conclusion based on the legal authority and the facts and representations presented by the taxpayer lifeinsco not taxpayer is the owner of the investco idf assets for federal_income_tax purposes except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and plr-117966-14 accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely donald j drees jr senior technician reviewer branch office of the associate chief_counsel financial institutions products cc


internal_revenue_service number release date index number department of the treasury washington dc person to contact telephone number refer reply to cc psi 4-plr-132133-01 date june re legend trustor a trustor b_trust trust a_trust b_trust c trust a-1 trust b-1 trust c-1 child a child b child c date date date date dear this is in response to your letter dated date in which a ruling was requested concerning the income estate gift and generation-skipping_transfer gst tax consequences of a proposed merger of two trusts trustor a and trustor b created a revocable_trust trust on date the trust was amended on date trustor a died in on date and under part of his will he bequeathed the residue of his estate to trust upon the death of trustor a_trust provides that a surviving spouse’s trust is to be created to hold trustor b’s share of community_property and other assets of trustor b under the terms of trust the plr-132133-01 balance of the trust assets transferred to the trust by trustor a passed to an irrevocable family_trust under the terms of the family_trust trustor b is the sole beneficiary during her lifetime upon the death of trustor b the family_trust assets are to be divided equally with one share held in separate trust for each surviving child and one share held in trust for each deceased child with surviving issue trustor b died in date trustor b was survived by child a child b and child c accordingly the family_trust was divided into trust a_trust b and trust c each trust benefiting child a child b and child c respectively under the terms of trust a_trust b and trust c the trustee is to pay the trust income at least quarterly and distribute principal if necessary or advisable for the health support education and maintenance of such child each child has a testamentary special_power_of_appointment over such child’s trust and may appoint the remaining trust estate to one or more of trustors’ issue or the spouse of a deceased issue upon the death of a child the child’s remaining unappointed trust estate passes either outright or in trust to the child’s issue per stirpes the executor for trustor a’s estate did not allocate any of trustor a’s gst_exemption to family_trust it is represented that at trustor a’s death trustor a had dollar_figure million gst_exemption available and that the assets passing to family_trust were less than dollar_figure million in value it is also represented that trustor a made no other bequests that would be direct skips for purposes of sec_2632 and made no other transfers to nonexempt trusts to which gst_exemption would be allocated under sec_2632 under sec_26_2632-1 trustor a’s gst_exemption is automatically allocated on the due_date for filing trustor a’s federal estate_tax_return to the assets passing to the family_trust as a result of the allocation to family_trust trust a_trust b and trust c each have a zero inclusion_ratio it is represented that no additions have been made to the family_trust since initial funding or to trust a_trust b and trust c at the time of trustor b’s death virtually all of her assets were held in the surviving spouse’s trust under the terms of the surviving spouse’s trust the trust assets are to be divided and held under terms identical to the terms that govern the family_trust the surviving spouse’s trust was divided equally with one share held in separate trust for each surviving child surviving spouse’s trust was divided into trust a-1 trust b-1 and trust c-1 each trust benefiting child a child b and child c respectively the executor of trustor b’s estate did not allocate any of trustor b’s gst_exemption to trust a-1 trust b-1 or trust c-1 it is represented that at trustor b’s death trustor b had dollar_figure gst_exemption available and that the assets passing to trust a-1 trust b-1 and trust c-1 were less than dollar_figure in value it is also represented that trustor b made no other bequests that would be treated as direct skips under sec_2632 and made no other transfers to nonexempt trusts to which gst_exemption would be allocated to under sec_2632 under sec_26_2632-1 trustor b’s gst_exemption is automatically allocated pro_rata on the due_date for filing trustor b’s federal estate_tax_return to the assets passing to trust a-1 trust b-1 and trust c-1 as a result of the allocation of the gst_exemption trust a-1 trust b-1 and trust c-1 plr-132133-01 each have a zero inclusion_ratio it is represented that no additions have been made to these trusts since the trusts were initially funded all trusts whether created under the family_trust or under the terms of the surviving spouse’s trust must terminate years after the death of the last to die of trustor a trustor b and their issue who were living on the death of the first trustor to die as a result of the foregoing each child now is the beneficiary of two separate trusts with identical provisions in order to save administrative expenses the trustees seek to merge trust a into trust a-1 trust b into trust b-1 and trust c into trust c-1 you have requested the following rulings the proposed merger of trust a into trust a-1 trust b into trust b-1 and trust c into trust c-1 will not cause trust a_trust a-1 trust b_trust b-1 trust c or trust c-1 to recognize gain_or_loss under sec_61 and sec_1001 pursuant to sec_1015 the basis for each asset held in trust after the merger of trust a into trust a-1 trust b into trust b-1 and trust c into trust c-1 will be the same as the basis of those assets prior to the merger pursuant to sec_1223 the holding_period for each asset held in trust a-1 trust b-1 and trust c-1 after the merger of trust a into trust a-1 trust b into trust b-1 and trust c into trust c-1 will include the holding_period for each asset held in trust a_trust b and trust c prior to the merger the proposed merger of trust a into trust a-1 trust b into trust b-1 and trust c into trust c-1 will not cause any constructive or actual additions to trust a-1 trust b-1 or trust c-1 and after the merger trust a-1 trust b-1 and trust c-1 will not lose their exempt status under sec_2601 the proposed merger of trust a into trust a-1 trust b into trust b-1 and trust c into trust c-1 will not be generation-skipping transfers and will not be subject_to gst tax under sec_2601 and will not cause any distributions from trust a to trust a-1 trust b to trust b-1 or trust c to trust c-1 upon the merger to become subject_to gst tax provided there are no post-merger additions to the trusts child a child b and child c’s exercise of a special_power_of_appointment provided under the terms of the successor trusts trust a-1 trust b-1 and trust c-1 will not cause any distributions from the successor trusts or distributions upon termination of the successor trusts to be subject_to the gst tax the proposed merger of trust a into trust a-1 trust b into trust b-1 and trust c into trust c-1 will not cause child a child b or child c to have made a taxable gift under chapter plr-132133-01 the proposed merger of trust a into trust a-1 trust b into trust b-1 and trust c into trust c-1 will not cause the interest that child a child b and child c has in the respective successor trust to be included in such child’s gross_estate under sec_2033 sec_2036 sec_2037 sec_2038 and sec_2041 except for the accrued but unpaid net_income at such child’s death ruling_request sec_61 of the internal_revenue_code provides that gross_income includes all income from whatever source derived sec_61 specifically includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss is the excess of the adjusted_basis provided in sec_1011 over the amount_realized sec_1001 provides that except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale or other exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides as a general_rule that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained for purposes of sec_1001 in an exchange of property each party to the exchange gives up a property interest in return for a new or additional interest such an exchange is a disposition under sec_1001 an exchange of property results in the realization of gain only if the properties exchanged materially differ 499_us_554 a material difference exists when the exchanged properties embody legal entitlements different in_kind or extent or if they confer different rights and powers id pincite in the present ruling_request the taxpayers represent and the underlying documents support that the terms and provisions of the trusts being merged are identical the current beneficiaries as well as remainder beneficiaries will possess the same income and remainder interests before and after the merger of the trusts consequently the interests of the beneficiaries after the merger will not materially differ from their interests under trust accordingly the proposed merger of trust a into trust a-1 trust b into trust b-1 and trust c into trust c-1 will not cause the trusts to recognize gain_or_loss from the sale_or_other_disposition of property under sec_61 or sec_1001 ruling_request sec_2 and sec_1015 provides that if property is acquired after date by a transfer in trust other than by a transfer in trust by gift bequest or devise the basis is the same as it would be in the hands of the grantor increased in the amount of gain plr-132133-01 or decreased in the amount of loss recognized to the grantor on the transfer under the law applicable to the year in which the transfer is made sec_1_1015-2 provides that in the case of property acquired after date by transfer in trust other than by a transfer in trust by a gift bequest or devise the basis_of_property so acquired is the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on the transfer under the law applicable to the year in which the transfer was made if the taxpayer acquired the property by a transfer in trust this basis applies whether the property be in the hands of the trustee or the beneficiary and whether acquired prior to termination of the trust and distribution of the property or thereafter sec_1223 provides that in determining the period for which the taxpayer has held property however acquired there shall be included the period for which the property was held by any other person if such property has for the purpose of determining gain_or_loss from a sale_or_exchange the same basis in whole or in part in the taxpayer’s hands as it would have in the hands of such other person accordingly we conclude that the basis of the assets in the successor trusts will be same as the basis of those assets in trust a_trust a-1 trust b_trust b-1 trust c and trust c-1 prior to the merger in addition we conclude under sec_1223 the holding_period for each asset held in trust a-1 trust b-1 and trust c-1 after the merger of trust a into trust a-1 trust b into trust b-1 and trust c into trust c-1 will include the holding_period for each asset in trust a_trust b and trust c prior to the merger ruling_request sec_4 and sec_2601 imposes a tax on every generation-skipping_transfer made by a transferor to a skip_person under a of the tax_reform_act_of_1986 the generation-skipping_transfer_tax is generally applicable to generation-skipping transfers made after date sec_2602 provides that the amount of tax imposed by sec_2601 is the taxable_amount multiplied by the applicable_rate sec_2641 provides that the applicable_rate is the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2642 provides in part that the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer will be equal to the excess if any of over the applicable_fraction determined for the trust from which such transfer is made the applicable_fraction generally is a fraction the numerator of which is the amount of the gst_exemption allocated to the trust and the denominator of which is the value of the property transferred to the trust plr-132133-01 sec_2631 provides that for purposes of determining the inclusion_ratio every individual is allowed a gst_exemption of dollar_figure million adjusted for inflation to dollar_figure for the year which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_26_2632-1 of the generation-skipping_transfer_tax regulations generally provides that a decedent’s unused gst_exemption is automatically allocated on the due_date for filing the form_706 to the extent not otherwise allocated by the decedent’s executor on or before that date unused gst_exemption is allocated pro_rata subject_to the rules of sec_26_2642-2 on the basis of the value of the property as finally determined for purposes of chapter chapter value first to direct skips treated as occurring at the transferor’s death the balance if any of unused gst_exemption is allocated pro_rata subject_to the rules of sec_26_2642-2 on the basis of the chapter value of the nonexempt_portion of the trust property or in the case of trusts that are not included in the gross_estate on the basis of the date of death value of the trust to trusts with respect to which a taxable_termination may occur or from which a taxable_distribution may be made sec_2652 provides that the transferor for generation-skipping_transfer_tax purposes is the decedent for purposes of chapter and the donor for purposes of chapter sec_2654 provides that the portions of a_trust attributable to transfers from different transferors are treated as separate trusts sec_26_2642-4 provides that if separate trusts created by one transferor are consolidated a single applicable_fraction for the consolidated trust is determined the numerator of the redetermined applicable_fraction is the sum of the nontax portions of each trust immediately prior to the consolidation in the present case trust a_trust b and trust c are identical to trust a-1 trust b-1 and trust c-1 respectively and each trust has an inclusion_ratio of zero trustor a is the transferor for generation-skipping_transfer purposes with respect to trust a_trust b and trust c trustor b is the transferor for generation-skipping_transfer purposes with respect to trust a-1 trust b-1 and trust c-1 see sec_2652 after the merger the portion of each successor trust attributable to trustor a will be treated as a separate trust from the portion of the successor trust that is attributable to trustor b for purposes of chapter see sec_26_2654-1 the portion of each successor trust attributable to trustor a will have an inclusion_ratio of zero following the merger the portion of each successor trust attributable to trustor b will also have an inclusion_ratio of zero following the merger see sec_26_2642-4 accordingly the proposed merger of trust a into trust a-1 trust b into trust b-1 and trust c into trust c-1 will not i cause any constructive or actual additions to the successor trusts trust a-1 trust b-1 and trust c-1 ii will not be generation-skipping transfers iii will not be subject_to gst tax under sec_2601 iv will not cause any distributions from trust a to trust a-1 trust b to trust b-1 or trust c to trust c-1 upon the merger to be subject plr-132133-01 to gst tax provided there are no post-merger additions and v each successor trust will be exempt from gst tax ruling_request sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of his death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power_of_appointment by disposition which is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent’s gross_estate under sec_2035 to inclusive sec_2041 defines the term general_power_of_appointment as a power which is exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_2652 provides that the transferor for generation-skipping_transfer_tax purposes is the decedent for purposes of chapter and the donor for purposes of chapter sec_26_2652-1 provides in general that the individual with respect to whom property was most recently subject_to federal estate or gift_tax is the transferor of that property for purposes of chapter sec_26_2652-1 provides that a transfer is subject_to federal estate_tax if the value of the property is includible in the decedent’s gross_estate as determined under sec_2031 or sec_2103 in the present case child a child b and child c possess a testamentary_power_of_appointment to appoint any remaining trust estate in trust a_trust a-1 trust b_trust b-1 trust c and trust c-1 respectively to one or more of trustors’ issue or spouse of a deceased issue child a child b and child c may not appoint the trust estate to himself or herself his her estate his her creditors or the creditors of his her estate accordingly the testamentary_power_of_appointment is not a general_power_of_appointment if child a child b or child c exercises his her power at death or if the power lapses because it is not a general_power_of_appointment the exercise or lapse of the power will not be treated as a transfer of property for purposes of sec_2041 child a child b and child c will not be treated as transferors for purposes of chapter thus we conclude child a child b and child c’s exercise of a testamentary special_power_of_appointment provided under the terms of the successor trusts trust a-1 trust b-1 and trust c-1 will not cause any distributions from the respective successor trust to be subject_to the gst tax ruling_request sec_2501 imposes a gift_tax on the transfer of property by gift sec_2511 provides that the gift_tax shall apply whether the transfer is in trust or otherwise plr-132133-01 whether the gift is direct or indirect and whether the property is real or personal tangible or intangible in the present case the interests of child a child b and child c before and after the proposed merger are identical accordingly the proposed merger of trust a into trust a-1 trust b into trust b-1 and trust c into trust c-1 will not cause child a child b or child c to have made a taxable gift under chapter ruling_request sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2033 provides that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of the decedent’s death sec_2036 provides that the value of the decedent’s gross_estate includes the value of all property to the extent of any interest transferred by the decedent with respect to which the decedent has retained for life either an income_interest in the property or the right to designate the persons who will possess or enjoy the property or have an interest in the income of the property sec_2038 provides that in the case of transfers after date the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money or money’s worth by trust or otherwise where the enjoyment thereof was subject at the date of death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power to alter amend revoke or terminate or when any such power is relinquished during the 3-year period ending on the date of the decedent’s death sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of his death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power_of_appointment by disposition which is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent’s gross_estate under sec_2035 to inclusive under the terms of trust and after the merger of trust a into trust a-1 trust b into trust b-1 and trust c into trust c-1 the interest of child a child b and child c will terminate at the child’s death and the corpus will either pass outright or be held in further trust for the benefit of each child’s issue accordingly child a child b and child c will not have an interest in the corpus of the respective trust at the time of such plr-132133-01 child’s death for purposes of sec_2033 child a child b and child c possess a testamentary special_power_of_appointment to appoint the trust estate to one or more of the trustors’ issue or the spouse of a deceased issue child a child b and child c do not possess a general_power_of_appointment as defined under sec_2041 further child a child b and child c have not transferred property to the respective trust for purposes of sec_2036 sec_2037 and sec_2038 under the facts as presented we conclude that the proposed merger of trust a into trust a-1 trust b into trust b-1 and trust c into trust c-1 will not cause the interest that child a child b and child c has in the respective successor trust to be included in his her gross_estate under sec_2033 sec_2036 sec_2037 sec_2038 and sec_2041 the ruling contained in this letter is 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 the ruling it is subject_to verification on examination except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code the 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 assistant to the branch chief branch office of associate chief_counsel passthroughs and special industries sincerely yours lorraine e gardner enclosure copy for sec_6110 purposes


t c summary opinion united_states tax_court daniel campbell and terri campbell petitioners v commissioner of internal revenue respondent docket no 23865-15s filed date daniel campbell and terri campbell pro sese michael francis o’donnell and ashley swick student for respondent summary opinion carluzzo chief special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not 1unless otherwise indicated section references are to the internal_revenue_code_of_1986 as amended in effect for the years in issue and rule references are to the tax_court rules_of_practice and procedure reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date notice respondent determined deficiencies in and penalties with respect to petitioners’ federal_income_tax as follows penalty year deficiency sec_6662 dollar_figure dollar_figure big_number dollar_figure after concessions the issues for decision for each year are whether petitioners are entitled to various deductions claimed on a schedule a itemized_deductions and liable for a sec_6662 accuracy-related_penalty 2respondent concedes that petitioners are entitled to a deduction for union dues for each of the years in issue in an amount that will be reflected in the parties’ rule_155_computations petitioners concede all of the remaining adjustments respondent made in the notice except for the disallowance of the deductions claimed for mr campbell’s petitioner unreimbursed employee business_expenses as described on form sec_2106 employee business_expenses the disallowance of the deductions claimed for petitioner’s u niform cleaning and the imposition of the sec_6662 accuracy-related_penalties background some of the facts have been stipulated and are so found at the time the petition was filed and at all times relevant here petitioners resided in new lenox illinois within the chicago illinois metropolitan area during the years in issue petitioner was employed by midwest fireproofing llc midwest to install flame-retardant insulating materials in new buildings and large renovation projects midwest’s records show the dates clients and locations of petitioner’s assignments none of which lasted for more than a few weeks he was seldom required to be present at any of midwest’s office business locations instead he routinely worked at various temporary worksites in the chicago metropolitan area except for a four-week period in when he worked in st louis missouri and a five-week period in when he worked in alton illinois distant worksites during the years in issue petitioner owned a half-ton pickup truck that he used to transport himself and whatever tools and equipment were required for an assignment when working in the chicago metropolitan area petitioner drove hi sec_3according to a date letter from petitioner’s employer the majority of petitioner’s worksite sic are located in the chicagoland area the distant worksites are located away from petitioner’s home within the meaning of sec_162 truck between his residence and his then-current worksites once a week on his way to a worksite he stopped to pick up materials and or equipment from a midwest warehouse when petitioner worked at a distant worksite he drove to the worksite at the beginning of the week stayed at a hotel during the workweek and returned to his home for the weekend while working at the distant worksites petitioner was entitled to and received a dollar_figure-per-day travel allowance midwest did not otherwise compensate or reimburse petitioner for lodging meals or other travel_expenses for any of his work assignments petitioner did not maintain a mileage log or logs during the years in issue and he did not retain any receipts that show lodging and meals expenses he paid_or_incurred while working at the distant worksites while working at the various worksites petitioner wore overalls and protective glasses during the application of the flame-retardant insulating materials to the buildings petitioner’s clothes got covered in a gypsum and a cementitious product that required him to use a commercial laundromat to clean them a paid income_tax_return_preparer prepared petitioners’ and federal_income_tax returns on schedules a attached to the returns petitioners claimed deductions for unreimbursed employee business_expenses totaling dollar_figure for and dollar_figure for the details of the unreimbursed employee_business_expense deductions are shown on form sec_2106 also included with petitioners’ and returns as follows unreimbursed employee_business_expense sec_2012 vehicle dollar_figure dollar_figure travel while away from home big_number big_number busine sec_1 meals and entertainment2 big_number big_number 1petitioners’ returns do not identify specific expenses included in the deduction for business_expenses 2before the application of the limitation prescribed in sec_274 petitioners also claimed deductions of dollar_figure and dollar_figure for and respectively attributable to the cost of cleaning the overalls that petitioner wore for work laundry expenses in addition to other adjustments now conceded in the notice respondent disallowed the deductions described in the preceding paragraph and imposed a sec_6662 accuracy-related_penalty for each year 4for each year in issue petitioners claimed deductions for unreimbursed employee business_expenses attributable to mrs campbell that are not reflected in this table as they are not in issue as best as we can tell from the record for each year in issue there is a discrepancy between the amount of the unreimbursed employee_business_expense deduction claimed on the schedule a and the sum of the unreimbursed employee business_expenses reported on the form_2106 attributable to petitioner and the form_2106 attributable to mrs campbell that discrepancy has not been explained discussion as we have observed in countless opinions deductions are a matter of legislative grace and the taxpayer bears the burden of proving entitlement to any claimed deduction rule a 503_us_79 292_us_435 taxpayers must substantiate deductions claimed by keeping and producing adequate_records that enable the commissioner to determine the taxpayer’s correct_tax liability sec_6001 65_tc_87 aff’d per curiam 540_f2d_821 5th cir 43_tc_824 a taxpayer claiming a deduction on a federal_income_tax return must demonstrate that the deduction is allowable pursuant to some statutory provision and must further substantiate that the expense to which the deduction relates has been paid_or_incurred see sec_6001 hradesky v commissioner t c pincite sec_1_6001-1 income_tax regs taxpayers may deduct ordinary and necessary expenses paid in connection with operating a trade_or_business sec_162 122_tc_305 generally the performance of services as an employee 5petitioners do not claim and the record does not show that the provisions of sec_7491 are applicable and we proceed as though they are not constitutes a trade_or_business 54_tc_374 sec_274 imposes strict substantiation requirements for travel entertainment gift and listed_property including passenger automobiles expenses 50_tc_823 aff’d per curiam 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date under sec_274 the taxpayer generally must substantiate either by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement the amount of the expense the time and place the expense was incurred the business_purpose of the expense and in the case of an entertainment or gift expense the business relationship to the taxpayer of each expense incurred for listed_property expenses the taxpayer must establish the amount of business use and the amount of total use for the property see sec_1_274-5t temporary income_tax regs fed reg date substantiation by adequate_records requires the taxpayer to maintain an account book a diary a log a statement of expense trip sheets or a similar record prepared contemporaneously with the expenditure and documentary_evidence eg receipts or bills of certain expenditures sec_1 c iii income_tax regs sec_1_274-5t temporary income_tax regs fed reg date substantiation by other_sufficient_evidence requires the production of corroborative evidence in support of the taxpayer’s statement specifically detailing the required elements sec_1_274-5t temporary income_tax regs fed reg date i unreimbursed employee business_expenses a vehicle expenses petitioners claimed vehicle expense deductions of dollar_figure and dollar_figure for and respectively petitioner computed those deductions by applying the applicable standard mileage rate6 for each year in issue to the business miles he claims to have driven between his residence and temporary worksites in the chicago metropolitan area sometimes stopping along the way at his employer’s warehouse to pick up various items and between his residence and the distant worksites including mileage driven while at the distant worksites in general and if properly substantiated transportation_expenses between places of business are deductible but as a general_rule a taxpayer’s costs of commuting between his or her residence and place of business or employment are 6the commissioner generally updates the optional standard mileage rates annually see sec_1_274-5 income_tax regs the standard mileage rate of cents per mile for is set forth in notice_2012_1 sec_2 2012_2_irb_260 the standard mileage rate of cents per mile for is set forth in notice_2012_72 sec_2 2012_50_irb_673 nondeductible personal expenses sec_162 sec_262 335_f2d_496 5th cir aff’g and remanding tcmemo_1962_233 32_tc_947 aff’d per curiam 283_f2d_865 5th cir see also 413_us_838 326_us_465 439_f2d_296 9th cir aff’g 52_tc_964 73_tc_766 roy v commissioner tcmemo_1997_562 aff’d without published opinion 182_f3d_927 9th cir sec_1_162-2 sec_1_262-1 income_tax regs seemingly nondeductible commuting expenses may be deducted if the expense is for travel between a taxpayer’s residence and a temporary distant worksite from the taxpayer’s home_office to a place of business and requiring the taxpayer to pay or incur additional costs to transport tools and materials from the taxpayer’s residence to a place of business see revrul_99_7 1999_1_cb_361 revrul_75_380 1975_2_cb_59 according to respondent petitioner is not entitled to the deductions for vehicle expenses because he has failed properly to substantiate the amounts of the underlying expenses substantiation argument to the extent the deductions might have been adequately substantiated respondent further takes the position that at least some of the vehicle expenses may not be deducted because the expenses are attributable to the cost of commuting commuting argument our attention is first directed to respondent’s substantiation argument as earlier explained deductions attributable to a taxpayer’s use of the taxpayer’s passenger automobile7 for business purposes are subject_to the strict substantiation rules of sec_274 and as previously noted petitioner did not maintain any contemporaneous logs or records contemplated by that statute or its corresponding regulation nevertheless we find that petitioner’s testimony coupled with the records of midwest sufficiently satisfies the substantiation requirements of sec_274 with respect to the mileage petitioner claims to have driven for work see sec_1_274-5t temporary income_tax regs supra it follows that petitioners are entitled to deduct vehicle expenses petitioner incurred for once-a- week travel between midwest’s warehouse and a worksite and for expenses petitioner incurred with respect to travel to and at the distant worksites the deductions are to be calculated in the parties’ rule_155_computations taking into account the standard mileage rates previously referenced and petitioners’ credible presentation regarding the number of miles driven for such purposes 7petitioner’s pickup truck fits within the definition of a passenger_automobile for purposes of sec_272 see sec_280f as far as substantiation goes the above reasoning applies to all of the mileage included in the vehicle expense deductions here in dispute adequately substantiating the mileage driven for purposes of sec_274 however is only half of the story respondent’s commuting argument must also be considered for the mileage driven between petitioner’s residence and the various chicago metropolitan worksites as indicated according to respondent the expenses paid_or_incurred to drive between those points are nondeductible commuting expenses see sec_262 petitioners disagree and without specific reference to the above- cited revenue rulings argue that for one or more of the reasons contemplated in the revenue rulings travel between petitioner’s residence and the chicago metropolitan area worksites does not constitute commuting we will take each of those reasons in turn temporary distant worksites a taxpayer is entitled to deduct transportation_expenses between the taxpayer’s residence and the taxpayer’s place of business only if the place of business constitutes a temporary distant worksite see 3_tc_544 revrul_99_7 1999_1_cb_361 states a taxpayer may deduct daily transportation_expenses incurred in going between the taxpayer’s residence and a temporary_work_location outside the metropolitan area where the taxpayer lives and normally works the worksites in the chicago metropolitan area or the chicagoland area as described by petitioner’s employer are not outside the metropolitan area where petitioner lives and normally works that being so petitioners cannot avoid respondent’s commuting argument on that basis home_office petitioners argue that they are entitled to deduct the mileage driven between their residence and all of petitioner’s worksites including the chicago metropolitan area worksites because he maintained a home_office in the garage of his residence if only by implication they rely on revrul_99_7 c b pincite which states in pertinent part if an office in the taxpayer’s residence satisfies the principal_place_of_business requirements of section 280a c a then the residence is considered a business location and the daily transportation_expenses incurred in going between the residence and other work locations in the same trade_or_business are ordinary and necessary business_expenses deductible under section a see eg 113_tc_106 a taxpayer generally is not entitled to deduct any expenses related to a dwelling_unit used as a residence during the taxable_year sec_280a expenses attributable to a home_office are excepted from this general_rule however if the expenses are allocable to a portion of the dwelling_unit which is exclusively used on a regular basis as the principal_place_of_business for the taxpayer’s trade_or_business sec_280a 125_tc_271 if the taxpayer is an employee the exception under sec_280a will apply only if the exclusive use of the office space is for the convenience of the taxpayer’s employer sec_280a further provides that in this context the term principal_place_of_business includes a place of business which is used by the taxpayer for the administrative or management activities of any trade_or_business of the taxpayer if there is no other fixed location of the trade_or_business where the taxpayer conducts substantial administrative or management activities of the trade_or_business see 94_tc_348 petitioners do not claim and they have not established that during the years in issue their garage was used exclusively on a regular basis as the principal_place_of_business for petitioner or that the garage home_office was maintained for the convenience of midwest even if petitioner used an area in his garage for business purposes petitioners would not be entitled to a home_office expense deduction attributable to that area indeed they did not claim one for either year and they cannot avoid respondent’s commuting argument on that basis either see eg 101_tc_537 citing and discussing 73_tc_766 transporting tools and materials revrul_75_380 1975_2_cb_59 allows taxpayers to deduct the additional costs that a taxpayer incurs to transport job-related tools and materials between a taxpayer’s residence and the taxpayer’s place of employment petitioners did not provide any evidence that would allow us to determine what excess commuting expenses if any might be attributable to transporting petitioner’s tools to and from his various worksites accordingly petitioners are not entitled to a deduction for any such expenses b deductions for meals_and_lodging petitioners claimed deductions of dollar_figure and dollar_figure for and respectively for meals_and_lodging expenses according to petitioners these expenses relate to amounts paid_or_incurred while petitioner worked at the distant worksites although midwest’s records show the dates that petitioner worked at the distant worksites the records do not show the amounts he might have spent for meals_and_lodging while at the distant worksites as noted petitioner did not retain any receipts that otherwise substantiate those expenses and as noted the deduction of expenses for meals_and_lodging is subject_to strict substantiation requirements because petitioners have failed to satisfy those requirements they are not entitled to the deductions for meals_and_lodging shown on the form sec_2106 c unspecified business_expenses for each year petitioners claimed deductions for expenses described on their returns as unspecified business_expenses petitioners offered no explanation for these expenses an unspecified business_expense is not deductible accordingly respondent’s disallowance of petitioners’ claimed deductions for unspecified business_expenses is sustained 8we are reluctant on our own to apply the benefits of revproc_2011_47 sec_4 2011_42_irb_520 which relaxes to some extent the strict substantiation requirements with respect to expenses for meals while traveling away from home this is because the form sec_2106 on which the expenses are listed do not take into account any per_diem_amounts that petitioner might have received from midwest and we cannot tell from what has been submitted whether the per_diem_amounts are included in the wage income petitioner reported on petitioners’ return for each year 9it is unclear whether petitioners have conceded these deductions we proceed as though they have not d laundry expenses petitioners claimed deductions of dollar_figure and dollar_figure for and respectively for the costs of cleaning petitioner’s work clothesdollar_figure according to petitioner these expenses relate to the cost to clean his work_clothes at a commercial laundromat if a taxpayer is entitled to a trade_or_business expense deduction for an article of clothing then the taxpayer is entitled to deduct the expenses paid_or_incurred to launder that item expenses for work clothing are deductible if the clothing or uniform is of a type specifically required as a condition_of_employment the uniform is not adaptable to general use as ordinary clothing and the uniforms are not worn as ordinary clothing 30_tc_757 wasik v commissioner tcmemo_2007_148 beckey v commissioner tcmemo_1994_514 the overalls petitioner wore for work as he described them are adaptable to general use as ordinary clothing that being so the costs of the overalls is not deductible as a trade_or_business 10petitioner also claimed unreimbursed employee_business_expense deductions of dollar_figure and dollar_figure for and respectively for the costs of purchasing work uniforms and gear at trial petitioners conceded entitlement to those deductions nonetheless respondent’s questions during the re-cross- examination of petitioner suggest that respondent agrees that petitioners are entitled to at least portions of those deductions if so that agreement may be reflected in the parties’ rule_155_computations expense and it follows that the expenses_incurred to launder the overalls are likewise not deductible see yeomans v commissioner t c pincite consequently petitioners are not entitled to deductions for the laundry expenses ii sec_6662 accuracy-related_penalties lastly we consider whether petitioners are liable for a sec_6662 accuracy-related_penalty for either year in issue that section imposes an accuracy-related_penalty equal to of the underpayment_of_tax that is attributable to negligence or other specified grounds negligence as used in sec_6662 is defined as any failure to make a reasonable attempt to comply with the code and any failure to keep adequate books_and_records or to substantiate items properly sec_6662 sec_1_6662-3 income_tax regs negligence has also been defined as the failure to exercise due care or the failure to do what a reasonable person would do under the circumstances see 92_tc_1 aff’d 925_f2d_348 9th cir 85_tc_934 respondent bears the burden of production with respect to the imposition of a sec_6662 accuracy-related_penalty see sec_7491 sec_6751 provides that subject_to certain exceptions in sec_6751 no penalty shall be assessed unless the initial determination of the assessment is personally approved in writing by the immediate supervisor of the individual making the determination or such higher level official as the commissioner may designate written approval of the initial penalty determination under sec_6751 must be obtained no later than the date the notice_of_deficiency is issued or the date the commissioner files an answer or amended answer asserting the penalty 851_f3d_190 2d cir aff’g in part rev’g in part tcmemo_2015_42 see also graev v commissioner t c date supplementing and overruling in part 147_tc_460 compliance with sec_6751 is part of the commissioner’s burden of production in any deficiency case in which a penalty subject_to sec_6751 is asserted chai v commissioner f 3d pincite the sec_6662 accuracy-related_penalties determined in the notice were properly approved as required by sec_6751 the record includes a civil penalty approval form approving imposition of accuracy-related_penalties against petitioners for and and executed by the irs tax examiner’s immediate supervisor before the date the notice was issued respondent has proven sufficient facts to satisfy the burden of production as to that issue petitioners have conceded without explanation or background many of the adjustments made in the notice furthermore petitioner failed to maintain adequate substantiating records for many of the expenses underlying the deductions claimed on petitioners’ and returns as a result we find that respondent met his burden of production with respect to the negligence_penalty the accuracy-related_penalty does not apply to any part of an underpayment_of_tax if it is shown that the taxpayer acted with reasonable_cause and in good_faith with respect to that portion sec_6664 the determination of whether a taxpayer acted in good_faith is made on a case-by-case basis taking into account all the pertinent facts and circumstances sec_1_6664-4 income_tax regs petitioner bears the burden of proving that he had reasonable_cause and acted in good_faith with respect to the underpayment see 116_tc_438 reliance on professional advice will absolve the taxpayer if such reliance was reasonable and the taxpayer acted in good_faith sec_1_6664-4 income_tax regs under certain circumstances a taxpayer’s reliance upon professional advice may establish the taxpayer’s reasonable_cause and good_faith with respect to an underpayment_of_tax if the taxpayer establishes that the professional was provided with complete and accurate information an incorrect return was a result of the preparer’s mistakes and the taxpayer demonstrates good-faith reliance on a competent professional see 112_tc_317 aff’d without published opinion sub nom schutter v commissioner 242_f3d_390 10th cir see also 115_tc_43 aff’d 299_f3d_221 3d cir although petitioners’ returns were prepared by a paid income_tax_return_preparer petitioners did not provide their return preparer with any source documents underlying the deductions either conceded or here disallowed furthermore petitioners’ return preparer testified that he did not provide any professional advice to petitioners instead he was simply a scrivener filling in whatever numbers petitioners provided to him for either reason petitioners’ claim that their reliance upon their return preparer insulates them from the imposition of the penalty is unavailing respondent’s imposition of the sec_6662 penalty for each year is sustained to reflect the foregoing decision will be entered under rule


t c memo united_states tax_court jerry l burton petitioner v commissioner of internal revenue respondent docket no filed date p received a lump-sum_distribution from two accounts under a qualified_pension plan in pursuant to a divorce decree entered shortly thereafter part of the distribution was used to pay off the mortgage on p's former residence and to pay his ex-wife dollar_figure p reported the distribution as income on his federal_income_tax return but included the amount used to satisfy his mortgage obligation and the amount_paid to his ex-wife as part of an alimony deduction r disallowed the alimony deduction and determined that p is taxable on the entire distribution p contends that he is not liable for tax on the portion of the distribution paid to his former wife and the portion used to satisfy the mortgage because the payments were made pursuant to a qualified_domestic_relations_order qdro as defined by sec_414 i r c held the divorce decree rendered after the lump-sum_distribution to p does not meet the requirements of sec_414 i r c and is thus not a qdro therefore p is liable for tax on the entire lump-sum_distribution held further p is liable for additional tax on the entire lump-sum as a result of the early distribution from a qualified_retirement_plan pursuant to sec_72 i r c john l onesto for petitioner donald k rogers and matthew j fritz for respondent memorandum opinion nims judge respondent determined a deficiency in the federal_income_tax of petitioner jerry l burton in the amount of dollar_figure stemming from funds received by petitioner in connection with the closing of his retirement benefits accounts a petition was filed on date an answer was filed on date respondent thereafter filed an amendment to answer claiming an increased deficiency of dollar_figure based upon sec_72 unless otherwise indicated all section references are to sections of the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure the sole issue for decision is whether the portion of petitioner's retirement account distribution used to pay off the mortgage on petitioner's former residence and to pay his ex-wife this case was reassigned to judge arthur l nims iii by order of the chief_judge dollar_figure pursuant to their divorce decree constituted taxable_income to petitioner in the amount of dollar_figure for this case was submitted to the court on a full stipulation of facts which are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time the petition was filed petitioner resided in jackson ohio background petitioner's employment with fluor daniel inc fluor daniel was terminated on date petitioner subsequently divorced linda gayle burton mrs burton on date an agreed decree of divorce decree was entered with the district_court of denton county texas the decree divested petitioner of his entire_interest in his former residence located pincite daybreak drive dallas texas daybreak drive and transferred that interest to mrs burton the decree also required petitioner to withdraw his entire retirement account balances at fluor daniel use the proceeds to pay off the mortgage on daybreak drive for which petitioner was personally liable and pay mrs burton the remaining balance in an amount not to exceed dollar_figure the decree states that petitioner shall be responsible for all taxes due on the lump sum retirement withdrawal and releases linda from any and all liability concerning the taxes on the retirement withdrawal the fluor daniel retirement_plan is and was at the time of petitioner's participation subject_to the requirements of the employee_retirement_income_security_act_of_1974 erisa publaw_93_406 88_stat_829 as amended petitioner had two separate retirement accounts at fluor daniel the retirement_plan and the savings investment plan sometime in march of petitioner asked the plan_administrator at fluor daniel to distribute to him the entire balance of each retirement account by letters dated may and date the plan_administrator acknowledged petitioner's request and reported to him the amounts to be distributed based on a valuation_date of date as of that date the combined value of the retirement_plan and the savings investment plan accounts plan balance was dollar_figure petitioner received this sum sometime at the end of date in the form of two checks dated date and issued by the northern trust company at the time petitioner received the checks he was under the age of and did not attain that age at any time during the record does not disclose whether petitioner had attained age see sec_72 petitioner paid off his mortgage debt on daybreak drive by wire transfer of dollar_figure from his account at bancohio national bank bancohio to his mortgage account at bank one dallas on date furthermore on or about date petitioner sent mrs burton a check drawn on petitioner's account at bancohio in the amount of dollar_figure to fulfill his obligation under the decree on his federal_income_tax return petitioner reported the plan balance as dividend income of dollar_figure and capital_gain income of dollar_figure petitioner also claimed an alimony deduction with respect to both the dollar_figure that he paid directly to mrs burton and the dollar_figure he paid to satisfy the mortgage on daybreak drive petitioner included this amount as part of the total alimony deduction of dollar_figure claimed on the return the parties have stipulated that petitioner's allowable alimony deduction for the taxable_year was dollar_figure in the amendment to answer referred to above the asserted increased deficiency of dollar_figure represents the imposition of additional tax under sec_72 on petitioner's premature retirement benefits distribution of dollar_figure since respondent asserts an increased deficiency she has the burden_of_proof on this issue rule a however the parties stipulated that dollar_figure of that distribution is taxable_income to petitioner the parties further stipulated that if the court holds that the total amount of the retirement accounts distribution dollar_figure is taxable to petitioner then petitioner is liable for the additional tax under sec_72 discussion we must decide whether the decree is a qualified_domestic_relations_order qdro within the meaning of sec_414 thus relieving petitioner of liability for tax pursuant to sec_402 on the dollar_figure portion of the lump-sum_distribution used to satisfy his mortgage and pay his ex-wife and the dollar_figure additional tax under sec_72 for the reasons which follow we hold that the decree does not constitute a qdro ordinarily any funds distributed from an exempt employees' trust under a tax qualified employees' plan are taxable to the plan participant or beneficiary who is entitled to receive the distribution under the plan 97_tc_51 however sec_402 now sec_402 states an exception to this general_rule providing that an alternate_payee who is the spouse or former spouse of the plan participant shall be treated as the distributee of any distribution or payment made to such payee under a qdro accordingly the tax_liability for the distribution from the fluor daniel retirement accounts will be allocated either to petitioner or to mrs burton depending upon whether the decree meets the statutory definition of a qdro the retirement_equity_act_of_1984 rea publaw_98_397 sec b 98_stat_1445 added sec_414 which defines a qdro sec_414 provides in pertinent part the following sec_414 qualified_domestic_relations_order defined --for purposes of this subsection and sec_401 -- in general -- a qualified_domestic_relations_order --the term qualified_domestic_relations_order means a domestic relations order-- i which creates or recognizes the existence of an alternate payee's right to or assigns to an alternate_payee the right to receive all or a portion of the benefits payable with respect to a participant under a plan and ii with respect to which the requirements of paragraphs and are met b domestic_relations_order --the term domestic_relations_order means any judgment decree or order including approval of a property settlement agreement which -- i relates to the provision of child_support alimony payments or marital property rights to a spouse former spouse child or other dependent of a participant and ii is made pursuant to a state domestic relations law including a community_property law order must clearly specify certain facts --a domestic_relations_order meets the requirements of this paragraph only if such order clearly specifies-- a the name and the last known mailing address if any of the participant and the name and mailing address of each alternate_payee covered by the order b the amount or percentage of the participant's benefits to be paid_by the plan to each such alternate_payee or the manner in which such amount or percentage is to be determined c the number of payments or period to which such order applies and d each plan to which such order applies order may not alter amount form etc of benefits --a domestic_relations_order meets the requirements of this paragraph only if such order-- a does not require a plan to provide any type or form of benefit or any option not otherwise provided under the plan b does not require the plan to provide increased benefits determined on the basis of actuarial value and c does not require the payment of benefits to an alternate_payee which are required to be paid to another alternate_payee under another order previously determined to be a qualified_domestic_relations_order thus to qualify as a qdro a domestic_relations_order must meet the following tests first it must be a domestic_relations_order that creates recognizes or assigns to an alternate_payee rights under a qualified_employee benefit trust otherwise payable to a plan participant second the qdro must clearly specify certain facts namely the names and last known mailing addresses of the participant and the alternate_payee the amount or percentage of the benefits to be paid or the manner in which such amount or percentage is to be determined the number of payments and each plan to which the order applies third the qdro may not alter the amount form etc of the benefits generally benefits under qualified_plans are subject_to prohibitions against assignment_or_alienation so-called spendthrift provisions s rept pincite 1984_2_cb_447 before the enactment of sec_414 the irs had ruled that the spendthrift provisions are not violated when a plan trustee complies with a court order requiring the distribution of benefits of a participant in pay status to the participant's spouse or children in order to meet the participant's alimony or child_support_obligations but the irs had taken no position with respect to this issue in cases in which the participant's benefits are not in pay status the senate report indicates that sec_414 was enacted to provide rational rules for plan administrators id congress believed it necessary to establish guidelines for determining whether the exception to the spendthrift rules applies to ensure that only those domestic relations orders that are excepted from the spendthrift provisions are not preempted by erisa id the facts in this case do not comport with the requirements of sec_414 petitioner's employment with fluor daniel was terminated on date during that same month petitioner asked the fluor daniel plan_administrator to distribute to him--petitioner--the entire plan balance in mid- may of that year the plan_administrator acknowledged petitioner's request and reported to him the amounts to be distributed based upon a march valuation_date petitioner received two checks both dated date which terminated his interest in the plan it is not clear why the plan_administrator agreed to this termination of petitioner's entire_interest in the plan one possibility is that the termination of petitioner's interest was permissible as being related to his separation_from_service with fluor daniel in any event since the plan proceeds were distributed to petitioner and not to mrs burton and in advance of the decree which was dated date it cannot be argued that the distribution was made by the plan_administrator to an alternate_payee in response to the decree 105_tc_29 involved a similar situation the domestic_relations_order in dispute in that case was not executed until after the taxpayer had received a lump-sum_distribution terminating his interest in a profit sharing plan we held that the domestic_relations_order in that case could not create or recognize rights that no longer existed at the time of the order id pincite the same is true in this case see also to the same effect 100_tc_521 nowhere is there any indication that the decree was presented to the plan_administrator even in draft form prior to the distribution of the plan proceeds to petitioner we have stated in rodoni v commissioner supra pincite that implicit in the procedural rules relating to employee_benefit_plan provisions contained in sec_414 and sec_414 is the requirement that a domestic_relations_order be presented to the plan_administrator and adjudged qualified before any distribution is made by the plan to the spouse or former spouse there is no evidence that this occurred in the case before us for the foregoing reasons we hold that the decree did not effectively create or recognize mrs burton's right as an alternate_payee within the meaning of sec_414 to receive petitioner's qualified_plan benefits the directions in the decree to turn over the disputed part of the plan proceeds could only have been effectively addressed to petitioner who already had the proceeds and not to the plan_administrator as a consequence of this holding the total amount of the plan distribution to petitioner is taxable to him in having so held we do not reach the question of whether the decree clearly specifies facts as required by sec_414 or alters the amount form etc of the benefits as prohibited by sec_414 in 86_f3d_982 10th cir the court_of_appeals disagreed with our holding in 102_tc_61 that the domestic_relations_order in that case did not create or recognize the existence of an alternate payee's right or assign to an alternate_payee the right to receive employee plan benefits and did not satisfy the clearly specified facts requirement of sec_414 however in that case the disputed domestic_relations_order preceded the plan distribution which makes this case distinguishable from hawkins in a way that is fatal to petitioner's position the court_of_appeals in hawkins v commissioner f 3d pincite itself recognized a similar disabling distinction under the facts of 100_tc_521 in 100_tc_521 a consent judgment was entered by a state divorce court in order to partition the community_property of mr and mrs karem t c pincite the consent judgment provided that mrs karem was to receive an interest in her ex-husband's pension_plan but it stated the following condition she shall receive that interest pursuant to a qualified_domestic_relations_order to be prepared by robert louis karem until the qualified_domestic_relations_order is completed robert louis karem shall pay barbara wiechman karem her interest in the pension_plan immediately when he receives it id after being assessed a deficiency in his gross_income based on a lump-sum plan distribution paid to mrs karem mr karem filed a petition in the tax_court arguing that the consent judgment was a qdro the court rejected this argument noting that the consent judgment directs that a qdro be drafted the consent judgment itself is not a qdro id pincite the court_of_appeals went on to observe that there was thus no written order in existence at the time of the distribution that would satisfy the requirements of sec_414 hawkins v commissioner supra pincite on brief petitioner argues that he received the plan benefits as agent for mrs burton however since the decree did not qualify as a qdro the possibility raised by this argument becomes moot as noted above the parties stipulated that if the court holds that the total amount of the retirement accounts distribution is taxable to petitioner then petitioner is also liable for the additional tax under sec_72 consistent with this stipulation we so hold decision will be entered for respondent