t c memo united_states tax_court state police association of massachusetts petitioner v commissioner of internal revenue respondent docket no filed date alfred j o'donovan iii for petitioner catherine r chastanet and christopher w schoen for respondent memorandum findings_of_fact and opinion wells judge respondent determined deficiencies in petitioners' federal income taxes additions to tax and penalties for the taxable years as follows additions to tax tye sec_6653 a sec april deficiency a a a a b secs secs dollar_figure dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number additions to tax and penalties tye sec sec sec secs july deficiency a a a a b dollar_figure dollar_figure dollar_figure dollar_figure big_number big_number - - big_number big_number big_number - - big_number percent of the interest due on the deficiency unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure the issues to be decided are whether the period of limitations on assessment and collection had expired with respect to certain of the taxable periods in issue at the time respondent sent to petitioner the statutory_notice_of_deficiency in issue in the instant case whether income generated by petitioner's solicitation program for its yearbook is unrelated_business_income subject_to tax pursuant to sec_511 for the taxable periods in issue and whether petitioner is liable for additions to tax pursuant to sec_6651 sec_6653 and a a and b and a and penalties pursuant to sec_6662 for certain of the taxable periods in issue findings_of_fact some of the facts have been stipulated for trial pursuant to rule and are incorporated herein by reference we find as facts the parties' stipulations of fact petitioner is a labor_organization exempt from taxation pursuant to sec_501 petitioner’s principal office at the time of the filing of the petition in the instant case was hillside avenue needham massachusetts the purpose of petitioner is to represent and act as bargaining agent in matters of policy wages hours and other conditions of employment and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection of and for the members of the uniformed branch of the division of state police department of public safety of the commonwealth of massachusetts and to promote and develop a friendly and fraternal spirit among all of the members of the uniformed branch of the division of state police approximately big_number to big_number state troopers were eligible to join petitioner during each of the taxable years in issue nearly all those who were eligible to be members were members the constabulary was the official publication of petitioner and was intended for both internal and external use the constabulary was characterized as petitioner’s yearbook or ad- book agreements petitioner entered into a contract with brent-wyatt east bwe on date agreement in which bwe agreed to conduct an earnings program the program for petitioner the agreement provided that i its term would be for years from date but would terminate upon written notice by one party to the other of breach and the failure of the defaulting party to cure the breach within days of receipt of the notice ii bwe agreed to conduct the program by marketing advertising on behalf of petitioner through a telephone solicitation and to produce publish and lay out at least big_number yearbooks iii petitioner would receive percent of gross weekly collections and any amounts left after all program obligations have been met but not less than dollar_figure for each solicitation which was to occur annually iv bwe would receive percent of gross weekly collections v telephone salesmen field representatives and office managers who worked for both petitioner and bwe would receive percent of gross weekly collections vi the parties would receive amounts due them at weekly settlement meetings vii all checks received as a result of the solicitation would be made payable to petitioner and turned over to the office manager or trooper monitor on duty any check received that was not made payable to petitioner would be returned to its maker viii daily reports of collected funds would be maintained and submitted weekly to petitioner’s treasurer ix petitioner would maintain a separate checking account and all expenses_incurred directly from the solicitation and approved by petitioner and bwe would be paid from that account x bwe would be an independent_contractor and not the agent of petitioner petitioner would have no direction or control_over bwe’s personnel or business activities and bwe would save petitioner harmless from any liability resulting from bwe’s business activities bwe could not incur indebtedness or expenses in the name of petitioner xi petitioner would provide a monitor trooper monitor who would be present at all times during the telephone solicitation xii petitioner would provide an editing staff for the yearbook xiii bwe would supply the marketing personnel but petitioner had the right to terminate the employment of any employee or subcontractor found to be using pressure or misrepresentation xiv during the program bwe had authority to use petitioner’s name and petitioner insured the cooperation of itself and its members xv petitioner had the right at any time to exempt any subscriber prospective subscriber or advertiser for any reason whatsoever xvi petitioner had the right to inspect any field_office from which the solicitation took place at any time without prior notice to determine whether bwe was fulfilling its obligation under the agreement xvii petitioner had the right to demand that written notices be placed in a conspicuous place at bwe’s offices and no office could operate without such notices xviii bwe would keep daily logs which contained specific information and would advise all police departments in the area of an ongoing solicitation xix petitioner’s trooper representatives had the right to accept or reject the office space to be used by bwe for the solicitation xx solicitations for the earnings program could be made only by telephone by memorandum of agreement dated date petitioner and bwe agreed that there would be no termination_date for the agreement and that the agreement would run until voluntarily terminated by one of the parties petitioner entered into a contract with bwe on date agreement which had terms similar to the agreement as amended except that i the agreement would continue indefinitely but would terminate upon written notice by one party to the other of breach and the failure of the defaulting party to cure the breach within days of receipt of the notice ii petitioner would receive percent of gross weekly collections and any amounts left after all program obligations have been met but not less than dollar_figure for each solicitation which was to occur annually iii telephone salesmen field representatives and office managers would receive percent of gross weekly collections iv the agreement would terminate upon an uncured breach by one party petitioner entered into a contract with r h mcknight co inc mcknight on date agreement which had terms similar to the agreement as amended and the agreement except that i mcknight replaced bwe ii reference to yearbooks was deleted and terms referring to a program guide which was to be distributed in connection with an annual road race known as the state police chase were inserted iii reference to telephone salesmen field representatives and office managers was deleted and a provision was inserted which provided that persons employed by mcknight for the purposes of soliciting funds would be paid percent of funds resulting from such persons’ solicitations telephone solicitations bwe and mcknight described their business as publishing and sales bwe or mcknight employed a subcontractor to conduct a solicitation campaign during each of the years in issue pursuant to the agreements each campaign consisted of telephone solicitations in which to callers called businesses located in the commonwealth of massachusetts individual residences were not solicited telephone solicitors used a stock solicitation format that prompted the solicitor to tell the person called that the solicitor was calling on behalf of the state police association of massachusetts that the troopers were putting together their annual business to business directory that the caller was calling local businesses to show support for the state police association by purchasing a sponsorship in a book and that money derived from the solicitation is used to improve working conditions for the membership telephone solicitations were conducted during normal business hour sec_5 days per week except on those days on which an evening solicitation was conducted when solicitations began pincite noon telephone solicitations were conducted approximately weeks per year telephone solicitations were monitored by a member of petitioner the trooper monitor to answer questions if necessary and to ensure that the solicitation did not involve coercion fraud or duress businesses which were solicited by telemarketers could have made a contribution to petitioner without having their name or any other identifying statement appear in print in the constabulary each year only five or six businesses that were solicited pursuant to the earnings program contributed money to the constabulary without being recognized by name in the constabulary in operation petitioner exercised substantial control_over bwe and mcknight petitioner set the office hours for advertisement solicitations for the constabulary set rules for depositing gross_receipts and returning bad checks monitored the use of telephones for personal calls by ad sellers required bwe and mcknight office managers to be present at weekly reconciliation meetings demanded to be advised of any problems demanded the names of all telephone solicitors required bwe and mcknight to maintain personal data files on all employees and geographically limited the areas to which advertisement solicitations could be made bwe and mcknight are considered professional fund raisers under the massachusetts charitable solicitation act collection and accounting for funds when a business agreed to make a payment to petitioner the telephone solicitor made a notation on an envelope itemizing the business its address the person he spoke with and the amount of the payment the envelope was delivered by a delivery service such as united parcel service ups to the business which delivered a check to the ups messenger who returned it to the solicitation office checks received by the solicitation office were made payable to petitioner and were deposited in a bank account owned by petitioner when checks came into the constabulary office they were counted and deposited in petitioner’s bank account by the office manager and a trooper bwe and mcknight or its subcontractor mr norman berube accounted for all receipts directly to petitioner amounts collected were distributed at the weekly meetings according to the agreements between petitioner and bwe or mcknight and the weekly settlement reports publication of the constabulary pursuant to the agreements bwe and mcknight published the constabulary once in each year in issue the constabulary was published in five editions troop a troop a greater boston troop b troop c and troop d in each year the following numbers of copies of the constabulary were printed troop troop a troop troop troop year a boston b c d big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number the constabulary was printed in two sections the common section and the display ad section the common section contained during each year in issue articles and editorials that were identical in each of the five editions additional material other than articles and editorials was common to every edition the material other than articles and editorials that was not common to every edition related to businesses which were located within the geographic location of the troop the display ad section contained display ads and listings the display ads displays which are indexed in alphabetical order in an advertiser’s index or index to display ads in the back of each edition of the constabulary consisted of messages covering from one-sixth of one page to a full page the display ads contained blocking illustrations signatures trademarks and emblems the display ads included such well-known companies or products as mcdonald's at t corp john hancock sheraton hotels mobil oil corp kentucky fried chicken rockport and aamco transmissions some of the display ads contained well- known slogans that sponsors also used in their national advertising the listings were placed after the displays in a section entitled business directory the business directory in the constabulary for the through editions consisted of two- or three-line listings of various businesses by name telephone number except for and address city and state only arranged alphabetically by type of business the beginning of each business directory in each edition of the constabulary published for the years through states on the following pages listed by category of service or product are advertisers who support the state police association of massachusetts we urge you to consider these fine companies when making purchases for yourself or your family each and edition of the constabulary contains a message from the president of petitioner which states as president of the state police association of massachusetts i am proud to announce this year’s edition of the constabulary this book is an attempt to showcase what the functions of the massachusetts state police are all about and i hope that the readers will find it enjoyable as in the past this book is made possible by the generous contributions of those who advertise in it it is our hope that the reader will make use of such advertisements and solicit the establishments herein the content of editorials and articles published in the constabulary was determined by the editorial staff of troopers most of the articles in the constabulary were written by troopers who were editors trooper editors reviewed every article and editorial before it was published distribution of the constabulary in each year approximately to copies of the constabulary were distributed to attendees of the state police chase an annual picnic and sports day and approximately big_number copies were hand-carried to trooper barracks over the course of a couple of weeks for distribution to members of petitioner each year the remaining copies of the constabulary were delivered to businesses in some but not all instances copies of the constabulary were sent to particular businesses to verify that petitioner and not some other organization published the book during the years in issue the constabulary however was not arranged as a program guide for the annual state police chase sporting event the and editions of the constabulary do not mention the state police chase and in the and editions the two- or three-page articles on the state police chase relate to the previous year's event the constabulary was never sold to anyone for a charge revenues petitioner received approximately the following gross amounts from displays year amount dollar_figure big_number big_number big_number big_number big_number petitioner received approximately the following gross amounts from listings year amount dollar_figure big_number big_number big_number big_number big_number operations petitioner had total income and expenses relating to the constabulary for the taxable periods in issue as follows year ending constabulary income constabulary expenses dollar_figure date big_number date big_number date big_number date date big_number date big_number date big_number total big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number the constabulary income amounts which are reported on a fiscal_year basis differ from the gross amounts from displays and listings which are compiled on a calendar_year basis petitioner used a price list in its solicitation program for the constabulary bwe and mcknight set the prices for the various sized displays and listings with petitioner's approval petitioner's president kevin w regan sent letters advising recipients that petitioner was selling advertising in the next edition of the constabulary yearbook in its letter petitioner set forth its price list for different sizes of advertisements petitioner advised prospective advertisers that the prices for advertisements in the constabulary were as follows display advertisements full page dollar_figure page l page page l page l page directory advertisements large bordered dollar_figure small bordered 3-line listing 2-line listing period of limitations by letter dated date petitioner's representative agreed to execute on behalf of petitioner a consent to extend the time to assess tax form_872 to allow the assessment of additional federal_income_tax to occur on or before date for the periods ended date through and date petitioner and respondent by their authorized representatives executed a consent to extend the time to assess tax form_872 on date the first page of the form_872 stated in pertinent part as follows state police assoc of massachusetts name s taxpayer s of hillside ave needham ma number street city or town state zip code and the district_director of internal revenue or regional_director_of_appeals consent and agree to the following the amount of any federal income excise tax due on any kind of tax_return s made by or for the above taxpayer s for the period s ended date and date may be assessed at any time on or before date however if expiration date a notice_of_deficiency in tax for any such period s is sent to the taxpayer s on or before that date then the time for assessing the tax will be further extended by the number of days the assessment was previously prohibited plus days the only returns filed by petitioner for the periods ended date through and date were returns of organization exempt from income_tax form_990 jurisdiction opinion the first issue we must decide is whether the period of limitations on assessment had expired with respect to certain of petitioner's representative modified the executed form_872 by deleting the reference to excise_tax a group manager in the exempt_organizations portion of the epeo division of the brooklyn district executed petitioner's modified form_872 on behalf of respondent on date the taxable periods in issue prior to the date respondent sent the notice_of_deficiency in issue in the instant case to petitioner pursuant to sec_6501 the good_faith filing of a form_990 by an exempt_organization commences the running of the period of limitations against assessment of tax on unrelated_business_income if the organization is later held to be a taxable organization 47_tc_335 because petitioner pled the bar of the statute_of_limitations petitioner must show that the statutory notice was issued beyond the normally applicable_period of limitations in 85_tc_535 we stated the bar of the statute_of_limitations is an affirmative defense and the party raising it must specifically plead it and carry the burden_of_proof with respect thereto rule sec_39 sec_142 where the party pleading such issue makes a showing that the statutory notice was issued beyond the normally applicable statute_of_limitations however such party has established a prima facie case at that point the burden of going forward with the evidence shifts to the other side and the other party has the burden of introducing evidence to show that the bar of the statute is not applicable where the other party makes such a showing the burden of going forward with the evidence then shifts back to the party pleading the sec_6501 provides if a taxpayer determines in good_faith that it is an exempt_organization and files a return as such under sec_6033 and if such taxpayer is thereafter held to be a taxable organization for the taxable_year for which the return is filed such return shall be deemed the return of the organization for purposes of this section statute to show that the alleged exception is invalid or otherwise not applicable the burden_of_proof ie the burden of ultimate persuasion however never shifts from the party who pleads the bar of the statute_of_limitations citations omitted in the instant case on date petitioner filed returns of organization exempt from income_tax forms for the periods ended date through and date petitioner did not file forms 990-t for unrelated_business_income_tax for those periods respondent's statutory notice was issued on date petitioner contends that it determined in good_faith that it was an exempt_organization had no taxable_income and therefore was not required to file any return other than form_990 accordingly petitioner argues that sec_6501 applies to commence the running of the period of limitations for the purposes of the form 990-t and that because the form_872 that petitioner signed referred only to return s made the form_872 did not extend the period of limitations in the instant case we need not decide whether petitioner's filing of a form_990 commenced the running of the period of limitations against assessment of the unrelated_business_income_tax determined by respondent because even if we were to so hold we conclude that the form_872 signed by the parties effectively extended that period of limitations petitioner argues that because the form_872 applies only to return s made by petitioner and because no tax was due or could be due on the returns filed by the petitioner for the applicable periods the form_872 does not extend the period of limitations to assess tax petitioner however concedes it intended to extend the period in which the respondent was required to assess a tax for unrelated_business_income for the periods ended date date date date and the three-month period ended date the applicable periods or issue a notice_of_deficiency to the petitioner as we construe the parties' use of the language income_tax due on any return s made by or for the above taxpayer s we think it is broad enough to include a return deemed made pursuant to sec_6501 ie a form 990-t we therefore hold that the parties duly extended until date the period of limitations within which respondent could assess deficiencies in petitioner’s unrelated_business_income_tax for the periods in issue the notice_of_deficiency was mailed to petitioner before that date and consequently the limitations_period remains open even if the language could not be construed to include a deemed return we would conclude that the form_872 could be reformed where a written_agreement does not conform with the actual agreement between the parties the court may reform the writing to conform with the parties' intentions 92_tc_776 in light of petitioner's concession concerning its intent to extend the period of limitations the form_872 may properly be reformed to conform to the agreement and intent of the parties the evidence is clear_and_convincing that the parties intended to extend the period of limitations with respect to returns made as well as those deemed made by reason of sec_6501 unrelated_business_income the next issue we must decide is whether the income generated from petitioner's solicitation program for the constabulary is unrelated_business_income subject_to tax pursuant to sec_511 petitioner argues that it merely solicited contributions and did not engage in the business of selling advertising respondent contends that petitioner’s solicitation of displays and listings in the constabulary constituted the sale of advertising as a trade_or_business we first examine whether petitioner sold advertising the code and the regulations do not provide a definition of the term advertising or advertisement in 87_tc_747 affd 833_f2d_717 7th cir we examined whether listings similar to those in the instant case constituted advertising in fraternal order of police an organization exempt from tax pursuant to sec_501 published the trooper magazine which contained articles relating primarily to the duties of police officers and two types of listings large listings which contained the usual elements associated with advertisements such as blocking illustrations signatures trademarks and emblems and a business directory which classified and arranged the listers in the same manner as the yellow pages of a telephone directory id pincite the trooper also had an advertisers’ index containing the name of the sponsor of each large listing and the page upon which its listing was located those sponsors included well-known companies such as american airlines and midas mufflers in fraternal order of police after examining the record and copies of the trooper magazine we were convinced that both the larger listings and the business listings constitute 'advertising ' id pincite we stated to conclude otherwise we would have to ignore the fact that the vast majority of the listings in the trooper are composed of slogans logos trademarks and other information which is similar if not identical in content composition and message to the listings found in other professional journals newspapers and the yellow pages of telephone directories we also note that the contracts with osc fop’s business forms and the magazine itself repeatedly use such words and phrases as advertising revenues advertisers prospective advertisers advertising marketing program and advertising to describe the listings and related activities id petitioner argues that fraternal order of police is distinguishable from the instant case because no expert testified in that case that the listings were not advertising in the instant case petitioner’s expert concluded that under generally accepted marketing theory only percent of the messages in the constabulary were advertising at trial however petitioner's expert was asked whether she knew that there was a relationship between the amount of space that a contributor’s message received and the amount that was contributed petitioner's expert testified it has just never been made specific and clear i would assume that because they petitioner are doing things in gratitude for contributions and i would think you would be more grateful for large contributions than you would be for small contributions but i think it really goes to a price list and i have never seen one and never heard of one and never been told that x amount buys you x space because that would imply advertising when presented with an exhibit containing prices for various sized spaces in the constabulary petitioner's expert testified it looks like a price list to me we weigh expert testimony in light of the expert’s qualifications as well as all the other credible_evidence in the record 102_tc_149 we are not bound by the opinion of any expert witness and we will accept or reject that expert testimony when in our best judgment based on the record it is appropriate to do so id and the cases cited therein while we may choose to accept in its entirety the opinion of one expert we may also be selective in the use of any portion of that opinion id we believe that the existence of a quid pro quo arrangement is important to an analysis of whether the displays and listings in the constabulary constitute advertising because petitioner's expert testified that she did not know that petitioner's contributors were told that there was a relationship between the amount of space a contributor's message received and the amount that was contributed we believe that the conclusions of petitioner's expert are based upon incomplete information accordingly we discount the testimony of petitioner's expert petitioner next argues that one factor to be used in determining the existence of advertising is the contributor's intent in making a payment to the organization petitioner argues that contributors to the constabulary expected no commercial benefit from their payment but merely intended to benefit petitioner in its affirmance of our decision in fraternal order of police v commissioner supra the seventh circuit_court of appeals stated that the sponsor's motivation to help support the families of officers killed in the line of duty does not define the fraternal order of police's activities to place a listing in the trooper each sponsor had to purchase a space and pay a prescribed rate which corresponded to the desired size of the listing moreover each issue of the trooper included the request by the editors that its readers patronize those who had paid for the listings fraternal order of police v commissioner f 2d pincite accordingly in the instant case we conclude that an inquiry into the contributor's intent in making a payment to petitioner is not helpful in light of the fact that the contributors received the displays and listings in consideration of their contribution ie they purchased the display or listing and the size of the space allotted to the contributor's message was linked to the amount_paid in any event petitioner has not established in the instant case that the display or listing received by the contributor had a value less than the amount of the contribution given in exchange for the display or listing consequently we will apply an analysis of the displays and listings similar to the one we used in 87_tc_747 to decide whether petitioner's displays and listings in the constabulary constitute advertising as in fraternal order of police the displays in the constabulary contained the usual elements associated with advertisements such as blocking illustrations signatures trademarks and emblems an advertisers’ index contained the name of the sponsor of each display including mcdonald's at t corp john hancock sheraton hotels and mobil oil corp among other well-known companies and specified the page upon which the display was located between the displays and the advertiser’s index appeared a section of listings called the business directory wherein various businesses were identified by name and classified by type of business as in the yellow pages of a telephone directory we have examined the record and copies of the constabulary and we are convinced that both the displays and the listings constitute advertising many of the displays are composed of slogans logos trademarks and other information which is similar if not identical in content composition and message to the listings found in other professional journals newspapers and the yellow pages of telephone directories additionally the contracts with bwe and mcknight petitioner's correspondence and the constabulary itself repeatedly use such words and phrases as advertising advertisements advertisers ad book and marketing advertising to describe the displays and listings and related activities consequently we conclude that the displays and listings in the constabulary constitute advertising petitioner next argues that sec_1_513-1 income_tax regs exempts its solicitation activity from being characterized as a trade_or_business because its advertising is a low-cost article that regulation addresses charitable fundraising programs where low-cost goods are sent out by organizations along with a solicitation to contribute money in its sales of advertising however petitioner did not follow such a procedure additionally the lowest charge for any of petitioner’s displays or listings was during some of the periods in issue dollar_figure for a two-line listing in the business directory a cost that cannot be properly described as low accordingly we conclude that petitioner is not eligible for the low-cost article exemption we next examine whether petitioner's selling of advertising space constitutes an unrelated_trade_or_business for purposes of sec_512 generally the selling of advertising space is an activity which is carried on for the production_of_income from the sale_of_goods and is therefore a trade_or_business within the meaning of sec_513 the supreme court has interpreted sec_1_513-1 income_tax regs as ‘fragmenting’ the enterprise of publishing into its component parts segregating the 'trade or business' of selling advertising space from the 'trade or business' of publishing a journal 475_us_834 the trade_or_business of soliciting selling and publishing advertising does not lose identity as a trade_or_business when the advertising appears in an exempt organization's periodical that contains editorial matter related to the exempt purposes of the organization id citing sec_1_513-1 income_tax regs accordingly we segregate the publishing of the editorial matter in the constabulary from the soliciting selling and publishing of advertising space in the constabulary petitioner concedes that the advertising activity is not substantially related to petitioner’s exempt_purpose consequently we hold that petitioner was engaged in an unrelated_trade_or_business of soliciting selling and publishing advertising space we next examine whether petitioner's unrelated_trade_or_business was regularly carried on within the meaning of sec_512 petitioner argues that its advertising activity was not regularly carried on the regulations provide the general requirement in determining whether trade_or_business from which a particular amount of gross_income derives is regularly carried on within the meaning of sec_512 regard must be had to the frequency and continuity with which the activities productive of the income are conducted and the manner in which they are pursued sec_1_513-1 income_tax regs the regulations also provide that this requirement must be applied in light of the purpose of the unrelated_business_income_tax to place exempt_organization business activities upon the same tax basis as the nonexempt business endeavors with which they compete id after stating the general principles the regulations next categorize an exempt organization’s business on the basis of its nonexempt counterparts’ normal time span of activities sec_1_513-1 income_tax regs the regulations inquire whether the exempt organization’s income-producing activities are of a kind normally conducted by nonexempt commercial organizations on a year-round basis or only a seasonal basis id for year-round activities the regulations provide that the conduct of such activities by an exempt_organization over a period of only a few weeks does not constitute the regular carrying on of trade_or_business but that the conduct of such activities for one day each week would constitute the regular carrying on of trade_or_business id for seasonal activities the regulations provide that the conduct of such activities by an exempt_organization during a significant portion of the season ordinarily constitutes the regular conduct of trade_or_business id the regulations provide special rules for intermittent activities sec_1_513-1 and iii income_tax regs we have previously noted the regulation does not in terms define intermittent we gather from the context that an activity is to be regarded as intermittent if it is not conducted by the tax-exempt_organization on a year- round basis or with regard to an activity that is normally conducted by nonexempt organizations only on a seasonal basis the activity is intermittent if it is not conducted by the tax-exempt_organization for substantially the full season 89_tc_7 the regulations apparently equating intermittent with discontinuous and periodical provide that exempt_organization business activities which are engaged in only discontinuously or periodically will not be considered regularly carried on if they are conducted without the competitive and promotional efforts typical of commercial endeavors sec_1_513-1 income_tax regs for example the publication of advertising in programs for sports events or music or drama performances will not ordinarily be deemed to be the regular carrying on of business id additionally the regulations provide that certain intermittent income producing activities occur so infrequently that neither their recurrence nor the manner of their conduct will cause them to be regarded as trade_or_business regularly carried on sec_1_513-1 income_tax regs the regulations add that such activities will not be regarded as regularly carried on merely because they are conducted on an annually recurrent basis id in the instant case petitioner advances two arguments that its advertising activity is not regularly carried on within the meaning of sec_1_513-1 income_tax regs petitioner's first argument is that bwe’s and mcknight’s activities should not be attributed to petitioner for purposes of determining whether petitioner regularly carried on its trade_or_business of selling and publishing advertising petitioner relies on ncaa v commissioner 914_f2d_1417 10th cir revg 92_tc_456 in ncaa this court concluded that the publisher’s activities should be attributed to the national collegiate athletic association ncaa because the ncaa failed to provide evidence regarding the extent and manner of the publisher’s conduct in connection with the solicitation sale and publication of advertising in the tournament programs ncaa v commissioner t c pincite on appeal however the tenth circuit_court of appeals focused instead on the fact that the programs were distributed over less than a 3-week span at an event occurring only once a year ncaa v commissioner f 2d pincite4 in the instant case petitioner argues that the activities of bwe and mcknight should not be attributed to petitioner petitioner argues that its contracts with each publisher provided that the publisher was an independent_contractor and not the agent of petitioner that petitioner had no direction or control_over bwe’s personnel or business activities and that the publisher agreed to save petitioner harmless from any liability resulting from the publisher’s activities petitioner points to the additional fact that the telephone callers were employed by a subcontractor of bwe and mcknight and petitioner asserts that the subcontractor had complete control_over the callers in ncaa this court found an agency relationship because the contract between the ncaa and the publisher expressly designated the publisher as the ncaa’s exclusive agent for the sale of advertising in the program and because the contract manifested an intent that the publisher would act on behalf of the ncaa in conducting the sale of advertising and that ncaa could control the publisher’s activities ncaa v commissioner t c pincite in the instant case petitioner’s agreements with bwe and mcknight provide that each of the latter is an independent_contractor and as such petitioner has no direction and control_over the personnel or business activities of publisher publisher is not the agent of petitioner and shall not incur any expenses bills indebtedness or obligations for or in the name of petitioner and shall save petitioner harmless from any liability whatsoever as a result of publisher’s business activities the manner in which the parties to an agreement designate their relationship is not controlling 198_us_424 a true agency relationship may be established despite the parties' designation to the contrary see id pincite quoting 172_us_602 in the instant case we conclude that the agreements manifested an intent that bwe and mcknight would act on behalf of petitioner in conducting the sale of advertising the agreements provided that bwe or mcknight as the case might be has full authority to use the good name of petitioner during the course of the earnings program additionally the agreements provided a payment collection procedure in which all checks or money orders received as a result of the solicitation shall only be made payable to petitioner by providing bwe and mcknight with the authority to use petitioner's name and to collect petitioner's solicitation payments the agreements authorized those companies to act on behalf of petitioner in conducting the sale of advertising additionally we conclude that petitioner could control bwe's and mcknight's activities the agreements provided petitioner shall have the right to inspect any field offices or other offices from which the solicitation program is taking place without prior notice and at any time so as to determine whether or not bwe or mcknight is fulfilling its obligations under this agreement petitioner reserved the right to exempt at any time any subscriber or any prospective subscriber or advertiser for any reason whatsoever bwe or mcknight had a duty to provide each monday a copy of the daily reports for the previous week of all collected funds accordingly we conclude that petitioner could and did control bwe's and mcknight's activities in the instant case we are convinced that neither the compensation structure which shifted part of the risk of loss to bwe and mcknight nor the presence of the indemnification clause in favor of petitioner negates the agency relationship accordingly we conclude that petitioner had an agency relationship with bwe and with mcknight and that bwe's and mcknight's activities as well as those of their subcontractors are to be attributed to petitioner for purposes of determining whether petitioner's trade_or_business of soliciting selling and publishing advertising space was regularly carried on within the meaning of sec_512 compare 87_tc_747 affd 883_f2d_717 7th cir where an exempt_organization having contracted with another entity to publish a continued citing 77_tc_1314 petitioner next argues that the time and effort spent in the solicitation of advertising for the constabulary should not be considered in deciding whether its trade_or_business is regularly carried on petitioner points to our conclusion in that case that nowhere in the regulations or the legislative_history of the tax on unrelated_business_income is there any mention of time apart from the duration of the event itself id pincite petitioner also points to the opinion of the tenth circuit_court of appeals in ncaa that the basketball tournament must be considered the actual time span of the business activity sought to be taxed here ncaa v commissioner f 2d pincite petitioner argues that even if bwe’s and mcknight’s activities are attributed to petitioner the mere employment of an independent commercial firm does not itself render the trade_or_business regularly carried on within the meaning of sec_1_513-1 income_tax regs finally petitioner argues that its intermittent activities were not conducted with the continued magazine and to sell advertising space therein on its behalf was found to be an active_participant in the publication of the magazine because it could appoint the executive editor prepare editorials and feature articles oversee and control solicitations of business listings and control the bank account and the reprint of articles competitive or promotional efforts typical of commercial endeavors we conclude that the facts of suffolk county and ncaa are distinguishable from those of the instant case in suffolk county although a large percentage of the organization's annual vaudeville shows' gross_receipts derived from the sale of advertising for the shows' program guides we defined the taxpayer's trade_or_business for purposes of sec_513 as the annual vaudeville shows suffolk county antedated 475_us_834 in suffolk county we did not segregate the business of the annual vaudeville shows from the publishing of the shows' program guides nor did we segregate the publishing of material relating to the shows from the business of selling and publishing advertising space in the program guides accordingly we conclude that suffolk county is not dispositive of the instant case in ncaa the tenth circuit_court of appeals defined the taxpayer's trade_or_business for purposes of sec_513 as the see 77_tc_1314 although petitioner does dispute that the annual vaudeville show constituted a trade_or_business its primary argument herein is that even if the show was a trade_or_business it was not 'regularly carried on ' id pincite ndollar_figure respondent maintains and we agree that the actual performance of the vaudeville show and the solicitation of advertising for the program guide are a single inseparable activity publication of advertisements in programs during the time span of the basketball tournament ncaa v commissioner f 2d pincite in contrast the facts in the instant case show that petitioner’s solicitation sale and publishing of advertising space was undertaken apart from any discrete event or show with a limited specified duration although petitioner argues that publication of the constabulary was tied to the state police chase an annual 1-day sports event it did not object to respondent’s proposed finding of fact that during the years in issue the constabulary was not arranged as a program guide for the annual 'state police chase' sporting event additionally based upon our own review of the constabulary we conclude that it was not a program for the state police chase which was mentioned in only the and editions in the constabulary for each of those years the state police chase of the prior year was profiled in a two- or three-page article accordingly we conclude that the constabulary was not tied to a sports event and that sec_1_513-1 income_tax regs therefore does not apply to the instant case consequently ncaa is distinguishable from the facts of the instant case as we have stated supra p sec_1_513-1 income_tax regs provides that the publication of advertising in programs for sports events or music or drama performances will not ordinarily be deemed to be the regular carrying on of business in the instant case we have held supra p that petitioner’s unrelated_trade_or_business for purposes of sec_513 was soliciting selling and publishing advertising space the advertising business is an income-producing activity of a kind normally conducted by nonexempt commercial organizations on a year-round basis sec_1_513-1 income_tax regs in deciding whether petitioner’s business was regularly carried on within the meaning of sec_512 and the regulations thereunder we examine all activities of petitioner's advertising trade_or_business which include soliciting selling and publishing commercial advertising united_states v american college of physicians supra pincite citing sec_1_513-1 income_tax regs we have concluded supra pp that the activities of bwe and mcknight and their subcontractors are to be attributed to petitioner for purposes of determining whether petitioner's business was regularly carried on through those entities petitioner conducted a solicitation program hours a day for approximately weeks a year petitioner distributed the constabulary once each year at the state police chase hand- carried approximately big_number copies to troopers' barracks over the span of a couple of weeks and delivered the remaining copies to businesses we conclude that such activities are sufficiently frequent and continuous to be characterized as regularly carried on within the meaning of sec_1_513-1 income_tax regs we have considered all remaining arguments of petitioner concerning the unrelated_business_income issue and find them to be without merit based on the record in the instant case we conclude that all the elements of sec_512 and sec_513 and sec_1_513-1 income_tax regs have been met consequently we hold that petitioner is liable for unrelated_business_income_tax on its advertising income additions to tax respondent determined in the notice_of_deficiency that petitioner is liable for additions to tax pursuant to sec_6651 sec_6653 and a a and b and a and penalties pursuant to sec_6662 for certain taxable periods in issue the instant case involves a complex and close question of law see 88_tc_654 72_tc_1209 affd 661_f2d_76 6th cir although we have distinguished 77_tc_1314 we conclude that the case provided petitioner with substantial_authority for its tax treatment of income from the constabulary and that petitioner's reliance on the case was reasonable under the circumstances considering the fact that this area of the law was developing during the periods in issue additionally we conclude that petitioner reasonably relied on the advice of its counsel that it need not file forms 990-t for the periods in issue accordingly we hold that petitioner is not subject_to the additions to tax or penalties for any of the taxable periods in issue to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ------------------------------------------------------------ -------------------------------- -------------------------- -------------------------------- ------------------------------------- department of the treasury washington dc third party communication government agency date of communication date person to contact ----------------------- id no ------------------- --------------------------------------------------- telephone number --------------------- refer reply to cc fip b05 plr-139748-16 date date legend division state act authority ------------------------------------------------------- ------------------- --------------------------------------------------------------------------------- --------------------------------------------------- corporation ---------------------------------------------------- -------------------------------------------------------------------------------- city year a b c d e f -------------------- ------- -- -- --- --- -- --- plr-139748-16 dear -------------- this letter is in response to the request for a ruling submitted on behalf of the division that the division is a political_subdivision of state for purposes of sec_1_103-1 of the income_tax regulations facts and representations under state’s constitution public transportation is an essential public purpose for which public funds may be expended under the act a state law the a-county city metropolitan area metro area public transportation needs are served by authority and its b divisions each of which have separate responsibilities with respect to the metro area public transportation division is one of the b divisions of authority authority was established as a unit of local_government by a referendum held in the a counties of the metro area authority is governed by a c-member board_of directors the authority board the members of the authority board are appointed by the heads of the governing bodies of the a counties in the metro area and by the chief executive official of city no member of the authority board may be a member of the governing body of any division under the act authority adopts plans that implement the public policy of state to provide public transportation in the metro area set goals objectives and standards for the provision of public transportation and coordinates investment in the public transportation facilities to enhance the integration of the public transportation in the metro area authority also provides financial oversight of the b divisions and allocates state and local_tax revenue to the b divisions in accordance with a statutory formula division was established by state as part of the metro area public transportation system to provide public transportation by commuter rail within the metro area division is governed by a d-member board_of directors the division board the members of the division board are appointed by the governing bodies of the counties in the metro area and by the chief executive official of city division board members serve for a period of e years the members of the division board may be removed for cause either by a qualified majority of the members of the division board or by the governor of state division has the power to issue revenue bonds to acquire construct or improve public transportation facilities it operates subject_to the approval of the authority board division has the power to acquire property by among other types of contracts installment or conditional purchase contracts and leases which can be paid for in annual installments with a term of up to f years division also has the power to pass ordinances and make all rules and regulations proper and necessary to regulate the use operation and maintenance of its property plr-139748-16 and facilities and by ordinance to prescribe fines_or_penalties for violations thereof in addition division may establish enforce and facilitate the achievement and maintenance of standards of safety against accidents with respect to public transportation provided by division or by other transportation agencies or contractors within its jurisdiction division determines the level and nature of public transportation by commuter rail in the metro area to meet the plans goals and objectives adopted by authority division determines the level of fares and charges for the public transportation it provides so that it can meet certain revenue standards established by authority division controls its own finances division proposes its budget subject_to a public hearing and the approval by authority authority approves the budget if the budget meets the specific criteria set by the act and is consistent with authority’s established requirements plans and objectives the division budget includes funding for the police force maintained by corporation corporation is a separate corporate entity that since year when the relevant part of the act was amended has operated division’s commuter rail facilities the governing board_of corporation consists of the members of the division board division supervises directs and may dissolve corporation the act confers certain powers upon corporation as are delegated to it by division one of such powers is the power to establish and maintain a police force that aids coordinates and supplements other police forces in protecting persons and property and reducing the threats of crime with regard to public transportation within division’s jurisdiction this police force has the same powers with regard to protection of persons and property as those exercised by municipal police law and analysis the internal_revenue_code does not define the term political_subdivision sec_1_103-1 provides that the term political_subdivision denotes any division of any state_or_local_governmental_unit that is a municipal corporation or that has been delegated the right to exercise part of the sovereign power of the unit as thus defined a political_subdivision of any state_or_local_governmental_unit may or may not for purposes of this section include special assessment districts such as road water sewer gas light reclamation drainage irrigation levee school harbor port improvement and similar districts and divisions of these units the three generally acknowledged sovereign powers of states are the power to tax the power of eminent_domain and the police power commissioner v 3_tc_131 acq c b aff'd 144_f2d_998 2d cir cert_denied 323_us_792 65_sct_433 89_led_631 it is not necessary that all three of these powers be delegated in order to treat an entity as a political plr-139748-16 subdivision for purposes of the code however possession of only an insubstantial amount of any or all of the sovereign powers is not sufficient all of the facts and circumstances must be taken into consideration including the public purposes of the entity and its control by a government revrul_77_164 1977_1_cb_20 division is charged by state law with providing public transportation by commuter rail within the authority’s jurisdiction traditionally a public purpose and declared as such by the state constitution division is controlled by state authority and all of the metro area county and city governments division board members are appointed by the governing bodies of the counties and city comprising the metro area division board members may be removed by the governor of state for cause as part of authority’s responsibility of coordinating planning and facilitating the provision of public transportation in the metro area it oversees the operation of division and approves its budget based on these facts we conclude that division is a division of a state_or_local_government for purposes of sec_1_103-1 division sets the routes of and charges for the public transportation by commuter rail in the metro area division possesses the power to pass rules and regulations proper and necessary to regulate the use operation and maintenance of its property and facilities that have effect on the public within its jurisdiction division may also impose fines and penalties for violations of those rules and regulations in addition division is authorized to provide through corporation a police force to protect persons and property and enforce rules and regulations related to commuter rail accordingly under all of the facts and circumstances we conclude that division possesses substantial police power conclusion based on the above we conclude that division is a political_subdivision for purposes of sec_103 of the code 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 accompanied by a penalty of perjury statement executed plr-139748-16 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 associate chief_counsel financial institutions products s by _______________________ timothy l jones senior counsel branch


t c memo united_states tax_court osama a mowafi petitioner v commissioner of internal revenue respondent docket no filed date mark e kellogg for petitioner taylor cortright for respondent memorandum findings_of_fact and opinion laro judge petitioner petitioned the court to redetermine deficiencies of dollar_figure and dollar_figure in his and federal_income_tax we must decide whether petitioner is a real_estate_professional under sec_469 we hold he is not unless otherwise indicated section references are to the internal - - revenue code applicable to the relevant years rule references are to the tax_court rules_of_practice and procedure findings_of_fact the parties have stipulated some of the facts we incorporate herein by this reference the parties’ stipulation of facts and the exhibits submitted therewith we find the stipulated facts accordingly petitioner is a well-educated man whose college degrees include a bachelor’s degree in electrical engineering telecommunications a master’s degree in business administration business management and a doctor’s degree in electrical engineering he resided in vienna virginia when his petition was filed he filed and federal_income_tax returns using the filing_status of married_filing_separately during the subject years petitioner worked full time for gte inc gte as a director of research and the manager of its research_and_development facility in waltham massachusetts waltham he generally worked for gte a minimum of hours per week staying at his residence in waltham during the week unless away from waltham traveling on gte business and staying at his wife’s principal_residence in vienna virginia on the ' gte paid to petitioner in each of the subject years a salary of approximately dollar_figure in part because of his supervisor’s perception that petitioner worked long hours for gte during the subject years petitioner was later promoted to vice president - - weekends he sometimes worked for gte on the weekends but usually spent his weekends in virginia with his wife son and daughter petitioner also was involved with rental real_estate properties rental properties located in virginia he and his wife jointly owned nine of these rental properties two of the others were owned by his brother and the remaining six were owned by a partnership in which petitioner was a partner petitioner devoted some of his personal time during each of the subject years to maintaining and accounting for all of the rental properties on his and federal_income_tax returns petitioner recognized losses of dollar_figure and dollar_figure respectively attributable to the rental properties respondent determined that these losses were passive losses the recognition of which was prohibited by the passive_activity_loss rules of sec_469 opinion respondent determined and argues that petitioner may not deduct his claimed losses on account of the rules of sec_469 petitioner asks the court to find as a fact that he worked in massachusetts fewer than days a week referencing his and massachusetts nonresident income_tax returns reporting that he worked in massachusetts during those respective years on days and days we decline to do so the record as a whole indicates that petitioner was physically present in waltham at least weeks while he worked for gte le sec_25 percent of that time during which he was physically absent from waltham while conducting business for gte q4e- which limit the current recognition of passive_activity_losses petitioner argues that he is excepted from the passsive activity loss limitation rules because he asserts he is a real_estate_professional under sec_469 petitioner concedes that respondent’s determination must be sustained if he is not a real_estate_professional individuals such as petitioner are generally precluded from currently deducting losses from a passive_activity a term that is defined to include any trade_or_business activity in which the taxpayer does not materially participate and all rental activities regardless of the taxpayer’s level of participation sec_469 c these passive_loss_rules enacted as part of the tax_reform_act_of_1986 publaw_99_514 100_stat_2085 prevent affected taxpayers from using deductions from a passive_activity to shelter wages or other active income see generally staff of joint comm on taxation general explanation of the tax_reform_act_of_1986 pincite j comm print although all rental activities are passive congress enacted an exception for certain post-1993 rental activities see sec_469 under this provision petitioner will be considered a real_estate_professional and the losses on his rental properties will not be per se passive to the extent that he proves that he meets the following two requirements he performed more than half of his personal services during the year in real_property trades_or_businesses in which he materially participated and he worked more than hours a year in those real_estate activities see sec_469 b see also rule a petitioner bears the burden_of_proof 290_us_111 same petitioner’s burden requires in part that he maintain sufficient documentation to substantiate the time that he devoted to his rental properties see sec_6001 65_tc_87 affd per curiam 540_f2d_821 5th cir as to the evidence that he may introduce to prove the amount of his personal time that he devoted to the rental properties sec_1_469-5t temporary income_tax regs fed reg date provides methods of proof the extent of an individual's participation in an activity may be established by any reasonable means contemporaneous daily time reports logs or similar documents are not required if the extent of such participation may be established by other reasonable means reasonable means for purposes of this paragraph may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period based on appointment books calendars or narrative summaries petitioner has failed to carry his burden ie we are not persuaded by the record that he was a real_estate_professional in either year petitioner strives to meet his burden by relying primarily on his testimony at trial and noncontemporaneous logs - - which he prepared in connection with his audit to support the hours of personal time which he purportedly devoted to the rental properties the logs list big_number hours and big_number hours of personal time that petitioner spent during the respective years working on the rental properties we find these logs untrustworthy and decline to rely blindly upon them to reach petitioner’s desired result cf rapp v commissioner tcmemo_1999_249 petitioner for example prepared these log sec_2 to years after the fact admittedly on the basis of speculation and with an end result in mind 1ie the need to arrive at a certain minimum number of hours being attributable to the rental properties so that he would meet both the more-than-half-the- personal-service requirement of sec_469 b and the 750-hour reguirement of sec_469 b i11 and he concedes that the times set forth therein may be off by as much as percent the log also conflicts dramatically with an earlier log that he prepared listing the time that he purportedly spent on the rental properties the prior log lists big_number hours of personal services that he performed as to the rental as to petitioner’s testimony we find much of it to be improbable questionable uncorroborated inconsistent and self- serving under the circumstances we are not required to and we do not rely on that testimony to support his position herein see 967_f2d_986 4th cir affg tcmemo_1990_618 286_f2d_139 4th cir affg tcmemo_1959_224 87_tc_74 - properties or in other words enough hours to meet the 750-hour requirement of sec_469 b but not enough hours to meet the more-than-half-the-personal-service requirement of sec_469 b i we also note that some of the services which he asserts that he performed as to the rental properties eg his time dedicated to purchasing his residence in waltham traveling between vienna and waltham outside of his work for gte and assisting in the preparation of his personal income_tax returns were for personal business rather than related to his rental activities and that the logs when considered in connection with his time cards at gte reveal that he claims to have worked almost hours in a day and on one occasion even more than hours we also consider implausible on this record his assertion that he worked for gte only big_number hours a year and that he spent almost all of his remaining time working on his rental properties see eg pohoski v commissioner tcmemo_1998_17 because petitioner has failed to prove either of the requirements set forth in sec_469 b for or we hold for respondent we have considered each of the arguments in fact petitioner increased in the current log the number of hours in certain days he claimed to have worked on the rental properties by as much as to hours from the corresponding days listed in the prior log --- - made by the parties and have rejected all arguments not discussed herein as meritless accordingly decision will be entered for respondent


internal_revenue_service number release date index number ------------------------- -------------------- ---------------------- -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no---------------- telephone number ---------------------- refer reply to cc psi b04 plr-135751-17 date date -------------------------------------------------- legend settlor spouse child child child attorney attorney trust foundation date date year court -------------------------------------------------------------- court order ----------------------------------------------------- ----------------------------------------------- -------------------------------------------- -------------------------------------------------- ------------------------------------------------ ---------------------- -------------------- ---------------------------------------------------------------------------------- ---------------------------------- ----------------------- ------------------------ ------- ---------------------------------------------------------------------------------- ----------------------------------------------------------- -------------------------------------------------------------------- ------------------------------------- --------------------- -------------------------------------------------------------- -------------------------------------------------------------- state state statute state statute dear ---- -------------------- plr-135751-17 this letter responds to your authorized representative’s letter dated date requesting rulings on the gift and estate_tax consequences of the reformation of an irrevocable_trust and an extension of time under sec_301 of the procedure and administration regulations to allocate gst_exemption under sec_2642 of the internal_revenue_code the facts and representations submitted are summarized as follows settlor executed an irrevocable_trust trust on date for the benefit of settlor’s descendants trust was funded in year no additional gifts have been made to trust since year trust is governed by the laws of state the current beneficiaries of trust are child child and child article second provides that the trustee will divide the trust property into three equal shares each share is to be named for one of settlor’s children each child is a beneficiary of an independent share of trust article third paragraph b provides that the trustee may pay to or for the benefit of such child or his or her issue such part of the net_income and principal as the trustee deems advisable and in their respective best interests provided however that in all but an extraordinary emergency situation distributions shall be limited to their medical and educational needs any net_income not so paid may be added to principal article third paragraph c provides that upon the death of a child the trustee shall distribute the remaining principal and all accrued and accumulated income to or for such one or more appointees as the child appoints by will other than the child the child’s estate the child’s creditors or creditors of the child’s estate article third paragraph d provides that any property not appointed by a child shall be distributed to child’s then living issue by right of representation any distribution to an issue of child under the age of will be held in further trust if there are no issue of child the unappointed property shall be distributed to the settlor’s then living issue and if none to foundation article third paragraph a generally provides for withdrawal rights for the beneficiaries specifically that during the calendar_year the child may make withdrawals from any additions to the principal of the share during such year this right of withdrawal may be exercised from time to time by a written request signed by the child or during any period when the child is legally incompetent by his or her legal_representative other than the settlor and delivered to the trustee for the purpose of this paragraph any withdrawal right with respect to any addition extends to the property if any in which such addition is invested the trustee immediately shall notify the child in writing as to any addition the existence of such right and the property to which it pertains notwithstanding the foregoing if any addition is added to the share after december 1st of any given calendar plr-135751-17 year the child’s withdrawal right with respect to such addition shall lapse on the thirty-first day after his or her receipt of the notice from the trustee this withdrawal right is non- cumulative settlor created and funded trust in reliance on the advice of attorney who drafted trust based on affidavits of settlor spouse and attorney settlor created trust to provide for his descendants of all generations and to reduce the overall transfer_taxes payable on trust assets by ensuring that the assets held in trust would not be includible in the children’s gross estates upon the children’s deaths and to minimize the amount subject_to gst tax by utilizing settlor’s and spouse’s gst_exemption the withdrawal provision in article third paragraph a contains two drafting errors first trust grants each child the right to withdraw the entire amount of any contribution to that child’s separate share of the trust and fails to limit the withdrawal right to the gift_tax annual exclusion amount causing the children to possess general powers of appointment within the meaning of sec_2514 and sec_2041 over the entire amount of the contribution to that child’s separate share of trust second each child’s withdrawal right over the assets contributed to trust in any given year is non-cumulative and lapses in its entirety on an annual basis since the lapse is not limited to the greater of dollar_figure or percent of the value of the trust assets any lapse of a child’s withdrawal right would be treated as a taxable transfer by that child under sec_2514 to the extent that the property that could have been withdrawn exceeds in value the greater of dollar_figure or percent of the aggregate value of the assets subject_to withdrawal settlor and spouse each timely filed a form_709 united_states gift and generation- skipping transfer_tax return and elected to gift-split under sec_2513 for year it is represented that at the time of the year transfer to trust settlor and spouse each had their full gst_exemption available to allocate and intended that it be allocated to the year transfer to trust settlor relied on attorney to advise him on the need to allocated gst_exemption to trust however settlor and spouse did not affirmatively allocate gst_exemption to trust on form_709 no other transfers have been made to trust and no gst transfers have been made from trust the errors were discovered when settlor retained a new attorney attorney to represent him in estate_planning matters attorney informed settlor of the drafting errors that defeated the intent of the settlor in establishing trust trustee filed a petition in state court requesting judicial reformation of the erroneous provision of article third paragraph a effective as of the date trust was originally created on date court allowed the petition and in court order reformed trust to eliminate the scrivener’s error retroactive to the date of trust’s creation as reformed trust limits the beneficiaries’ withdrawal rights to the gift_tax annual exclusion amount and it limits the annual lapse of the withdrawal rights to the greater of dollar_figure or percent of the value of the trust assets plr-135751-17 you have requested the following rulings as a result of the judicial reformation of trust settlor’s children child child and child do not possess general powers of appointment within the meaning of sec_2514 and sec_2041 over their respective shares of trust except to the extent of each child’s withdrawal rights under the reformed trust instrument the judicial reformation of trust does not constitute for federal gift and estate_tax purposes the exercise or release by any child of settlor of a general_power_of_appointment the lapse of any child’s withdrawal right over trust did not result in a gift_for federal gift_tax purposes no part of trust property will be included in the gross estates of settlor’s children for federal estate_tax purposes except to the extent of each child’s withdrawal rights under the reformed trust instrument exercisable on the child’s death settlor and spouse request an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-3 of the procedures and administration regulations to allocate their respective gst_exemption to the year transfer to trust rulings sec_2001 provides that a tax is imposed on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2033 provides generally that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death sec_2041 provides that the value of the gross_estate includes 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 a 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 for purposes of sec_2041 the power_of_appointment shall be considered to exist on the date of the decedent’s death even though the exercise of the power is subject_to a precedent giving of notice or even though the exercise of the power takes effect only on the expiration of a stated period after its exercise whether or not on or before the date of the decedent’s death notice has been given or the power has been exercised plr-135751-17 sec_2041 provides that for purposes of sec_2041 the term general_power_of_appointment means a power which is exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_2041 provides that the lapse of a power_of_appointment created after date during the life of the individual possessing the power shall be considered a release of such power the preceding sentence shall apply with respect to the lapse of powers during any calendar_year only to the extent that the property which could have been appointed by exercise of such lapsed powers exceeded in value at the time of such lapse the greater of the following amounts a dollar_figure or b percent of the aggregate value at the time of such lapse of the assets out of which or the proceeds of which the exercise of the lapsed powers could have been satisfied sec_2501 provides generally that a tax is imposed for each calendar_year on the transfer of property by gift by any individual resident or nonresident sec_2511 provides that the gift_tax shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power sec_2514 provides that for purposes of sec_2514 the term general_power_of_appointment means a power which is exercisable in favor of the individual possessing the power his estate his creditors or the creditors of his estate sec_2514 provides that the lapse of a power_of_appointment created after date during the life of the individual possessing the power shall be considered a release of such power the rule_of the preceding sentence shall apply with respect to the lapse of powers during any calendar_year only to the extent that the property which could have been appointed by exercise of such lapsed powers exceeds in value the greater of the following amounts dollar_figure or percent of the aggregate value of the assets out of which or the proceeds of which the exercise of the lapsed powers could be satisfied in 387_us_456 the court considered whether a state trial court’s characterization of property rights conclusively binds a federal court or agency in a federal estate_tax controversy the court concluded that the decision of a state trial_court as to an underlying issue of state law should not be controlling when applied to a federal statute rather the highest court of the state is the best authority on the underlying substantive rule_of state law to be applied in the federal matter if there is no decision by that court then the federal authority must apply what it finds to be state law after giving proper regard to the state trial court’s determination and to relevant rulings of plr-135751-17 other courts of the state in this respect the federal_agency may be said in effect to be sitting as a state court state statute provides in part that a proceeding to approve or disapprove a proposed modification or termination of a_trust may be commenced by a trustee or a beneficiary state statute provides in part that the court may reform the terms of a_trust even if unambiguous to conform the terms to the settlor’s intention if it is proved by clear_and_convincing evidence that the settlor’s intent or the terms of the trust were affected by a mistake of fact or law in this case an examination of the relevant trust instruments affidavits and representations of the parties indicate that the original terms of article third paragraph a are contrary to the intent of settlor the purpose of the reformation is to correct the scrivener's error not to alter or modify the trust instrument accordingly based on the facts submitted and the representations made we conclude that as a result of the reformation of trust settlor’s children do not possess general powers of appointment within the meaning of sec_2514 and sec_2041 over their respective shares of trust except to the extent of each child’s withdrawal rights under the reformed trust instrument further we conclude that the judicial reformation of trust does not constitute for federal gift and estate_tax purposes the exercise or release of a general_power_of_appointment by any child of settlor accordingly we conclude that the lapse of any child’s withdrawal right over trust did not result in a gift_for federal gift_tax purposes finally we conclude that no part of the trust property will be included in the gross_estate of child child or child for federal estate_tax purposes except to the extent of each child’s withdrawal rights under the reformed trust instrument exercisable on the child’s death ruling sec_5 sec_2513 provides generally that a gift made by one spouse to any person other than the donor’s spouse is considered for purposes of the gift_tax as made one-half by the donor and one-half by the donor’s spouse but only if at the time of the gift each spouse is a citizen or resident_of_the_united_states sec_2601 imposes a tax on every generation-skipping_transfer gst which is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate sec_2641 defines the applicable_rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under sec_2642 the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is generally defined as the excess of over the applicable plr-135751-17 fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption amount 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 or her 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 provides that the manner in which allocations are to be made shall be prescribed by forms or regulations issued by the secretary sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulation shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death are to be treated as if not expressly prescribed by statute and taxpayers may seek an extension of time to make an allocation described in sec_2642 or b under the provisions of sec_301_9100-3 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 code except subtitles e g h and i plr-135751-17 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 under sec_2652 for purposes of chapter the term transferor means the decedent in the case of any property subject_to tax imposed by chapter and the donor in the case of any property subject_to tax imposed by chapter sec_26_2652-1 of the generation-skipping_transfer regulations provides that the individual with respect to whom property was most recently subject_to federal estate or gift_tax is the transferor of that property for purposes of chapter in this case settlor and spouse each elected to gift-split under sec_2513 on their respective timely filed form_709 for year thus settlor and spouse are each treated as the transferor of one-half of the assets gifted to trust in year based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore settlor and spouse are granted an extension of time of days from the date of this letter to allocate settlor’s and spouse’s available gst_exemption to their respective share of the year transfer to trust the allocations will be effective as of the respective date of the transfer to trust and the value of the transfer to trust as determined for federal estate_tax purposes will be used in determining the amount of settlor’s and spouse’s gst_exemption to be allocated to trust this allocation should be made on supplemental form sec_709 and filed with the cincinnati service_center at the following address internal_revenue_service cincinnati service_center - stop cincinnati oh a copy of this letter should be attached to the supplemental form sec_709 a copy of this letter should be attached to any gift estate or generation-skipping_transfer_tax returns that you may file relating to these matters 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 plr-135751-17 by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically ruled herein we do not express nor imply any opinion concerning the tax consequences of the transaction or any subsequent transaction regarding trust under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely yours associate chief_counsel passthroughs special industries lorraine e gardner 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 cc