t c no united_states tax_court city of columbus ohio petitioner v commissioner of internal revenue respondent docket no 3301-95b filed date p a home rule municipal corporation and political_subdivision of the state of ohio seeks a declaratory_judgment that interest on bonds it proposes to issue will be exempt from taxation under sec_103 i r c in in exchange for the assumption of p's accrued unfunded pension obligation by a fund established for that purpose by the state of ohio p incurred a long- term obligation to the state fund in p made a lump-sum payment equal to percent of the remaining principal in satisfaction of the long-term obligation taking into account the 35-percent discount the yield to p in making the prepayment as compared to the payments it otherwise would have made is percent p proposes to issue long-term obligations with an interest rate of percent to fund the prepayment to the state fund pending our decision herein p has issued short-term obligations to fund the prepayment held p entered into the prepayment transaction with a principal purpose being to profit from the discount offered by the state fund held further to reflect the economic_substance of the transaction r may characterize the prepayment as the acquisition of property sec_1_148-10 income_tax regs held further the prepayment constitutes investment-type_property sec_148 i r c with a materially higher yield than the proposed bonds thus interest on the proposed bonds will not be excludable from gross_income under sec_103 i r c david l miller jerry o allen and david a rogers for petitioner rebecca l caldwell-harrigal joel e helke and richard l carlisle for respondent opinion tannenwald judge this is an action for a declaratory_judgment pursuant to sec_7478 and rule on date petitioner submitted a ruling_request to respondent seeking a determination that interest on certain proposed bonds will be excludable from gross_income under sec_103 after administrative review on date respondent ruled that interest on the proposed bonds will not be excludable under sec_103 on the grounds that the bonds would be arbitrage and or hedge bonds within the meaning of sec_148 and sec_149 respectively all of the jurisdictional requirements for a declaratory_judgment action have been satisfied rule c all statutory references are to the internal_revenue_code and all rule references are to the tax_court rules_of_practice and procedure petitioner bears the burden_of_proof rule c a our decision is based upon the stipulated administrative record which is incorporated herein by this reference and additional evidence received pursuant to an order of this court rule a petitioner is the city of columbus ohio city on date the city council of columbus adopted an ordinance authorizing the issuance of bonds in a principal_amount not to exceed dollar_figure million in its ruling_request petitioner anticipated the actual amount of the proposed bonds would be dollar_figure having retired dollar_figure in principal_amount of its bond anticipation notes see infra p petitioner now anticipates the actual amount of the proposed bonds will be dollar_figure petitioner is a home rule municipal corporation and political_subdivision of the state of ohio state before the city maintained two pension funds for its police officers and firefighters collectively referred to hereinafter as the city fund in a state law was enacted creating the police and firemen's disability and pension fund the state fund a respondent objects to what she describes as petitioner's attempt to admit additional material into evidence by way of appendices a and b to petitioner's opening brief appendix a contains an amortization of the city obligation based on an exhibit in the stipulated record and is thus not new evidence appendix b however is an amortization schedule of the proposed bonds and is new evidence as to which we sustain respondent's objection statewide pension fund for police officers and firefighters the state fund was created to replace unfunded plans of the city and other municipalities with a fully funded pension_plan the state fund assumed and guaranteed the pre-1967 pension liabilities of ohio municipalities including the city the state fund obligation in addition the state law provided that pension liabilities for police officers and firefighters accruing on and after date would be supported by current employer and employee contributions pursuant to the state law the value of the transferred liabilities and assets of each municipality was determined by the wyatt company wyatt an actuarial company employed by the state to make the calculations wyatt computed the present_value of each municipality's accrued unfunded pension liability using a discount factor of dollar_figure percent compounded annually the mathematical equivalent of dollar_figure percent compounded semiannually and certain actuarial assumptions based on mortality tables wyatt determined the present_value of the accrued unfunded liabilities of the city fund that were transferred to the state fund to be dollar_figure of that amount dollar_figure was satisfied by assets of the city fund and the city was credited with dollar_figure of accrued interest resulting in a net accrued liability of dollar_figure on date as required by the law creating the state fund the liabilities and assets of the city fund were transferred to the state fund the state law required each municipality to pay to the state fund either immediately or over time with interest an amount equal to its accrued unfunded pension liability ie the difference between the transferred liabilities and assets if a municipality opted to pay that amount over time the state law as originally enacted required it to pay interest pincite percent per annum on the unpaid balance subsequent to an amendment to the state law in the interest rate charged by the state fund has been dollar_figure percent per annum petitioner chose to pay the present_value of its accrued unfunded pension liability over time the city obligation it has never been obligated to make up for any shortfalls or deviations from the actuarial calculation of its accrued unfunded pension liability the deferred payment option in the original state law required any amount unpaid as of date to be paid over years in equal principal installments ie at least percent of the amount unpaid as of date each year together with interest pincite percent principal and interest on the obligation were payable semiannually on dates to be determined by the trustees of the state fund by state law effective date the unpaid city obligation as of date was to be paid percent in percent in percent in percent in and percent per annum beginning in and each year thereafter for years this repayment schedule incorporated the payment of interest at a rate of dollar_figure percent compounded semiannually the city made payments pursuant to the above schedule through under the state fund pension system both municipal_corporations and their employees who are police officers and firefighters contribute a percentage of current wages to the state fund the state fund pays pensions in defined amounts to retired police officers firefighters and surviving spouses and dependents it treats all participating municipal_corporations and their police officers and firefighters equally based on current contributions no consideration is given as to whether a particular municipal corporation paid the principal_amount of its accrued unfunded pension liability in full or agreed to pay such liability over time amounts in the state fund are invested for the equal benefit of all police officers and firefighters throughout the state the actuary for the state fund has assumed a rate of return on investments of the state fund of dollar_figure percent compounded annually approximately municipalities transferred their assets and accrued liabilities as of date to the state fund in sec_742 c was added to the ohio revised code which provided c the board_of trustees of the police and firemen's disability and pension fund may enter into an agreement with a municipal corporation for a single payment by the municipal corporation of the employer's accrued liability the agreement may provide for a reduction in the amount of the accrued liability based on the value to the fund of receiving a single payment a municipal corporation that has made payment in accordance with such an agreement shall have no further obligation to make payments under this section ohio rev code ann sec_742 c anderson supp pursuant to this provision the state fund allowed single lump-sum payments beginning date the state fund adopted percent of the outstanding principal balance as the discounted amount it would accept for such a payment from date to date municipalities including the city made a lump-sum payment in exchange for release of the full amount of their outstanding liability to the state fund on date the city entered into a prepayment agreement with the state fund on date the outstanding principal balance of the city obligation was dollar_figure which amount was still to be paid periodically until under the agreement the city agreed to pay a lump sum of dollar_figure following which it would have no further obligation to the state fund the city was obligated to make the lump-sum payment within days of date and was required to pay interest at a rate of dollar_figure percent per annum from date until the payment was made the city made the payment of dollar_figure to the state fund on date including interest of dollar_figure if the 35-percent discount is taken into account the yield to petitioner for prepaying the city obligation as compared to the payments it otherwise would have made is percent it was commercially reasonable for the city to finance the lump-sum payment by issuing obligations carrying a taxable interest rate however petitioner initially contemplated issuing tax-exempt_bonds after discussions with respondent and before issuing long-term bonds petitioner decided to obtain a private_letter_ruling from respondent on whether interest on the bonds would be excludable from gross_income under sec_103 on date the city issued dollar_figure in 1-year bond anticipation notes ban's due_date the ban's sold for dollar_figure and were general obligations of the city on date the city transferred dollar_figure of the ban proceeds to the state fund in satisfaction of the lump-sum payment agreement upon the maturity of the ban's petitioner having repaid dollar_figure of the ban's refinanced the remaining dollar_figure with an issue of ban's in that amount maturing date the ban's all ban proceeds were expended on date to discharge the ban's petitioner intends to continue to refinance the ban's with short-term ban's until there is a final court determination in this matter petitioner proposes to issue the proposed bonds either on a tax-exempt or taxable basis depending on the final_determination in this proceeding and immediately utilize all proceeds of the bonds to discharge the then-outstanding ban's and pay related expenses on the issue of the proposed bonds petitioner represents that the proposed bonds will be long-term obligations but did not in its ruling_request or otherwise until its original brief see supra note set forth any terms of payment of principal for purposes of its ruling_request petitioner represented that the proposed bonds would be long-term obligations with a term of years or less and that the yield should be assumed to be percent compounded semiannually sec_103 generally excludes interest on state and local_government bonds from taxable_income the exclusion is the ban's have been issued on the basis that the interest thereon was not excludable under sec_103 petitioner has however sought to preserve the possible tax-exempt status of such interest by filing internal_revenue_service form 8038-g in respect of the and ban's and internal_revenue_service form 8038-t along with an arbitrage rebate payment in respect of the ban's based on the differential between the 25-percent interest rate on the city obligation and the yield on such ban's inapplicable to any arbitrage_bond within the meaning of sec_148 sec_103 an arbitrage_bond is defined in sec_148 as follows a arbitrage_bond defined --for purposes of sec_103 the term arbitrage_bond means any bond issued as part of an issue any portion of the proceeds of which are reasonably expected at the time of issuance of the bond to be used directly or indirectly-- to acquire higher_yielding_investments for purposes of this subsection a bond shall be treated as an arbitrage_bond if the issuer intentionally uses any portion of the proceeds of the issue of which such bond is a part in a manner described in paragraph a higher yielding investment is any investment_property which produces a yield over the term of the issue which is materially higher than the yield on the issue sec_148 sec_148 provides in pertinent part investment_property --the term investment_property means-- a any security within the meaning of sec_165 or b b any obligation c any annuity_contract d any investment-type_property the legislative purpose in enacting these provisions is reflected in the following statement in the report of the house ways_and_means_committee at the time sec_148 was enacted in the bill also provides additional restrictions on the types of obligations in which bond proceeds may be invested without regard to yield restrictions under the bill the arbitrage restrictions are expanded to apply to the acquisition of any property_held_for_investment other than another bond exempt from tax under the code thus investment in any taxable security as well as any deferred payment contract eg an annuity or other_property held for investment is precluded if the yield on the property is materially higher than the yield on the bonds this restriction applies regardless of the purpose of the investment eg whether the investment is acquired as an acquired purpose_obligation an acquired nonpurpose_obligation or an acquired program obligation under this rule for example the purchase of an annuity_contract to fund a pension_plan of a qualified governmental_unit would be subject_to the same arbitrage restrictions as would direct funding of that plan with bond proceeds the purchase of bond insurance is not considered to be the purchase of an annuity_contract similarly investment of bond proceeds in any other type of deferred payment investment-type contract to fund an obligation of the issuer or bond beneficiary would be subject_to these yield restrictions the restriction would not apply however to real or tangible_personal_property acquired with bond proceeds for reasons other than investment eg courthouse facilities financed with bond proceeds h rept 1986_3_cb_1 fn ref omitted emphasis added almost the same statement appears in the report of the senate_finance_committee s rept 1986_3_cb_1 see also h conf rept 1986_3_cb_1 investment-type_property is defined in sec_1_148-1 income_tax regs in pertinent part as follows investment-type_property includes any property other than property described in sec_148 b c that is held principally as a passive vehicle for the production_of_income except as otherwise provided a prepayment for property or services is investment-type_property if a principal purpose for prepaying is to receive an investment return from the time the prepayment is made until the time payment otherwise would be made a prepayment is not investment-type_property if-- the prepayment is made for a substantial business_purpose other than investment return and the issuer has no commercially reasonable alternative to the prepayment or prepayments on substantially the same terms are made by a substantial percentage of persons who are similarly situated to the issuer but who are not beneficiaries of tax-exempt_financing the parties have presented us with a welter of arguments many of which are devoted to a semantical analysis of the foregoing statutory provision and of other provisions of the regulations under sec_148 and sec_150 dealing with the extent to which the regulations in respect of the refunding of prior issues apply to the proposed bond issue and the ban's in particular petitioner argues that the proposed bonds constitute a refunding_issue of the ban's and through them of the city obligation and that the specific tracing methods of the regulation sec_4 preempt any prepayment analysis respondent agrees that the proposed bonds are a refunding_issue of the ban's so that we may treat the see sec_1_148-9 sec_1_150-1 income_tax regs proposed bonds as if the funds raised therefrom were utilized directly in as to petitioner's characterization of the city obligation petitioner fails to accord adequate recognition to the broad authority given to the secretary to issue regulations implementing sec_148 thus sec_148 provides i regulations --the secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section the breadth of this authority to issue legislative regulations see 106_tc_1 is clearly revealed by the following statement in the report of the house ways_and_means_committee at the time of the enactment of the technical_and_miscellaneous_revenue_act_of_1988 publaw_100_647 102_stat_3342 the bill further deletes and re-inserts the term necessary in the specific regulatory authority granted the treasury_department under the arbitrage restrictions this amendment is intended to clarify that treasury's regulatory authority is to be interpreted broadly rather than in a literal dictionary manner that regulatory authority is intended to permit treasury to eliminate any devices designed to promote issuance of bonds either partially or wholly as investment conduits in violation of the provisions adopted by congress to control such activities and to limit the issuance of tax-exempt_bonds to amounts actually required to fund the activities for which their use specifically has been approved by congress further that regulatory authority is intended to permit treasury to adopt rules including allocation accounting and replacement rules necessary or appropriate to accomplish the purpose of the arbitrage restrictions which is to eliminate significant arbitrage incentives to issue more bonds to issue bonds earlier or to leave bonds outstanding longer h rept pincite in accordance with the authority sec_1_148-10 income_tax regs provides e authority of the commissioner to clearly reflect the economic_substance of a transaction if an issuer enters into a transaction for a principal purpose of obtaining a material financial advantage based on the difference between tax-exempt and taxable interest rates in a manner that is inconsistent with the purposes of sec_148 the commissioner may exercise her discretion to depart from the rules of sec_1_148-1 through sec_1_148-11 as necessary to clearly reflect the economic_substance of the transaction for this purpose the commissioner may recompute yield on an issue or on investments reallocate payments and receipts on investments recompute the rebate amount on an issue or otherwise adjust any item whatsoever bearing upon the investments and expenditures of gross_proceeds of an issue petitioner makes much of the fact that it is prepared to issue the proposed bonds on the basis of the interest thereon being taxable ie not exempt under sec_103 such being the case petitioner argues that the prepayment did not have a principal purpose to receive an investment return within the meaning of sec_1_148-1 or sec_1_148-10 income_tax regs consequently petitioner asserts that the question of yield becomes irrelevant in determining whether the proposed bonds are arbitrage_bonds we disagree there is no question that petitioner's purpose in prepaying the city obligation was to profit from the discount offered by the state fund the fact that it would profit from the discount if the interest on the proposed bonds were taxable does not negate the fact that such profit would be greater if such interest was exempt from tax under sec_103 nor does the fact that the issuance of taxable bonds would also be advantageous turn the purpose of the proposed issue on a nontaxable basis from a principal to a subsidiary purpose such a view would emasculate the arbitrage restrictions of sec_148 whenever a financial advantage of a bond issue could be obtained whether the interest on the bonds was taxable or nontaxable in this connection we think it significant that the regulation speaks in terms of a and not the principal purpose 22_f3d_725 7th cir in its application_for the ruling petitioner stated o ne of the principal governmental purposes for issuing the bans and for issuing the proposed bonds was to achieve an economic benefit represented by a present_value debt service savings with respect to the city obligation that debt service savings was made possible in part because of the ability of the city to pay off the city obligation at the amount provided for in the payoff agreement ie of the principal balance of the city's employer's accrued liability plus accrued interest through date pincite two key requirements for the application of the arbitrage provisions of sec_148 are that there must be an acquisition of investment_property which produces a materially higher yield sec_148 and b supra p we turn first to the question of whether the prepayment was used to acquire investment_property petitioner argues initially that at no time was there any acquisition of investment_property because in there was simply an exchange of liabilities ie the obligation of the city fund for the obligation of the state fund this position is utterly without merit the obligation of the state fund was clearly property in the hands of the city and was a specific type of property that congress had in mind ie the equivalent of a funding of the pension obligation of the city see supra p petitioner goes on to argue that at the time of the prepayment in the city was doing nothing more than discharging the city obligation and that one does not acquire property when it acquires its own indebtedness leaving aside the question whether the acquisition of one's own indebtedness constitutes the acquisition of property we think petitioner overstates the proposition in the context of the situation herein the city obligation represented the payment for the obligation of the state fund in and we think that nexus remained extant at the time of the prepayment in short the source to which the prepayment applied was the acquisition of the obligation of the state fund and controls the character of the transaction cf 397_us_572 articulating the origin_of_the_claim_test thus we conclude that the prepayment was for property and consequently we turn to the question whether it was investment_property on this point the parties have locked horns on whether the prepayment falls within the ambit of investment-type_property within the meaning of sec_1_148-1 income_tax regs supra p petitioner argues that the prepayment is not investment-type_property because it satisfies the latter of the two exceptions in the regulations namely a prepayment is not investment-type_property if prepayments on substantially the same terms are made by a substantial percentage of persons who are similarly situated but who are not beneficiaries of tax-exempt_financing the regulation does not define a substantial percentage as of date when the state fund offered the discount for prepayment there were municipalities with obligations to the state fund as of date municipalities had prepaid at the 35-percent discount it is represented that none of the municipalities excluding petitioner utilized the benefit of tax-exempt_financing with respect to their prepayments in sum of municipalities or dollar_figure percent made a prepayment on substantially_similar terms petitioner cites various instances where the term substantial refers to percentages of to percent including sec_1_103-11 income_tax regs percent sec_1 e b income_tax regs percent sec_6662 percent and sec_147 percent elsewhere the term refers to percentages as high a sec_25 percent sec_42 section c and percent sec_382 clearly the term substantial can cover a wide range of values where congress meant only to allow customary prepayments we do not find that dollar_figure percent is a substantial percentage thus the prepayment herein does not satisfy the exception and the prepayment of the city obligation with the proceeds of the ban's constitutes the acquisition of investment- type property moreover we are not convinced that congress intended that the exception should apply where as is the case herein the only offerees of the prepayment opportunity were entities who were beneficiaries of tax-exempt_financing rather than to a class of offerees that included some of these beneficiaries if this were the standard for the application of see nabisco brands inc v commissioner tcmemo_1995_127 at n the exception the number of persons who took advantage of the prepayment terms would appear to be irrelevant having decided that petitioner is not entitled to the benefits of the exception in sec_1_148-1 income_tax regs we are left with the issue whether the prepayment produced a materially higher yield than the proposed bonds sec_148 respondent argues that by virtue of the discount arrangement with the state fund the city should be treated as sharing in the investment_yield of that fund the rate of yield being dollar_figure percent petitioner argues that the city and the state fund are separate entities and that such sharing implies a partnership or combined entity which has no legal justification we agree with petitioner on this point there is no doubt that the high rate of yield anticipated by the state fund was the foundation of the discount arrangement and no doubt entered into the determination of the amount of the discount which the state fund decided to offer but it does not follow that this circumstance justifies the conclusion that the city had an ongoing share in the investment_yield of the state fund our no inference should be drawn that we would have ruled in favor of petitioner if the exception did apply under such circumstances we would still have to decide whether respondent should still prevail because of the broad discretionary authority conferred upon her by sec_1_148-10 income_tax regs supra p rejection of respondent's yield argument does not however end our inquiry petitioner concedes that if the discount is taken into account the yield is percent which is more than sufficient to constitute a materially higher yield than the percent yield on the proposed bonds petitioner contends however that the discount should not be taken into account and that the proper yield for purposes of comparison is the percent interest rate on the city obligation we disagree if the discount is not taken into account one is faced with a most peculiar situation namely a borrowing pincite-percent interest to pay off an obligation bearing 25-percent interest it is only because of the discount that the prepayment and the financing thereof at a 6-percent interest rate make any sense indeed that is the clear foundation of the transactions and the substantive justification for the prepayment in sum we hold that however one views the transactions involved herein a principal purpose of the city was to replace the city obligation with a payment for an investment in the state a materially higher yield with exceptions not applicable herein is a yield one-eighth of percentage_point greater than that of the issue in question sec_1_148-2 income_tax regs staff of the joint comm on taxation general explanation of the tax_reform_act_of_1986 pincite2 j comm print fund's obligation to finance the city's original unfunded pension obligations in a manner which produces the equivalent of a 57484-percent return ie yield on such investment under the circumstances herein irrespective of the technicalities of the arbitrage regulations under sec_148 respondent was entitled to make the adjustment of the yield calculation to take the 35-percent discount into account and to reject petitioner's application_for ruling under sec_1_148-10 income_tax regs on the ground that the economic_substance of the transaction clearly revealed a materially higher yield within the meaning of sec_148 and b and the regulations thereunder consequently the interest on the proposed bonds will not be exempt under sec_103 in view of the foregoing we find it unnecessary to consider the other arguments of the parties decision will be entered for respondent


t ax e x e m p t an d g o v e r n m e n t e n t i t i e s d i v i s i o n department of the treasury internal rev enue se rvice washington d c contact person contact identification_number telephone number employer_identification_number number release number date date uniform issue list legend p r dear ------------------- you requested the following rulings in a letter dated -------------------- the proposed division of all of p’s assets between p and r will constitute a transfer of assets described in sec_507 of the code and will not result in the imposition of a termination_tax pursuant to sec_507 of the code for purposes of chapter and sec_507 through of the code after the division of assets each of p and r will be treated as a transferee foundation the transfers from p are not subject_to tax under sec_4940 of the code all of p’s aggregate tax_benefit as defined in sec_507 of the code will be carried over in equal shares of one-half each to p and r each of p and r may use its one-half share of any excess sec_4940 tax paid_by p before the transaction to offset its own sec_4940 tax_liability p’s transfer of one-half of its assets to r will not constitute self-dealing under sec_4941 of the code p’s transfers of assets incident to the division will not constitute qualifying distributions each of p and r will assume its one-half share of p’s undistributed_income before the transaction and reduce its own distributable_amount for purposes of sec_4942 of the code by its one-half share of p’s excess qualifying distributions before the transaction p’s transfer of one-half of its assets to r incident to the division will not constitute a jeopardizing investment within the meaning of sec_4944 of the code p’s transfer of one-half of its assets to r incident to the division will not constitute a taxable_expenditure within the meaning of sec_4945 of the code and p will have no expenditure_responsibility as set forth in sec_4945 and sec_4945 with respect to the transfer p and r are nonprofit_corporations exempt from federal_income_tax under sec_501 of the code and are private_foundations under sec_509 of the code p with local court approval will transfer approximately one-half of its assets to r in a letter dated date you stated that p has agreed to exercise expenditure_responsibility under sec_4945 of the code and sec_53_4945-5 of the regulations as to its transfer of approximately half of its assets to r and that p has met the reasonable pre-grant inquiry required for expenditure_responsibility sec_501 of the code provides for the exemption from federal_income_tax of nonprofit_organizations organized and operated exclusively for the charitable and or other exempt purposes stated in that section sec_509 of the code describes organizations exempt from federal_income_tax under sec_501 of the code that are private_foundations subject_to the provisions of chapter of the code sec_507 of the code and sec_1_507-1 of the income_tax regulations provide that a private_foundation may voluntarily terminate its private_foundation_status by submitting to the internal_revenue_service a statement of its intention to voluntarily terminate its private_foundation_status pursuant to sec_507 of the code and by paying the private_foundation_status termination_tax under sec_507 of the code sec_507 of the code imposes excise_tax on a private_foundation which voluntarily terminates its private_foundation_status under sec_507 of the code and provides that this sec_507 tax is equal to the lower_of the aggregate tax benefits that have resulted from the private foundation's exempt status under sec_501 of the code or the value of the net assets of the private_foundation sec_507 of the code concerns the transfer of assets by one private_foundation to one or more other private_foundations and provides that each transferee private_foundation shall not be treated as a newly created organization sec_1_507-3 of the regulations indicates that a transfer under sec_507 of the code includes a transfer of assets from one private_foundation to one or more other private_foundations pursuant to any reorganization including a significant disposition of or more of the transferor private foundation's assets sec_1_507-3 of the regulations provides that a transferor private_foundation is required to meet its charitable distribution_requirements under sec_4942 of the code even for any_tax year in which it makes a transfer of its assets to another private_foundation pursuant to sec_507 of the code sec_1_507-3 of the regulations provides that where a private_foundation has transferred all of its assets to another private_foundation in a transfer under sec_507 of the code it is not required to exercise expenditure_responsibility under sec_4945 of the code with respect to such transfer sec_1_507-3 of the regulations provides that if a private_foundation transfers assets to one or more private_foundations which are effectively controlled directly or indirectly within the meaning of sec_1_482-1 of the regulations by the same persons who effectively control the transferor foundation each transferee foundation will be treated as if it were the transferor foundation for purposes of sec_4940 through and sec_507 through of the code each transferee is treated as its transferor in the proportion which the fair_market_value of the transferor's assets transferred to the transferee bears to the fair_market_value of all of the transferor's assets immediately before the transfer sec_1_507-3 of the regulations provides that a transfer of assets under sec_507 of the code does not relieve the transferor private_foundation from filing its own final tax_year return as required by sec_6043 of the code sec_1_507-4 of the regulations provides that the tax on termination of private_foundation_status under sec_507 of the code does not apply to a transfer of assets under sec_507 of the code sec_1_507-1 and sec_1_507-3 of the regulations provide that a transferor private foundation's transfer of assets under sec_507 of the code will not constitute termination of the transferor foundation's private_foundation_status under sec_509 of the code sec_4940 of the code imposes excise_tax on certain investment_income of a private_foundation sec_4941 of the code imposes excise_tax on any act of self-dealing between a private_foundation and any of its disqualified persons under sec_4946 of the code sec_53_4946-1 of the foundation and similar excise_tax regulations provides that for purposes of self-dealing under sec_4941 of the code an exempt_organization under sec_501 of the code is not a disqualified_person sec_4942 of the code requires that a private_foundation must expend annual qualifying distributions under sec_4942 of the code for the conduct of exempt purposes revrul_78_387 1978_2_cb_270 describes the carryover of a transferor private foundation's excess qualifying distributions under sec_4942 of the code where the transferor and the transferee foundations are controlled by the same persons under sec_1_507-3 of the regulations the transferee is treated as the transferor so that the transferee can reduce its own distributable_amount under sec_4942 of the code by its share of the transferor foundation's excess qualifying distributions under sec_4942 of the code sec_4944 of the code imposes excise_tax on any private foundation’s making of a jeopardizing investment sec_4945 of the code imposes excise_tax on any private foundation's making of a taxable_expenditure under sec_4945 of the code sec_53_4945-6 of the regulations allows a private_foundation to transfer its assets to exempt_organizations under sec_501 of the code including private_foundations pursuant to sec_507 of the code without the transfers being taxable_expenditures under sec_4945 of the code sec_4945 of the code requires that in order to avoid making a taxable_expenditure a transferor private_foundation must exercise expenditure_responsibility under sec_4945 of the code on its grants to another private_foundation for example in hans s mannheimer charitable_trust v commissioner 93_tc_15 date the tax_court held that sec_4945 requires expenditure_responsibility on a grant by a private_foundation to another private_foundation regardless of the familiarity of the private_foundations with each other sec_4945 of the code defines expenditure_responsibility in terms of the grantor private_foundation requiring pre-grant inquiry and post-grant reports as to the grantee private_foundation on its uses of the grant sec_53_4945-5 of the regulations provides that expenditure_responsibility includes a requirement that the grantor private_foundation must make a pre-grant inquiry of the prospective grantee private_foundation thus before making a grant the grantor must conduct a limited inquiry of the potential grantee such pre-grant inquiry must be complete enough to give a reasonable person assurance that the grantee will use the grant for the proper exempt purposes this inquiry should concern matters such as the identity prior history and experience of the grantee organization and its managers and any knowledge which the grantor has based on prior experience or other information which is readily available concerning the management activities and practices of the grantee foundation the scope of this inquiry may vary from case to case depending upon the size and purpose of the grant the period of time over which it is to be paid and the prior experience which the grantor has had with respect to the capacity of the grantee to use the grant for the proper purposes sec_53_4945-5 of the regulations on capital endowment grants made by one private_foundation to another private_foundation provides that if a private_foundation makes a grant to another private_foundation for endowment or for other capital purposes the grantor private_foundation must require reports from the grantee private_foundation on the uses of the principal and the income if any from the grant funds the grantee private_foundation must make such reports annually for its tax_year in which the grant was made and for its immediately succeeding two tax years only if it is reasonably apparent to the grantor private_foundation before the end of such grantee's second succeeding tax_year that neither the principal nor the income from the grant funds has been used for any purpose which would result in liability for tax under sec_4945 of the code may the grantor then allow the grantee's reports to be discontinued sec_53_4945-5 of the regulations provides that in order to exercise expenditure_responsibility the grantor private_foundation must require that the grantee organization be made subject_to a written commitment signed by an appropriate officer director or trustee of the grantee to repay any portion of the amount granted which is not used for the purposes of the grant to submit full and complete annual reports on the manner in which the grant funds are spent and the progress made in accomplishing the purposes of the grant to maintain records of receipts and expenditures and to make its books_and_records available to the grantor at reasonable times and not to use any of the funds to carry on propaganda or otherwise attempt to influence legislation within sec_4945 of the code or to influence the outcome of any specific public election or to carry on any voter registration drive within the meaning of sec_4945 or to make any grant which does not comply with the requirements of sec_4945 or sec_4945 or to undertake any activity for any purpose other than one specified in sec_170 of the code the agreement must clearly specify the purposes of the grant such purposes may include contributing for capital endowment provided that neither the grants nor the income therefrom may be used for purposes other than those in sec_170 of the code analysi sec_1 under sec_507 of the code and sec_1_507-3 of the regulations a transfer under sec_507 of the code includes a transfer of assets from one private_foundation to one or more other private_foundations pursuant to any reorganization which includes any significant disposition of or more of the transferor's assets because p will be in such a reorganization by its transfer of approximately one-half of its assets to r p's transfer of assets to r will be a transfer under sec_507 of the code under sec_1_507-4 of the regulations p's transfer of assets pursuant to sec_507 of the code will not terminate p's private_foundation_status under sec_509 of the code and thus will not result in private_foundation termination_tax under sec_507 of the code for purposes of chapter of the code and sec_507 through of the code r will be treated as having received assets as a transferee foundation pursuant to sec_507 of the code as approximately one-half of p’s assets are being transferred to r as the transferee private_foundation p and r will thus remain private_foundations p's transfer of assets to r will not be investment_income or a taxable disposition of property and will not result in tax under sec_4940 of the code sec_507 and sec_1_507-3 of the regulations provide that in a sec_507 transfer a transferee organization will not be treated as a newly created organization the transferee organization is treated as possessing those attributes and characteristics of the transferor organization which are described in sec_1_507-3 and p's transfer of assets will be made for exempt purposes to r which is an organization exempt from federal_income_tax under sec_501 of the code under sec_53_4946-1 of the regulations r is not a disqualified_person under sec_4946 of the code for purposes of sec_4941 of the code because r is exempt from federal_income_tax under sec_501 of the code because p's transfer of assets to r will not be a transfer to a disqualified_person under sec_4946 of the code p's transfer will not be an act of self-dealing under sec_4941 of the code under sec_1_507-3 of the regulations p's transfer will result in r being treated as p for purposes of sec_4942 of the code so that a p's distribution_requirements under sec_4942 for the tax_year of its transfer may be satisfied by r and b p's qualifying distributions during p's tax_year of its transfer may be treated as made by r as in revrul_78_387 cited above r may reduce its required distributions under sec_4942 of the code including those for r's tax_year of the transfer by the amount if any of p's excess qualifying distributions carryover under sec_4942 of the code as of the time of p's transfer under sec_4944 of the code p's transfer of assets to r will not constitute jeopardizing investments or result in tax under that section under sec_53_4945-6 of the regulations a private_foundation can transfer its assets to private_foundations pursuant to sec_507 of the code without the transfer being a taxable_expenditure under sec_4945 of the code thus p's transfer of assets to r will not be a taxable_expenditure under sec_4945 of the code however p must exercise expenditure_responsibility under sec_4945 of the code and sec_53_4945-5 of the regulations on its transfers of some of its assets to r because the exception under sec_1_507-3 of the regulations to expenditure_responsibility for a transfer of all assets does not apply to p because p's transfer to r consists of one-half rather than all of p's assets sec_4945 of the code and sec_53_4945-5 of the regulations have long specifically provided that expenditure_responsibility is required when one private_foundation provides funds to another private_foundation for capital endowment in hans s mannheimer charitable_trust v commissioner 93_tc_15 date the tax_court upheld the position that sec_4945 of the code requires expenditure_responsibility on a grant by a private_foundation to another private_foundation regardless of the familiarity of the private_foundations with each other here p is reorganized as to its assets and governing persons but p and r under sec_507 of the code keep the same private_foundation_status and entity forms as before the transfers and p’s transfers are to another private_foundation r as endowment and are thereby within sec_4945 of the code and sec_53_4945-5 of the regulations accordingly we rule that the transfer of approximately one-half of p's assets to r will constitute a transfer of assets described in sec_507 of the code and will not result in a termination_tax under sec_507 of the code for purposes of chapter of the code and sec_507 through of the code after the transfer of p’s assets r will be treated as a transferee private_foundation p's transfers of assets under sec_507 of the code will not be subject_to tax under sec_4940 of the code all of p's aggregate tax_benefit as defined under sec_507 of the code will be divided in proportion to the assets transferred here in equal shares of one-half to each private_foundation p and r each private_foundation p or r may use its one-half share of any excess tax paid under sec_4940 of the code by p before the sec_507 transaction to offset p’s or r’s own tax_liability under sec_4940 of the code p’s transfers of assets to r under sec_507 of the code will not be self-dealing under sec_4941 of the code p’s transfers of assets to r under sec_507 of the code will not be qualifying distributions under sec_4942 of the code each foundation may assume a one-half share of p’s sec_4942 undistributed_income before the transfers and may reduce its own distributable_amount for purposes of sec_4942 of the code by one-half of p’s excess qualifying distributions before the transfers p's transfers of assets will not subject p or r to the tax on jeopardizing investments under sec_4944 of the code p's transfers of approximately one-half of its assets to r will not be any taxable_expenditure under sec_4945 of the code because p will exercise expenditure_responsibility under sec_4945 of the code and sec_53_4945-5 of the regulations with respect to the transferred assets as a capital endowment grant by p to r this rulings letter will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this rulings letter with deletions made which we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice because this rulings letter could help to resolve any questions please keep it in your permanent records this rulings letter is directed only to the organizations that requested it sec_6110 of the code provides that this rulings letter may not be used or cited as precedent sincerely debra j kawecki manager exempt_organizations technical group enclosure notice


t c memo united_states tax_court jimmie e cannon petitioner v commissioner of internal revenue respondent docket no filed date jimmie e cannon pro_se timothy f salel for respondent memorandum findings_of_fact and opinion cohen judge respondent determined deficiencies in and additions to tax with respect to petitioner’s federal income taxes as follows additions to tax_year deficiency sec_6651 a sec_6654 dollar_figure dollar_figure dollar_figure big_number big_number big_number - - the issues for decision are whether petitioner filed federal_income_tax returns for the years in issue whether respondent properly determined petitioner’s income from the practice of law whether petitioner is entitled to any deductions beyond those conceded by respondent and whether petitioner is liable for the additions to tax determined by respondent 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 findings_of_fact petitioner resided in la mesa california when he filed his petition in this case petitioner was admitted to practice law in california in date during and petitioner specialized in immigration law and handled a high volume of amnesty cases deportation hearings asylum applications and family petitions petitioner’s practice was conducted under the name santa ana immigration center saic petitioner maintained bank accounts in the name of saic and held signature_authority over the bank accounts during saic was operated out of a commercial office located on north broadway in santa ana california in saic moved to an office on main street in santa ana - - during and petitioner was married to crucita cannon crucita cannon worked with petitioner at saic petitioner also had a secretary named judy sanchez hanibal mike justo justo and his wife graciela justo the justos were bilingual english and spanish and ran a small income_tax service and wedding chapel in santa ana the justos referred some cases to petitioner and assisted petitioner in dealing with hispanic clients petitioner and the other persons working in his office maintained receipt books in which they recorded payments received from and balances due from clients of saic the payments included fees earned by petitioner as well as reimbursements for filing fees and payments for services rendered by persons other than petitioner the money receipt books reflected total payments of dollar_figure received during and dollar_figure received during petitioner also received fees of dollar_figure from octovio molina and dollar_figure from gerald scott during that he did not record in the money receipt books barly in petitioner’s sister sharon cannon attempted to set up books for saic for and she reviewed the receipt books ledger cards and client files in she set up a client billing system on the computer she secured from the - - justos check stubs and miscellaneous receipts for expenses of saic she concluded her work by date prior to petitioner commenced an action for dissolution of his marriage to crucita cannon in a declaration filed date in the divorce action petitioner represented the income records for my immigration law practice for last years which i have in my possession indicate that there was in the area of dollar_figure or so per month that was transferred through the business account---- money that p’s wife crucita took in deposited and i’m sure transferred out without her cooperation it will be very difficult for me to determine more about my practices sic income i should point out that with crucita controlled the mail at my office and with crucita’s mother controlling the mail at my residence they were effectively able to keep me in the dark about the true extent of income and where the money was being spent based upon what i know now i believe that crucita systematically looted income from my immigration law practice in an income and expense declaration filed in the divorce action on date petitioner represented that his gross monthly income his net monthly disposable income his other income and various other items were unknown in date petitioner rented commercial space on south broadway in santa ana from jorge nanni nanni in date nanni commenced eviction proceedings against petitioner nanni delivered two boxes containing money receipt books to an office of the internal_revenue_service irs - - in date agents of the immigration and naturalization service ins executed an arrest warrant for crucita cannon and a search warrant for the premises of saic crucita cannon was subsequently convicted of selling fraudulent immigration documents on date petitioner was disbarred from the practice of law in california in its opinion cannon v state bar of cal cal 3d the supreme court of the state of california found that petitioner had committed multiple instances of serious misconduct many of which involved moral turpitude the statutory notice in this case was prepared based on the receipt books delivered to the irs by nanni the notice was sent to petitioner on date respondent determined that petitioner had schedule c profit or loss from business income from his law practice of dollar_figure in and dollar_figure in the explanation of adjustments that was attached to the statutory notice stated a it is determined that santa ana immigration center realized income in the amount of dollar_figure in the tax_year ending december and dollar_figure in the tax_year ending date under the community_property rules of the state of california one-half of this income is taxable to you accordingly your taxable_income is increased by dollar_figure for and dollar_figure in -- - respondent also determined that petitioner was liable for self- employment_tax and for additions to tax for failure_to_file tax returns and for failure to pay estimated_tax in the petition filed date petitioner’s disagreement with the adjustments was stated as follows i received no taxable_income during the tax years of and from santa ana immigration center or any other source therefore there is no responsibility for paying taxes in this matter because no income was personally collected earned or received at no time did petitioner amend the petition to allege that he filed returns or to state any other special matter the case was first set for trial on date by notice served date on date petitioner filed a petition with the u s bankruptcy court for the southern district of california under u s c chapter on date petitioner filed an adversary proceeding in the bankruptcy court against the united_states of america the gist of petitioner’s complaint was that his books_and_records used by the irs in making the determinations at issue in this case were wrongfully seized by the ins in pursuant to stipulation on date petitioner’s action against the united_states of america was dismissed on date petitioner also filed an adversary proceeding in the bankruptcy court against a former employee of the ins and against nanni the gist of the complaint in this _- _- action was also that petitioner’s records had been wrongfully seized on date the bankruptcy court granted a motion for summary_judgment in favor of the former employee of the ins the bankruptcy court ruled that petitioner’s constitutional tort claim would not stand because petitioner plaintiff in the bankruptcy adversary proceeding plainly had available the remedies afforded in rule of the federal rules of criminal procedure by which he could have challenged the search of the subject offices and sought return of his property plaintiff clearly knew the search occurred in because he was at the site when it took place and it would be inappropriate years after the fact to imply a private cause of action against defendant when plaintiff could have availed himself of the rule remedy at the time of the search the bankruptcy court further held that the action was barred by the statute_of_limitations and that the former ins employee should prevail on his claim of qualified immunity stating no evidence was adduced in response to the former employee’s assertion that he did not provide any documents to the i r s on date petitioner’s adversary complaint against nanni was dismissed and closed opinion prior to trial of this case petitioner’s strategy was to refuse to cooperate with respondent and instead to pursue arguments not raised in the pleadings that respondent was somehow precluded from pursuing this case because of misconduct in relation to the seizure of petitioner’s records in --- - during trial while asserting the same claims petitioner successfully showed errors in respondent’s schedules summarizing the receipt books those records as explained in petitioner’s testimony also reflected nontaxable reimbursements and deductible expenses petitioner did not present any additional evidence of deductions in his opening brief respondent corrected the errors and made appropriate concessions based on the receipt books received in evidence petitioner has not made any further attempt to show errors in respondent’s revised computations instead he pursues a hodgepodge of nonmeritorious contentions respondent’s position in respondent’s brief respondent tabulated the various receipt books and derived new totals of gross_receipts for petitioner for and respondent’s revised totals are dollar_figure for and dollar_figure for in recomputing the gross_receipts respondent omitted items identified in the receipt books as reimbursement of expenses a loan from petitioner’s father and receipts marked void respondent concedes that petitioner paid wages of dollar_figure in and dollar_figure in respondent also concedes that petitioner paid filing fees of dollar_figure in and dollar_figure in paid for services rendered by justo in the amount of dollar_figure in and paid bail bond expenses of dollar_figure in respondent also concedes --- - that petitioner is entitled to deduct dollar_figure as rental expenses in finally respondent concedes that petitioner is entitled to deduct one-half of the self-employment_tax imposed for and as recalculated with respect to the items of income and deductions respondent computed petitioner’s tax_liability on one-half of the net_income determined pursuant to california community_property law petitioner’s contentions petitioner contends that respondent has the burden_of_proof by clear_and_convincing evidence in this case he equates respondent’s determination that he failed to file tax returns as fraud under sec_7454 and rule b respondent however has not determined the applicability of a civil_fraud penalty in this case the addition_to_tax for failure_to_file sec_665l1 a and not the addition_to_tax for fraud former sec_6653 is an issue failure_to_file tax returns is not the equivalent of fraud for purposes of civil_tax_penalties see eg 86_tc_1253 koeneman v commissioner tcmemo_1958_186 cf current sec_6651 sec_6663 the clear_and_convincing standard is not applicable in this case the preponderance_of_the_evidence supports respondent’s position on each of the issues petitioner argues that he did file tax returns and that the statute_of_limitations bars the deficiency_notice in this case -- - he claims that he testified that he filed the required returns however neither the transcript pages that he cites nor any other pages of the transcript contain such testimony his contention throughout this case beginning with the petition was that he did not have taxable_income for or he never stated specifically that he prepared or filed federal_income_tax returns for or he did not plead the bar of the statute_of_limitations in the petition he never provided copies of any returns details concerning the time or manner of preparation of returns or any other credible_evidence that supports his belated assertion in the briefs that he filed returns for the years in issue the official irs transcripts of his account received in evidence as stipulated exhibits show that there were no returns filed prior to the substitutes for returns filed in we do not believe that petitioner filed federal_income_tax returns for the years in issue petitioner argues that his inability to produce records of his income and deductions is attributable to the government’s seizure of his records in and failure to return those records to him again we do not believe petitioner’s assertions petitioner called as a witness his sister who testified that she worked on the books of saic in in response to petitioner’s questions his sister indicated that it was kind of hard to discern whether justo or petitioner made a profit petitioner presented no evidence of preparation of tax returns or schedules showing his income for or during his divorce proceedings in petitioner represented that he did not know what his income was allegedly because of actions by his then wife based on his sister’s description of the efforts she made in to reconstruct the business income and his own assertions in we do not believe that any seizure of records in was the cause of petitioner’s inability and failure to report correctly his income and expenses for or during the years in issue and in his proposed findings_of_fact in his brief petitioner has represented that he conducted saic as sole practitioner petitioner now contends that the notice_of_deficiency is invalid on its face because he was not named as a partner in the notice_of_deficiency petitioner’s argument is based on the alleged treatment of petitioner and justo as partners for employment_tax purposes by the irs he contends that the court does not have jurisdiction because the commissioner did not issue a notice of final_partnership_administrative_adjustment under sec_6226 regardless of the lack of factual support for petitioner’s argument sec_6226 applies only to partnerships having more than partners sec_6231 b petitioner claims that any and income_tax liabilities were discharged as a result of the bankruptcy proceedings whether a discharge applies to a taxpayer’s income_tax deficiencies must be determined by the bankruptcy court see 94_tc_1 75_tc_389 petitioner’s other contentions regarding the effect of the bankruptcy are predicated on his erroneous assumption that respondent has the burden_of_proof that the taxes were not discharged or on legal arguments not properly pleaded in this case petitioner’s recurrent theme is that some misconduct on the part of the federal government should inure to his benefit in this case we are not persuaded by petitioner’s claims of malfeasance and misconduct neither apparently was the bankruptcy court even in cases where questionable conduct is attributable to irs agents however suppression of evidence generally is not a suitable sanction ina civil tax case 919_f2d_115 9th cir affg tcmemo_1988_586 97_tc_7 miller v commissioner tcmemo_1998_72 we do not think any sanction is appropriate here the remainder of petitioner’s contentions to the extent that they are intelligible are so patently lacking in merit that they do not require a response summary and conclusions petitioner blames his present situation on the u s government the justos his former wife his former landlord and unidentified others we are satisfied that petitioner’s predicament is of his own making respondent has by the receipt books in evidence and petitioner’s testimony presented substantive evidence that petitioner received unreported income see 774_f2d_932 9th cir 92_tc_661 87_tc_74 petitioner has shown no error in respondent’s corrected schedules of income set forth in respondent’s opening brief petitioner has not identified any deductions to which he is entitled beyond those conceded by respondent based on the records in evidence petitioner’s burden with respect to deductions is well established see eg 512_f2d_882 9th cir affg tcmemo_1972_133 as explained above we do not believe petitioner’s claims that respondent is responsible for his inability to substantiate deductions even if the records had been lost or destroyed while in respondent’s hands however petitioner would not be relieved of his burden with respect to deductions see 756_f2d_1430 9th cir taxpayers’ self-certification of their record- keeping system is not a substitute for proof of their -- deductions affg and vacating on another issue 80_tc_34 71_tc_1120 sentinel fin servs v commissioner tcmemo_1992_ affd without published opinion 39_f3d_1188 9th cir sec_6651 provides for an addition_to_tax for failure_to_file federal_income_tax returns as discussed above we do not believe petitioner’s belated claim that he filed timely returns he has shown no reasonable_cause for failure_to_file the returns and the sec_6651 addition_to_tax is sustained the addition_to_tax for failure to make estimated_tax payments under sec_6654 is imposed in the absence of special exceptions not applicable here see generally 75_tc_1 to reflect respondent’s concessions decision will be entered under rule


internal_revenue_service number release date index number --------------------------- ----------------------------- ----------------------------------------- -------------------------------- re ---------------------------------------------- ---------------------------------------------- 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-130321-15 date date legend decedent date spouse date ------------------------------------------------------- ---------------------- ------------------- ---------------------------- dear ------------- this letter responds to your authorized representative’s letter dated date requesting an extension of time pursuant to of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code code to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations submitted are as follows decedent died on date survived by spouse date is a date after the effective date of the amendment of sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is months after decedent’s date of death or the last day of the period covered by an extension decedent’s form_706 was due on date but the estate did not file a timely form_706 to make the portability election the estate discovered its failure to elect portability after the due_date for making the election it is represented that the value of decedent’s gross_estate is less than the basic exclusion amount in the year of decedent’s death including any taxable_gifts made during her lifetime plr-130321-15 you request an extension of time pursuant to to elect portability of decedent’s dsue amount pursuant to sec_2010 law and analysis 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_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 plr-130321-15 sec_20_2010-2t a of the estate_tax regulations as in effect on date provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely-filed form_706 under sec_20_2010-2t a the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted under sec_20_2010-2t a the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may 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 six months except in the case of taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides the standards the commissioner will use 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 a request for relief under sec_301_9100-3 will be granted when the taxpayer provides 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 failed to make the election because after exercising reasonable diligence taking into account the taxpayer’s experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election the due_date for the portability election is prescribed by statute in the case of an estate required to file an estate_tax_return under sec_6018 see sec_2010 sec_6075 and sec_6018 in the case of an estate that is not required to file an estate_tax_return under sec_6018 the due_date is prescribed by regulation see sec_20_2010-2t a see also sec_20_2010-2 and revproc_2014_18 2014_7_irb_513 sec_2 accordingly in the latter case a taxpayer may seek an extension of time to elect portability under the provisions of sec_301_9100-3 plr-130321-15 sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date it is represented that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly-prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-130321-15 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely associate chief_counsel passthroughs special industries by ____________________________ lorraine e gardner senior counsel branch office_of_chief_counsel passthroughs special industries enclosure copy for sec_6110 purposes copy of this letter


internal_revenue_service number release date index number dollar_figure department of the treasury washington dc person to contact telephone number refer reply to cc corp 3-plr-162125-02 date date distributing controlled i controlled ii controlled iii state x business a business b business c plr-162125-02 business d a agency dear this letter responds to a request dated date submitted on your behalf by your authorized representative for rulings on the federal_income_tax consequences of a proposed transaction the ruling_request supplements a previous request for rulings dated date subsequently withdrawn including additional information that was submitted in letters dated january and date additional information has been submitted in letters dated december and date and january february and date the information submitted is summarized below summary of facts distributing a state x corporation is the common parent of an affiliated_group_of_corporations that file a consolidated federal_income_tax return distributing has a single class of voting common_stock outstanding which is held by a individuals distributing’s three wholly-owned subsidiaries controlled i controlled ii and controlled iii collectively the controlleds join in the distributing consolidated_return distributing controlled i controlled ii and controlled iii conduct business a business b business c and business d respectively distributing and the controlleds have submitted financial information indicating that distributing’s business a controlled i’s business b controlled ii’s business c and controlled iii’s business d respectively each have had gross_receipts and operating_expenses representative of the active_conduct_of_a_trade_or_business for each of the past five years distributing’s business a which involves government contracting is subject_to the strict regulatory rules of agency these rules govern distributing’s reporting method_of_accounting and method of employee compensation because the controlleds are part of the distributing affiliated_group they are also subject_to agency’s required method of reporting as well as agency’s method of employee compensation because the agency system of reporting and operation is more complex and expensive than plr-162125-02 needed by the controlleds the controlleds currently are incurring unnecessary costs that they would not otherwise incur if they operated outside the distributing affiliated_group_of_corporations distributing and an independent consulting firm in a detailed opinion state that if the controlleds are separated from distributing and each of the controlleds conduct its respective business as a stand-alone corporation significant cost savings will result the projected cost savings both with respect to each of the three proposed distributions and in the aggregate will be in excess of one percent of the base_period net_income of the distributing consolidated_group for the five year base_period that is each of the proposed distributions of the stock of controlled i controlled ii and controlled iii will meet the business_purpose requirement under the cost savings analysis set forth in revproc_96_30 appendix a sec_2 because controlled i controlled ii and controlled iii will contribute to the overall post-spin off cost savings of more than one percent of the base_period net_income of distributing’s affiliated_group and controlled i controlled ii and controlled iii each will meet the one percent test on a separate basis without taking into account the cost savings of the other controlleds detailed analysis has been submitted which explains why the cost savings cannot be achieved through a nontaxable_transaction that does not involve the distribution of the stock of controlled i controlled ii and controlled iii and which is neither impractical nor unduly expensive the alternative transactions considered include both the use of a holding_company structure and the spin-off of various combinations of controlled i controlled ii and or controlled iii only by spinning off each of the controlleds simultaneously is a one percent or greater cost savings achieved if the three controlleds are not simultaneously spun off the projected overall cost savings fall below the one percent threshold accordingly in order to achieve the above cost savings it is proposed that distributing will distribute to its shareholders pro_rata all the stock of controlled i controlled ii and controlled iii collectively the distributions representations the taxpayers have made the following representations a b no part of the shares of the controlleds to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of the corporation the five years of financial information submitted on behalf of distributing and each of the controlleds are representative of each corporation’s present operations and there have been no substantial operational changes since the date of the last financial statements submitted plr-162125-02 c d e f g h i j following the transaction distributing and each of the controlleds will continue the active_conduct of its businesses independently and with its separate employees the distribution of the stock of each of the controlleds is carried out for the following corporate business_purpose cost savings the distribution of the stock of each of the controlleds is motivated in whole or substantial part by this corporate business_purpose there is no plan or intention by the shareholders of distributing to sell exchange transfer by gift or otherwise dispose_of any of their stock in either distributing or any of the controlleds after the transaction except for sales of distributing stock or one of the controlled’s stock back to the applicable_corporation by a terminating employee under the respective corporation’s stock plan a shareholder terminating employment with distributing or a controlled must offer all of his or her shares for sale to distributing and the controlleds at the same time as he or she offers shares in the employing corporation thus preventing termination of interest in one of the corporations but not all of them there is no plan or intention by distributing or any of the controlleds directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 1996_1_cb_696 distributing and the controlleds had no accumulated_earnings_and_profits at the beginning of their respective taxable years distributing and the controlleds will have no current_earnings_and_profits as of the date of the distribution no distribution_of_property by distributing immediately before the proposed transaction would require recognition of gain resulting in current_earnings_and_profits for the taxable_year of the distribution there is no plan or intention to liquidate distributing or any of the controlleds to merge any of them into any other corporation or to sell or otherwise dispose_of the assets of any of these corporations after the transaction except in the ordinary course of business no property will be transferred and no liabilities will be assumed in the proposed transaction no intercorporate debt will exist between distributing and any of the controlleds or between any controlleds inter sese at the time of or subsequent to the distribution of the controlleds’ stock plr-162125-02 k l m immediately before the distribution of the stock of the controlleds items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations further distributing’s excess_loss_account with respect to stock of the controlleds if any will be included in income immediately before the distribution payments made in connection with all continuing transactions if any between distributing and any controlled or between any of the controlleds inter sese will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length the distributions are not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock entitled to vote or stock possessing percent or more of the total value of all classes of stock of distributing or the controlleds n distributing is not an s_corporation within the meaning of sec_1361 and there is no plan or intention by distributing or any of the controlleds to make an s_corporation_election pursuant to sec_1362 rulings based solely on the information submitted and the representations made we rule as follows no gain_or_loss will be recognized by distributing upon the distribution of all the stock of controlled i controlled ii and controlled iii pro_rata in the distributions sec_355 no gain_or_loss will be recognized by and no amount will be included in the income of the distributing shareholders upon the receipt of the stock of controlled i controlled ii and controlled iii sec_355 the aggregate basis of the distributing controlled i controlled ii and controlled iii shares in the hands of the distributing shareholders immediately after the distributions will be the same as the aggregate basis of the distributing stock in the hands of the distributing shareholders immediately before the distributions allocated between the distributing and the controlled i controlled ii and controlled iii shares in proportion to the fair_market_value of each in accordance with sec_1_358-2 sec_358 b and c the holding_period of the controlled i controlled ii and controlled iii shares in the hands of the distributing shareholders will include the holding_period of the plr-162125-02 distributing shares with respect to which the distributions are made provided the distributing shares are held as a capital_asset by such shareholder on the date of the distributions sec_1223 earnings_and_profits will be allocated between distributing and controlled i controlled ii and controlled iii in accordance with sec_312 and sec_1_312-10 and sec_1_1502-33 we express no opinion about the tax treatment of the proposed transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings the rulings contained in this letter are predicated upon the facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for a ruling verification of the information representations and other data may be required as part of the audit process see dollar_figure and dollar_figure of revproc_2003_1 2003_1_irb_1 which discusses in greater detail the revocation or modification of ruling letters however when the criteria in dollar_figure of revproc_2003_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent it is important that a copy of this ruling letter be attached to the federal_income_tax return of each party involved for the taxable_year in which the transaction covered by this letter is consummated a copy of this letter has been sent to your authorized representative pursuant to the power_of_attorney on file in this office sincerely richard e coss senior counsel branch office of associate chief_counsel corporate


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp 2-plr-145150-02 date date legend distributing1 distributing2 controlled1 controlled2 c2sub business b target continent z dollar_figurec dollar_figuree percentage dear mr this letter responds to your letter dated date requesting a ruling supplementing the prior letter rulings dated date plr-127322-00 the prior ruling and date plr-121501-02 the prior supplemental ruling the prior ruling as supplemented by the prior supplemental ruling addresses a distribution of controlled1 stock by distributing1 to distributing2 a contribution by plr-145150-02 distributing2 of the continent z business b assets and the controlled1 stock to controlled2 followed by the transfer of the continent z business b assets and the controlled1 stock to c2sub a wholly owned subsidiary of controlled2 and the distribution by distributing2 of controlled2 stock pro_rata to its shareholders followed immediately by the acquisition by controlled2 of target in exchange for not more than percentage of the stock of controlled2 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials 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 the facts as described in the prior ruling as supplemented by the prior supplemental ruling are unchanged except as stated below the distribution of dollar_figurec by target will occur without cancellation of any target ordinary shares immediately prior to the acquisition target will reduce to dollar_figuree per share the exercise price of those target share options that have an exercise price in excess of dollar_figuree such repricing is contingent upon issuance of this supplemental ruling target has terminated certain employees any target share options held by each terminee will be modified to provide that vesting of such options will continue for months following such terminee’s termination_date and that such options will continue to be exercisable for a 6-month period thereafter representations the representations made in connection with the prior ruling as modified and expanded in the prior supplemental ruling remain valid in full force and effect ruling the additional information submitted will have no adverse effect on the rulings set forth in the prior ruling and the prior supplemental ruling 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 plr-145150-02 this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office copies of this letter are being sent to the taxpayer and its representative sincerely gerald b fleming senior technician reviewer branch office of associate chief_counsel corporate


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 plr-124041-10 date november x ---------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- ----------------------- state -------------------------- state ------------ date --------------------- date ---------------------- year ------- year ------- year ------- dear ----------- we received your letter dated date and subsequent correspondence written on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code code this letter responds to your request x was incorporated under the laws of state on date x elected to be an s_corporation effective date beginning in year x remitted a state tax on behalf of facts plr-124041-10 its shareholders who were not residents of state while x did provide each of its shareholders who were not residents of state with the amount of state tax x paid on their behalf x did not treat those payments as constructive distributions to such shareholders x represents the state tax_payments it made from year through year should have been treated as constructive distributions which caused the distributions x made to its shareholders to be disproportionate from year through year x represents it was not aware that its failure to treat the state tax_payments as constructive distributions could cause x to be treated as having more than one class of stock likewise x represents that it did not intend to terminate its s_corporation_election and that the circumstances resulting in the possible termination of the election were not motivated by tax_avoidance or retroactive tax planning x represents it has taken or will take the following corrective actions in late year x made remedial distributions to correct the effect of the potential disproportionate distributions x may have made for year and subsequent years x will treat the state tax it pays on behalf of its shareholders who are not residents of state as constructive distributions and will take into account such constructive distributions when making distributions to its shareholders so that each outstanding share of its stock will confer identical rights to distributions x represents that x and each of its shareholders have filed all returns consistent with x's s_corporation_election from year through the present law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that for purposes of subchapter_s the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not among other things have more than one class of stock sec_1_1361-1 of the income_tax regulations provides in part that a corporation that has more than one class of stock does not qualify as a small_business_corporation except as provided in sec_1_1361-1 relating to instruments obligations or arrangements treated as a second class of stock a corporation is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds differences in voting rights among shares of stock of a corporation are disregarded in determining whether a corporation has more than one class of stock sec_1_1361-1 provides in part that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state law and binding agreements relating to distribution and liquidation plr-124041-10 proceeds collectively the governing provisions although a corporation is not treated as having more than one class of stock so long as the governing provisions provide for identical distribution and liquidation rights any distributions including actual constructive or deemed distributions that differ in timing or amount are to be given appropriate tax effect in accordance with the facts and circumstances sec_1_1361-1 provides that state laws may require a corporation to pay or withhold state income taxes on behalf of some or all of the corporation's shareholders such laws are disregarded in determining whether all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds within the meaning of sec_1_1361-1 provided that when the constructive distributions resulting from the payment or withholding of taxes by the corporation are taken into account the outstanding shares confer identical rights to distribution and liquidation proceeds a difference in timing between the constructive distributions and the actual distributions to the other shareholders does not cause the corporation to be treated as having more than one class of stock except as provided in sec_1362 sec_1362 provides that a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides in part that if an election under sec_1362 by any corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in the termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make the adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the termination the corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based on the information submitted and representations made we conclude that if x had more than one class of stock x's election to be treated as an s_corporation terminated in year when x first made the state tax_payments on behalf of its shareholders who were not state residents however we conclude that if x's s_corporation_election was terminated such termination was inadvertent within the plr-124041-10 meaning of sec_1362 therefore x will be treated as continuing to be an s_corporation from year and thereafter provided x's s_corporation_election was valid and was not otherwise terminated under sec_1362 for all relevant years x's shareholders must include their pro_rata share of the separately_stated and nonseparately computed items of income or loss of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether x is otherwise eligible to be treated as an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely s mary beth carchia senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes