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-105044-10 date date in re -------------------------------------------- ------------------------------------------------------------- --- --------------------- legend ---------------------------- testator -------------------------------------- child a ----------------------------- child b --------------------------------------- child c -------------------------------- stock stock trust ------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------- residuary_trust ------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ children’s agreement ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------- state state a date date date date date date a b c d stock trust a ----------------------------------------------------------------------------------------------------------------- ------------------ ---------- -------------------- ------------------- -------------------------- ------------------------- ------------------------- ----------------------- ------ ------- ------ ------ ------------------------------------------------------------------------ plr-105044-10 --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------------------------------ residuary_trust a ----------------------------------------------------------------------------------------------------------------------- cite ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------- cite ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------ cite cite ------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------- cite ----------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------ cite ------------------------------------------------------------------------ ------------------------------------------------------- cite cite ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------- highest court highest court of state a state court ---------------------------------------------------------------------------------------------------------------- state statute ------------------------------------------------------------------------------------------ --------------------------------------------- state governing statute a --------------------------------------------------- state governing statute b --------------------------------- state a statute q ---- ---- r ---- s ---- t u -------- -------- v -------- x y ------ ------------ z ------------------------------------------- ----------------------------------- ------------------------------------------------------------------------ --------------------------------------------------------------------------------- dear ------------ this responds to the date letter from your authorized representative requesting rulings on the income gift estate and generation-skipping_transfer gst tax consequences of a proposed settlement agreement plr-105044-10 the facts and representations are as follows testator died a resident of state on date he was survived by three children child a child b and child c the children five grandchildren the five grandchildren were then living there were no great-grandchildren at the time under articles third and eighth of testator’s will the will his shares of stock were to be held in trust the stock trust trust income was to be divided equally among the children on a child’s death the child’s income share was to be divided equally among the child’s then living children testator’s grandchildren the stock trust was to terminate twenty-one years after the death of testator’s last surviving grandchild when the principal would be divided equally per capita among testator’s then living great-grandchildren and deceased great-grandchildren whose then living descendants would take by representation under article twenty-second of the will the residue of testator’s estate was to be held in another trust the residuary_trust the residuary_trust provisions were identical to those of the stock trust except that the residuary_trust was to terminate when testator’s youngest great-grandchild reached age twenty-one the rule_against_perpetuities under the state rule_against_perpetuities in effect at testator’s death a bequest of a future_interest was void if considered prospectively at the testator’s death there was a possibility that the interest would not vest by the end of twenty-one years after the death of a life or lives in being at the testator’s death the permissible period a bequest to a class was void if there was a possibility that all the members of the class would not be ascertained and take vested interests within the permissible period a void specific_bequest passed to the testator’s residuary_estate if the testator’s disposition of the residuary_estate was void as well the residuary_estate passed as a reversion by intestacy cite in this case at testator’s death it was possible for the children to have additional children so that there could be grandchildren whose lives were not then in being this was the pivotal factor in determining whether his bequests of stock trust and residuary_trust income and remainders to his grandchildren and great-grandchildren violated the rule_against_perpetuities testator’s bequest of lifetime income interests to the grandchildren was to all of his grandchildren as a class a grandchild born after testator’s death would be part of the grandchildren’s class and would receive stock trust income_for_life based on this it was considered possible that not all of the grandchildren’s income interests would vest during lives in being at testator’s death certain annuities were also created that have since terminated plr-105044-10 testator’s bequests of remainders to his great-grandchildren were to vest only after all of testator’s grandchildren died the life of a grandchild born after testator’s death would also be a measuring life therefore at testator’s death it was possible that the time for vesting of the great-grandchildren’s remainders would be based on a life not in being at testator’s death accordingly the validity of these bequests was in doubt the bequests in the stock trust if void passed to the residuary_trust at testator’s death the bequests in the residuary_trust if void passed to testator’s intestate estate as a reversionary_interest the children’s agreement the children were testator’s heirs at law they acquired his property passing by intestacy consequently on date shortly after testator died the children entered into an agreement the children’s agreement revising the time when the great-grandchildren’s remainders were to vest under the children’s agreement the trusts were to terminate and the great-grandchildren’s remainders were to take effect on the death of the survivor of the children and five grandchildren that is lives in being at testator’s death the children’s agreement also changed the will’s pro_rata distribution of the stock trust and residuary_trust remainder to a per stirpes distribution on termination trust principal would be divided into three equal parts and distributed per stirpes under this revision the great-grandchildren descended from child a would share one third of the principal per stirpes those descended from child b would share a second third per stirpes and those descended from child c would share the last third per stirpes in all other respects the terms of the revised stock trust stock trust a and residuary_trust residuary_trust a were the same as those provided in testator’s will on a date before date testator’s shares of stock were transferred to stock trust a residuary_trust a was not funded it is represented that no additions have been made since then the litigation over more than x decades the trust beneficiaries and others have instituted actions for state court determinations regarding testator’s will and the children’s agreement specifically in cite the highest court of state highest court considered testator’ sec_2 each trust considered herein ie stock trust and residuary_trust in the will and stock trust a and residuary_trust a under the children’s agreement provided for distribution of the remainder at the end of twenty-one years following the death of the last survivor of the persons whose lives measured the duration of that trust because the perpetuities issue in this case centers on the lives measuring a respective trust’s duration and not on the twenty-one year period following the death of the last survivor the twenty-one year period is hereafter assumed to be a part of each trust’s duration even though it is not specifically stated plr-105044-10 bequests of income interests to the grandchildren the court reasoned that under testator’s will a grandchild’s income_interest would vest when his or her parent child a child b or child c died thus the grandchildren’s class would necessarily close at the death of the last survivor of the children who were in being at testator’s death highest court held that therefore the bequest of lifetime income interests to the grandchildren as a class did not violate the rule_against_perpetuities the court held the stock trust created in the will to be valid through the lives of the grandchildren highest court then considered testator’s bequest of remainders to his great-grandchildren the court reasoned that the grandchildren’s life estates preceded the remainders and the grandchildren’s class was not limited to lives in being at testator’s death because the remainders would take effect only after all of those including afterborn grandchildren died it was possible that the remainders would not vest within lives in being at testator’s death therefore highest court held the stock trust remainders to be void and illegal as violating the rule_against_perpetuities cite state statute the wait and see rule nearly y decades after highest court rendered its decision in cite the state legislature enacted state statute state statute provides a wait and see rule in determining whether a future_interest satisfies the rule_against_perpetuities or is void under the wait and see rule a future_interest does not violate the rule_against_perpetuities if actual events demonstrate that the interest did in fact vest by the end of the permissible period state statute applies retroactively to all interests heretofore created following the enactment of state statute highest court considered the statute’s retroactivity cite in the case before the court the trust was created many decades before state statute was enacted at the time of creation certain interests were void as violating the rule_against_perpetuities however highest court applied state statute’s wait and see rule to conclude in retrospect that the interests were not void and did not violate the rule_against_perpetuities testator’s bequest to the grandchildren though valid did not provide for distribution of a grandchild’s income share when the grandchild died before the trust ended on the death of the first grandchild to die on date the trustees petitioned the state court for instructions the state court held that based on testator’s intent a deceased grandchild’s children succeeded to the income share for the duration of the trust cite by inference highest court also considered testator’s bequest of the residuary_trust remainders highest court in effect confirmed that the stock trust remainder and residuary_trust remainder passed by intestacy to the children however the court did not rule on how the remainder would pass to the great-grandchildren plr-105044-10 as a result the courts of state now apply the wait and see rule retroactively to conclude that a future_interest that was void when created many years before state statute was enacted is not void because in hindsight it vested before the permissible period ended accordingly such otherwise void interests are retroactively sustained as not violating the rule_against_perpetuities cite however highest court has not yet addressed due process issues that may be presented the actualities in this case no additional grandchildren were born after testator’s death the lives of the children and the five grandchildren were all in being at testator’s death all of the children have died the last survivor of the five grandchildren died on date at the time there were z great-grandchildren of testator the trust will terminate twenty-one years after date which is date of testator’s z great-grandchildren a descended from child a b descended from child b and c descended from child c if the wait and see rule is applied to validate testator’s bequest of remainders to his great-grandchildren the principal would be divided into z equal shares and distributed under the will alternatively if testator’s disposition of the remainders is considered void the principal would be divided into three equal shares and distributed per stirpes under the children’s agreement the portion of a one-third share distributable to a great-grandchild would depend on the framework of the family line ie child a’s child b’s or child c’s to which that great-grandchild belongs great-grandchildren’s litigation there is a substantial difference between what a great-grandchild would receive in a per capita distribution and what he or she would receive in a per stirpes distribution on date the great-grandchildren benefitting from a per capita distribution the per capita parties instituted their action in state court for adjudication on the distribution of the stock trust remainder the great-grandchildren benefitting from a per stirpes distribution the per stirpes parties opposed the suit and also requested adjudication in addition an action was instituted concerning the distribution of income during the twenty-one year period state court combined the proceedings to consider the income and principal issues together cite in contrast the legislature of state a enacted state a statute which like state statute retroactively applies a wait and see rule to determine whether a future_interest that was void at the time it was created before the state a statute was enacted did in fact vest during the permissible period highest court of state a refused to apply the wait and see rule retroactively despite the relevant language in state a statute instead that court addressed issues of constitutionality and held that state a statute could not be applied retroactively to destroy vested or substantive rights created before state a statute was enacted cite plr-105044-10 over a d-year period guardians ad litem were appointed there was extensive discovery counsel filed three voluminous sets of briefs and the court heard two days of oral arguments the per capita parties argued that the wait and see test of state statute now applies under that test testator’s the will’s disposition of the stock trust remainder does not violate the rule_against_perpetuities therefore the stock trust principal is distributable per capita to testator’s living great-grandchildren and deceased great-grandchildren whose living descendants would take by representation the per stirpes parties argued that the highest court’s determinations were final and those rulings can not now be constitutionally impaired by a later-in-time state statute or judicial_ruling because highest court determined the remainders in the will to be void they passed as reversionary interests by intestacy to the children as such the remainders passed per stirpes under the children’s agreement some parties argued that trust income should be distributed per stirpes through the roots of the children for the duration of the stock trust others argued that the income is distributable per capita the court encouraged the parties to explore ways to resolve their differences through negotiation and compromise rather than through continued litigation among the potential outcomes regarding trust principal was a judicial_ruling that i ii iii principal is distributable per capita on date under the terms of the stock trust in the will or principal is distributable per stirpes on date under the terms of the children’s agreement or principal was distributable as of the last surviving grandchild’s death under the residuary_trust in the will which vested or will vest in the takers under the residuary_trust among the potential outcomes regarding trust income was a judicial_ruling that iv v income is distributable per stirpes from the death of the last surviving grandchild to date under either the will or the children’s agreement or income is distributable per capita from the death of the last surviving grandchild to date under the will or the children’s agreement or plr-105044-10 vi all rights to receive stock trust income terminated when the last surviving grandchild died at which time the stock trust principal was distributable under the residuary_trust of the will the great-grandchildren’s settlement agreement the parties negotiated extensively at the outset they agreed that the issues could be settled using a fractional difference settlement based on an assessment of the relative strengths of their adverse positions under the general framework of the compromise the great-grandchildren’s settlement agreement the ggc agreement provides for the stock trust principal to be divided into z separate shares based on the number of testator’s then living great-grandchildren and deceased great-grandchildren with then living children the share of a deceased great-grandchild will be divided per stirpes among that great-grandchild’s living descendants the stock trust assets will be divided in accordance with certain percentages the formula of the compromise provides for a q per stirpes r per capita fractional difference as to income and an s per stirpes t per capita fractional difference as to principal after the division into separate shares u of each great-grandchild’s share will be distributed outright to the great-grandchild if living or if the great-grandchild is deceased to his or her living descendants per stirpes the remaining v of each share will continue in trust for such great-grandchild or such descendants until the termination_date date each share will be a separate trust the respective great-grandchild or deceased great-grandchild’s descendants will be the sole beneficiary of the share for distributions of income and principal a sophisticated algorithm taken to thirteen decimal places will be used in the pro_rata division and outright distributions the division will take into account both the market_value and respective tax bases of the assets the ggc agreement was presented to state court for consideration the state court approved the settlement and ordered the division and distribution of the stock trust as set forth in the ggc agreement the ggc agreement is subject_to a favorable ruling from the internal_revenue_service you have asked for the following rulings for purposes of describing the ggc agreement the stock trust and stock trust a are considered to be the same trust plr-105044-10 the terms of the ggc agreement will not cause distributions from the stock trust or the continuing separate settlement trusts to become subject_to the generation-skipping_transfer_tax the terms of the ggc agreement will not cause any party to the agreement to make a gift to any other party to the ggc agreement the terms of the ggc agreement will not cause any party to the agreement to be required to include trust assets in his or her gross_estate unless such assets are distributable or have been distributed to such party prior to his or her death the terms of the ggc agreement will not cause any party to the agreement to realize income from the sale_or_exchange of any trust assets or interests ruling generation-skipping_transfer gst tax sec_2601 of the internal_revenue_code imposes a tax on every generation-skipping_transfer which is defined under sec_2611 as a taxable_distribution a taxable_termination or a direct_skip under of the tax_reform_act_of_1986 the act gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer under a_trust that was irrevocable on date except to the extent the transfer is made out of corpus added to the trust by an actual or constructive_addition after date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 will not cause the trust to lose its exempt status these rules are applicable only for purposes of determining whether an exempt trust retains exempt status for gst tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a court-approved settlement of a bona_fide issue regarding the administration of the trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject_to chapter if the settlement is the product of arm's length negotiations and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement a settlement that results in a compromise between the positions of the litigating parties and reflects the parties' assessments of the relative strengths of their positions is a settlement that is within the plr-105044-10 range of reasonable outcomes in this case the stock trust was irrevocable on date further it is represented that there have been no actual or constructive additions to the stock trust after date accordingly the stock trust is exempt from gst tax under sec_26_2601-1 the terms of the ggc agreement including the proposed division of the stock trust into separate shares and partial distributions of principal are the result of a settlement of substantial issues between the per capita parties and the per stirpes parties these issues have been tenaciously litigated over more than x decades highest court rendered opinions regarding these trusts many years ago however state statute has since been enacted with retroactive effect and highest court has affirmed state statute’s retroactive application to a similarly-created trust in light of this that court’s earlier determinations of the issues in this case are now in question we conclude that the ggc agreement constitutes a settlement of bona_fide issues concerning the provisions of the stock trust and its administration we also conclude that the terms of the ggc agreement are the product of arm's length negotiations they represent a compromise between the positions of the parties and reflect the parties' assessments of the relative strengths of their positions we further conclude that the ggc agreement is within the range of reasonable outcomes under the governing instruments and the applicable state law addressing the issues resolved in the ggc agreement accordingly based upon the facts submitted and the representations made we rule that the division of the stock trust into the z separate great-grandchildren’s trusts and the distributions to the living great-grandchildren and the descendants by representation of a deceased great-grandchild made in accordance with the ggc agreement will not cause the stock trust the continuing separate stock trusts or the distributions as described above to be subject_to the generation-skipping_transfer_tax ruling gift_tax issue sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year sec_2511 provides that the gift_tax applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-1 of the gift_tax regulations provides that as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in him or her no power to change its disposition whether for his or plr-105044-10 her own benefit or for the benefit of another the gift is complete sec_25_2511-1 provides that any transaction in which an interest in property is gratuitously passed or conferred upon another regardless of the means or device employed constitutes a gift subject_to tax whether an agreement settling a dispute is effective for gift_tax purposes depends on whether the settlement is based on a valid enforceable claim asserted by the parties and to the extent feasible produces an economically fair result see 674_f2d_761 9th cir citing 387_us_456 thus state law must be examined to ascertain the legitimacy of each party's claim if it is determined that each party has a valid claim the service must determine that the distribution under the settlement reflects the result that would apply under state law if there is a difference it is necessary to consider whether the difference may be justified because of the uncertainty of the result if the question were litigated the proposed settlement is a mediated settlement and is based on arm's length negotiations among all the parties all interested parties who hold or may hold an interest in the trusts including any minors and unborn heirs have been represented in the negotiations as discussed above the ggc agreement represents the resolution of a bona_fide controversy between the parties the terms of the ggc agreement are the product of arm's length negotiations and represent i a compromise between the positions of the per capita parties and the per stirpes parties and ii reflect the parties' assessments of the relative strengths of their positions we further conclude that the ggc agreement is within the range of reasonable outcomes under the governing instruments and applicable state law accordingly based on the facts submitted and representations made we conclude that the terms of the ggc agreement as described above will not cause any of the beneficiaries to have made a taxable gift_for purposes of the federal gift_tax under sec_2501 ruling estate_tax issue sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2033 provides that the value of the gross_estate includes the value of all property to the extent of the interest therein of the decedent at the time of death sec_2035 provides that if the decedent transferred an interest in property or relinquished a power with respect to any property during the 3-year period ending on plr-105044-10 the date of death and the value of the property or interest therein would have been included in the gross_estate under sec_2036 sec_2037 sec_2038 or sec_2042 if the interest or power had been retained by the decedent on the date of death then the value of the gross_estate includes the value of the property or interest that would have been so included sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period that does not in fact end before his death possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income from the property sec_2037 provides that the value of the gross_estate includes the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise if possession or enjoyment of the property can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property and the value of such reversionary_interest immediately before the death of the decedent exceed sec_5 percent of the value of such property sec_2038 provides that the value of the gross_estate includes the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona fine sale for adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power either by the decedent alone or in conjunction with any person to alter amend or revoke or where the decedent relinquished any such power during the 3-year period ending on the date of the death sec_2041 provides that the value of the gross_estate shall include the value of all property with respect to which the decedent possessed a general_power_of_appointment at the time of death sec_2041 defines the term general_power_of_appointment as a power that is exercisable in favor of the decedent the decedent's_estate the decedent's creditors or the creditors of the decedent's_estate in order for sec_2035 through to apply a decedent must have made a transfer of property or an interest therein except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth under which the decedent retained an interest in or power over the income or corpus of the transferred property plr-105044-10 as discussed above the ggc agreement represents the resolution of a bona_fide controversy between the parties it is a settlement of bona_fide issues and is the product of arm's length negotiations it reflects the parties' assessments of the relative strengths of their positions no great-grandchild or deceased great-grandchild’s descendants by representation has made a transfer to the stock trust or to any other great-grandchild by reason of the settlement agreement accordingly based upon the facts submitted and representations made we conclude that the terms of the ggc agreement will not cause any party to the agreement to have made a transfer within the meaning of sec_2035 through however once the ggc agreement becomes effective any trust property actually distributed or receivable by a beneficiary or his or her assignee would generally be included in the beneficiary’s federal transfer_tax base see eg sec_2033 sec_2041 sec_2501 ruling income_tax issue sec_61 provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1001 provides that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained 499_us_554 addresses the issue of whether a sale_or_exchange that has taken place results in the realization of gain_or_loss under sec_1001 in cottage savings a financial_institution exchanged its interests in one group of residential mortgage loans for another lender's interests in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution the supreme court in cottage savings u s pincite concluded that sec_1_1001-1 reasonably interprets sec_1001 and stated that an exchange of property gives rise to a plr-105044-10 realization event under sec_1001 if the properties exchanged are materially different in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent cottage savings u s pincite the court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans cottage savings u s pincite in the present case state governing statute a allows the court for cause shown to authorize the division of a_trust into two separate trusts on such terms and conditions and with such notice as the court directs in addition state governing statute b gives trustees the power to distribute in cash or in_kind or partly in each and allocate particular assets in proportionate or disproportionate shares in this case the court order approving the ggc agreement orders the division and distribution of the stock trust as set forth in the ggc agreement accordingly the court approved the non-pro rata distributions called for in the ggc agreement and further authorized the trustees to make the necessary transfers and assignments of the unconverted investment securities t herein awarded in_kind accordingly the submission concludes that the distribution scheme in this case is authorized by state law we agree the stock trust will be divided into z trusts on a non pro-rata basis under the state statutes cited above the court has the authority to authorize the trustees to make this type of non pro-rata apportionment thus the proposed division and distribution of the stock trust assets among the z trusts will not result in a material difference in_kind or extent of the legal entitlements enjoyed by the beneficiaries within the meaning of cottage savings accordingly based upon the facts submitted and representations made we conclude that the division of the stock trust into the z great-grandchildren’s trusts will not result in the recognition of gain_or_loss under sec_1001 by the stock trust any beneficiary of the stock trust or any separate great-grandchild’s trust the rulings in this letter pertaining to the federal estate and or generation-skipping_transfer_tax apply only to the extent that the relevant sections of the internal_revenue_code are in effect during the period at issue except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours plr-105044-10 leslie h finlow acting senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosure copy for purposes


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 b02 plr-139875-13 date december legend x -------------------------- ----------------------- state ----------- date ------------------- dear -------------- this is in response to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting that the service grant x an extension of time under sec_301_9100-1 of the procedure and administration regulations to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes and relief to file a late s_corporation_election under sec_1362 of the internal_revenue_code according to the information submitted x was formed in state on date x’s default status was as a disregarded_entity for federal tax purposes x intended to elect to be treated as an association_taxable_as_a_corporation and to elect to be treated as an s_corporation for federal tax purposes with both elections effective date however neither form_8832 entity classification election nor form_2553 election by a small_business_corporation was timely filed for x sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes elections are necessary only when an eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification plr-139875-13 sec_301_7701-3 provides that unless the entity elects otherwise a domestic eligible_entity is i a partnership if it has two or more members or ii disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301 b by filing form_8832 with the appropriate service_center under sec_301_7701-3 this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief 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 granting relief will not prejudice the interests of the government sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year plr-139875-13 based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date a copy of this letter should be attached to the form_8832 in addition based solely on the facts submitted and the representations made we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective date accordingly provided that x makes an election to be an s_corporation by filing a complete form_2553 effective date along with a copy of this letter with the appropriate service_center within days from the date of this letter then such election will be treated as timely made for date this ruling is contingent on x filing within days of this letter all required returns and amended income_tax returns consistent with the requested relief in this letter a copy of this letter should be attached to any such returns except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter will be sent to x’s authorized representative sincerely associate chief_counsel passthroughs special industries by _______________________________ bradford poston senior counsel branch office of the associate chief_counsel passthroughs special industries cc


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 b02 plr-156671-04 date date -------------------------------------------- -------------------- -------------------------- x -------------------------------------- a ---------------------------------------- b_trust ------------------------------------ -------------------------------------- trust ---------------------------- -------------------------------------- date ---------------------- date ------------------ date ---------------------- date ------------------------- date -------------------------- date ----------------------- dear -------------- a the president of x represents that x was formed on date and elected to be this letter responds to a letter dated date submitted on behalf of x plr-156671-04 by its authorized representative requesting relief under ' f of the internal_revenue_code an s_corporation effective date a and b were the original shareholders of x a represents that b created trust on date and on date transferred all b’s shares of x to trust during b’s life b had the power_to_revoke modify or alter trust shares of x were transferred to trust a represents that trust was intended to qualify as a qualified_subchapter_s_trust qsst however a the beneficiary of trust did not know and the accountants and attorneys advising a did not inform a of the need to file the qsst election required under sec_1361 on date the failure_to_file the qsst election was discovered and this request for relief was prepared avoidance or retroactive tax planning a represents that a has filed a’s federal_income_tax return consistent with the treatment of trust as a qsst x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation a represents that the failure_to_file the qsst election was not motivated by tax b died on date trust continued to hold shares of x until date when the sec_1361 of the code provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under ' a is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate a_trust described in ' c or an organization described in sec_1361 who is not an individual sec_1361 provides that for purposes of ' b b a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder sec_1361 provides that for purposes of sec_1361 a_trust which was described in sec_1361 immediately before the death of the deemed owner and which continues in existence after the death is a permitted shareholder but only for the 2-year period beginning on the day of the deemed owner’s death sec_1361 provides that in the case of a qsst for which a beneficiary makes an election under ' d the trust is treated as a_trust described in ' c a i and for purposes of ' a the beneficiary of the trust shall be treated as the owner of that portion of the trust that consists of stock in an s_corporation with respect to which the election under ' d is made plr-156671-04 sec_1361 provides that a beneficiary of a qsst may elect to have that section apply sec_1_1361-1 of the income_tax regulations provides that the current income_beneficiary of the trust must make the election under ' d by signing and filing with the service_center with which the corporation files its income_tax returns the applicable form or a statement including the information listed in ' j ii sec_1362 provides that if an election under ' a by any corporation a was not effective for the taxable_year for which made determined without regard to ' b by reason of a failure to meet the requirements of ' b or to obtain shareholder consents or b was terminated under ' d or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to ' f agrees to make such 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 ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we conclude that trust was an eligible s_corporation shareholder under sec_1361 before date after date and until date trust was an eligible s_corporation shareholder under sec_1361 we conclude further that x’s s_corporation_election terminated on date when trust an ineligible s_corporation shareholder acquired x stock and that the termination was inadvertent within the meaning of sec_1362 we further hold that pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from date and thereafter provided x’s s_corporation_election was otherwise valid and provided that the election was not terminated under sec_1361 trust will be treated as a_trust described in sec_1361 and a will be treated as the owner of the portion of the trust that consists of x stock the shareholders of x must include their pro-rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 if x or its shareholders fail to treat themselves as described above this ruling is null and void plr-156671-04 this ruling is conditioned upon a filing an appropriately completed qsst election effective date with the appropriate service_center within days following the date of this letter a copy of this letter should be attached to the election except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code in particular we express no opinion on whether trust is or ever was a qsst within the meaning of sec_1361 this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s authorized representative enclosures copy of this letter copy for sec_6110 purposes sincerely j thomas hines branch chief branch passthroughs special industries


internal_revenue_service number info release date index number ---------------------- --------------------------------------- ---------------------------------- re ---------------------------- department of the treasury washington dc person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 - genin-150299-03 date feb we are answering correspondence submitted by your accountant requesting late s dear --------------- corporation election relief although we are unable to respond to your request as submitted this letter provides information relating to your request announcement copy enclosed provides guidance on seeking relief for late s_corporation elections generally to request relief for a late s_corporation_election you must request a private_letter_ruling from the national_office the information forwarded to our office is insufficient for us to process a private_letter_ruling request the procedures for requesting a private_letter_ruling are set forth in revproc_2003_1 copy enclosed in addition taxpayers must submit a user_fee along with their ruling_request the standard user_fee for a private_letter_ruling is dollar_figure however taxpayers with gross_income of less than dollar_figure million on their tax_return for the most recent 12-month taxable_year qualify for a reduced user_fee in the amount of dollar_figure if you qualify for the reduced fee you must include a statement claiming that your gross_income for the last 12-month taxable_year was less than one million dollars sample format provided in appendix b of revproc_2003_1 your request should include all required procedural statements a check for the user_fee and any documents that substantiate your intent to be an s_corporation from inception please refer your request to our office by adding the following to the address direct to cc psi attn cc pa t p o box ben franklin station washington dc if you decide to submit a formal request for a private_letter_ruling please follow the room incidentally the irs has developed two compact discs to help educate small_business owners on their tax responsibilities introduction to federal taxes for small_business self- please keep this letter with your tax records we hope that the above information genin-150299-03 employed and a virtual small_business workshop these items are free and can be ordered by calling the irs also makes information available to small_business taxpayers online at www irs gov businesses small index proves helpful s dianna k miosi enclosures dianna k miosi chief branch associate chief_counsel passthroughs and special industries announcement revproc_2003_1 sincerely yours


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 b02 plr-103683-08 date date legend x date date -------------------------------------------- ------------------------- ---------------------- country -------- dear ------------------ this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting that the internal_revenue_service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect under sec_301_7701-3 to be classified as disregarded as an entity separate from its owner for federal tax purposes the information submitted states that x is a limited_liability_company formed on date under the laws of country x inadvertently failed to file a form_8832 entity classification election electing to treat x as disregarded as an entity separate from its owner for federal tax purposes effective date plr-103683-08 sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301 b or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-3 provides guidance on the classification of a foreign_entity for federal tax purposes sec_301 b i generally provides that unless it elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 entity classification election the effective date of the election cannot be more than seventy-five days prior to the date the form is filed and cannot be more than twelve months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as 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_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief 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 granting relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as disregarded as an entity separate from its owner for u s tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose plr-103683-08 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely william p o’shea associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number ------------------------ --------- ----------------------------------------- ----------------------------------- ----------------------------------- ty ------- ty ------- legend taxpayer advisor datea dateb year1 dear ----------------- 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 ita b02 plr-104812-11 date date ----------------------------------------- ---------------------- ---------------------- -------------------------- ------- this is in response to the letter dated ----------------------- submitted on your behalf by your authorized representative in the letter you request an extension of time to file with your year1 federal_income_tax return a form_3115 application_for change in accounting_method to change your method_of_accounting for advance_payments for the taxable_year beginning datea and ending dateb the request is made in accordance with sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations taxpayer engaged advisor to assist in preparing an accounting_method change request for tax_year ending dateb in accordance with the procedures in revproc_2008_52 the item for which taxpayer requested a method change was advance_payments received pursuant to its licensing and research service agreements advisor prepared the form_3115 and provided it to the taxpayer so the taxpayer could attach it to its form_1120 for year1 and file a copy of the form_3115 with the internal_revenue_service irs national_office on or before the date it filed its return in accordance with section a of revproc_2008_52 for year1 taxpayer timely filed a duplicate of its original form_3115 with the irs national_office as required by section a of revproc_2008_52 2008_2_cb_587 to change its method_of_accounting for advance_payments for the taxable_year plr-104812-11 ending dateb however due to an oversight by taxpayer’s mail room taxpayer inadvertently failed to timely file its federal_income_tax return and original form_3115 for the taxable_year ending dateb thus the original form_3115 that accompanied the return was not attached to a timely filed federal_income_tax return as required by section a of revproc_2008_52 upon discovery of this oversight taxpayer immediately contacted advisor who instructed taxpayer to request an extension of time under sec_301 of the regulations to file the form_3115 with taxpayer’s year1 return revproc_2008_52 provides the procedures by which a taxpayer may obtain automatic consent to change certain methods_of_accounting a taxpayer complying with all the applicable provisions of this revenue_procedure has obtained the consent of the commissioner to change the taxpayer’s method_of_accounting under sec_446 of the internal_revenue_code and regulations thereunder section a of revproc_2008_52 provides that a taxpayer changing a method_of_accounting pursuant to revproc_2008_52 must complete and file a form_3115 in duplicate the original must be attached to the taxpayer’s timely filed including extensions original federal tax_return for the year_of_change and a signed copy of the form_3115 must be filed with the irs national_office no earlier than the first day of the year_of_change and no later than when the original is filed with the federal_income_tax return for the year_of_change sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make certain regulatory elections sec_301_9100-1 defines a regulatory election as 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 that requests 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 based solely on the facts and representations submitted including affidavits we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied accordingly an extension of time is hereby granted taxpayer to file a form_3115 requesting permission to change its method_of_accounting for advance_payments plr-104812-11 effective for the taxable_year ending dateb in this regard we will consider the form_3115 that taxpayer attached to its year1 form_1120 to be timely filed a copy of this letter should be associated with the form_3115 that accompanied taxpayer’s federal_income_tax return filed for the taxable_year ending dateb 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 specifically we express no opinion concerning whether taxpayer is qualified to file its application_for a change in accounting_method under revproc_2008_52 or that it otherwise meets the requirements of that revenue_procedure this ruling letter does not grant taxpayer an extension of time for filing taxpayer’s federal_income_tax return for year1 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 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 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely _norma c rotunno ____________ norma c rotunno senior technician reviewer branch office of associate chief_counsel income_tax accounting cc


t c memo united_states tax_court harvey s and willyce barr petitioners v commissioner of internal revenue respondent docket no filed date harvey s barr for petitioners steven n balahtsis for respondent memorandum findings_of_fact and opinion vasquez judge respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax and a dollar_figure accuracy- related penalty under sec_6662 after a concession by unless otherwise indicated all section references are to the internal_revenue_code code in effect for the year in issue petitioners the issues for decision are whether petitioners recognize ordinary_income or capital_gain from the surrender of a life_insurance_policy and whether petitioners are liable for the sec_6662 penalty we hold that petitioners’ gain is ordinary_income we hold further that petitioners are liable for the accuracy-related_penalty findings_of_fact some of the facts have been stipulated and are so found the first stipulation of facts the second stipulation of facts and the attached exhibits are incorporated herein by this reference petitioners resided in new york at the time they filed their petition harvey s barr petitioner has been an attorney since and currently is a partner at the law firm barr post associates pllc petitioner specializes in complex commercial transactions and bankruptcy law and is admitted to practice before the u s tax_court several u s district courts the u s court_of_appeals for the second circuit and the supreme court of the united_states willyce barr is petitioner’s wife petitioners concede a dollar_figure dividend from the life_insurance_policy shown on form 1099-div dividends and distributions should be included in their gross_income and treated as ordinary_income petitioner’s mother lillian barr ms barr is a retired schoolteacher and currently resides in new york she taught in arizona where she lived from the mid-1960s until in ms barr wanted to purchase a life_insurance_policy to help her children pay the anticipated estate_tax liability after her passing petitioner convinced ms barr to meet and discuss the issue with jack tilden of new england mutual life_insurance co in new york new england mutual with whom petitioner shared office space ms barr agreed and she and petitioner met with mr tilden on date new england mutual issued a life_insurance_policy the policy insuring the life of ms barr the policy was a whole life policy with a face_amount of dollar_figure it was not an annuity petitioner and his sister susan roe ms roe were coowners and beneficiaries of the policy under the terms of the policy all communications including premium notices were sent to petitioner’s spring valley new york address the annual premium due under the policy was dollar_figure for the first or years ms barr indirectly paid the premiums by gifting half of the amount to petitioner and half to ms roe petitioner and ms roe then paid the premiums directly no additional payments were made by petitioner ms roe or ms barr after the first or years thereafter the policy borrowed against itself to pay the premiums ie premiums were automatically paid from dividend accumulations and loans against the cash_value of the policy policy_loans other than automatic policy_loans used to pay the premiums no one ever borrowed against the policy by the policy was held by new england financial a metropolitan life_insurance co metlife affiliate on date new england financial sent a letter to petitioner explaining the tax consequences of the policy along with a statement of gain the letter stated in pertinent part according to federal tax law a policy contains taxable gain to the extent that its cash_value including loaned cash_value exceeds its total net investment generally gain must be recognized as taxable_income to the extent any cash received or loan extinguished exceeds total net investment we are required to report any taxable_income to the internal_revenue_service on form 1099-r you may wish to consult with your tax advisor if you have any doubt concerning the tax treatment of this contract new england financial provided a second statement of gain to petitioners dated date according to the statement of gain the net investment in the policy at the time was dollar_figure the total cash_value was dollar_figure the total indebtedness was dollar_figure and the taxable gain was dollar_figure on date new england financial sent a letter to petitioner notifying him that the policy was in overloan in order to continue the policy in force petitioner was required to pay both the overloan amount dollar_figure and the premiums due at the time dollar_figure the letter included the following language should you allow the policy to terminate through failure to pay the overloan amount new england financial is required by federal_law to report any taxable gain to the internal_revenue_service petitioner reviewed one or more of the letters received from new england financial in and discussed their contents with ms barr they decided the policy was no longer necessary and allowed it to terminate petitioner surrendered the policy effective date he was the sole owner and beneficiary at the time in petitioner received and cashed a check from metlife for dollar_figure as well as a check for a dollar_figure dividend in date petitioner received a form 1099-r distributions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc from metlife showing a gro sec_3 the letter was mistakenly addressed to harvey s roe rather than harvey s barr we assume this was a clerical_error as the letter was also sent to the attention of petitioner’s sister susan roe at some point before termination ms roe became ill and transferred her ownership_interest to petitioner the exact date petitioner became the sole owner is unknown distribution and taxable_amount of dollar_figure for petitioner also received a form 1099-div showing a dollar_figure taxable dividend from the surrender of the policy petitioners timely filed their joint federal_income_tax return for petitioners did not include either the dollar_figure shown on form 1099-r or the dollar_figure shown on form 1099-div in their gross_income reported on their return amount included in gross_income opinion gross_income includes all income from whatever source derived including income from life_insurance contracts sec_61 any amount received upon the surrender of a life_insurance_contract which is not received as an annuity is specifically included in gross_income to the extent that it when added to amounts previously received under the contract and excluded from gross_income exceeds the investment_in_the_contract sec_72 c sec_1_72-11 income_tax regs the income also was not reported on any other taxpayer’s federal_income_tax return this rule applies if sec_72 does not apply sec_72 refers to amounts received on or after the annuity_starting_date and thus does not apply under the facts of this case sec_72 also supersedes the application of sec_72 and a to any amount received under the insurance_contract when the policy terminated petitioner received a net distribution of dollar_figure this amount represents the total cash_value dollar_figure plus a terminal dividend dollar_figure less dollar_figure which was withheld to repay the outstanding policy loan balance the satisfaction of the loans had the effect of a pro tanto payment of the policy proceeds to petitioner and constituted income to him at that time see atwood v commissioner tcmemo_1999_61 thus petitioner constructively received the policy’s cash_value of dollar_figure without reduction for outstanding loans upon surrender petitioner’s net investment at the time of surrender was dollar_figure accordingly despite receiving a check for only dollar_figure petitioner is taxable under sec_72 on the dollar_figure gross distribution metlife reported to the irs on form 1099-r see id cf dean v commissioner tcmemo_1993_ holding policy loan remaining unpaid when an annuity_contract is terminated constitutes taxable_income at that time character of gain recognized to recognize a capital_gain or loss petitioner must have engaged in a sale_or_exchange of a capital_asset sec_1222 through 111_tc_256 affd 196_f3d_866 7th cir though the code does not define what is a sale_or_exchange the terms sale and exchange are given their ordinary meaning 313_us_247 generally the lapse cancellation surrender or termination of a contract does not equate to a sale_or_exchange 148_f3d_186 2d cir revg 108_tc_208 the surrender of an insurance_policy is not a sale_or_exchange of a capital_asset and thus does not result in capital_gain see 33_bta_901 holding the phrase ‘sale or exchange’ does not include the surrender of a life_insurance_contract see also 41_bta_1225 affd 125_f2d_150 6th cir 271_f2d_856 2d cir 150_f2d_471 2d cir 309_f2d_587 8th cir affg estate of katz v commissioner tcmemo_1961_270 327_f2d_809 7th cir affg tcmemo_1963_167 111_f2d_19 9th cir 103_f2d_982 3d cir it is entirely clear that the sums received by petitioners do not argue and we do not decide whether sec_1234a applies to these facts that section applies to property acquired or positions established after date economic_recovery_tax_act_of_1981 publaw_97_34 95_stat_333 see also 148_f3d_186 2d cir revg 108_tc_208 the policy was issued date the taxpayer from the insurance_company were not received by virtue of the sale_or_exchange of capital assets petitioners acknowledge the legal precedent ie gain recognized from the surrender of a life_insurance_policy receives ordinary_income treatment nevertheless petitioners argue that the facts here are so exceptional as to require capital_gain treatment to support this position petitioner cites 275_f2d_33 n 4th cir revg 30_tc_866 which states on reargument counsel for the commissioner conceded that there may be exceptional circumstances requiring a modification of this rule ordinary_income treatment for example if a policyholder had an amount receivable thereunder which was in excess of his cost but policyholder was afflicted with a disease which would result in his death in the near future he could if in need of cash assign his policy for an amount in excess of that receivable under the policy and as to such excess treat the same as a capital_gain petitioner did not assign his policy nothing about the policy or the manner in which it was surrendered is exceptional finally petitioner argues that despite the legal precedent maybe it’s time for a change in the law we need not decide the merits of this argument it should be raised before congress not the tax_court the surrender of the life_insurance_policy did not constitute the sale_or_exchange of a capital_asset accordingly we find the resultant gain is ordinary_income and sustain respondent’s determination accuracy-related_penalty sec_7491 provides that the commissioner bears the burden of production with respect to the liability of any individual for additions to tax and penalties the commissioner’s burden of production under sec_7491 is to produce evidence that it is appropriate to impose the relevant penalty addition_to_tax or additional_amount 118_tc_358 see 116_tc_438 the commissioner however does not have the obligation to introduce evidence regarding reasonable_cause or substantial_authority higbee v commissioner supra pincite the taxpayer bears the burden_of_proof with regard to those issues once the commissioner has met his burden of production the taxpayer must come forward with evidence sufficient to persuade a court that the commissioner’s determination is incorrect id pursuant to sec_6662 a taxpayer may be liable for a penalty of percent on the portion of an underpayment_of_tax attributable to a substantial_understatement of income tax8 or due to negligence or disregard of rules or regulations see sec_6662 a substantial_understatement_of_income_tax is understatement means the excess of the amount of the tax required to be shown on the return over the amount of the tax imposed which is shown on the return reduced by any rebate sec_6662 defined as an understatement_of_tax that exceeds the greater of percent of the tax required to be shown on the tax_return or dollar_figure see sec_6662 the understatement is reduced to the extent that the taxpayer has adequately disclosed his or her position and has a reasonable basis for such position or has substantial_authority for the tax treatment of the item see sec_6662 in addition sec_6662 defines negligence as any failure to make a reasonable attempt to comply with the provisions of the code and disregard means any careless reckless or intentional disregard negligence is strongly indicated where a taxpayer fails to include on an income_tax return an amount of income shown on an information_return as defined in sec_6724 sec_1_6662-3 income_tax regs whether otherwise applied because of a substantial_understatement_of_income_tax or negligence or disregard of rules or regulations the accuracy-related_penalty is not imposed with respect to any portion of the underpayment as to which the taxpayer acted with reasonable_cause and in good_faith see sec_6664 the decision as to whether the taxpayer acted with reasonable_cause and in good_faith depends upon all the pertinent facts and circumstances see sec_1_6664-4 income_tax regs relevant factors include the taxpayer’s efforts to assess his proper tax_liability including the taxpayer’s reasonable and good_faith reliance on the advice of a professional such as an accountant see id further an honest misunderstanding of fact or law that is reasonable in light of the experience knowledge and education of the taxpayer may indicate reasonable_cause and good_faith see remy v commissioner tcmemo_1997_72 for the tax_year respondent determined that petitioners are liable for an accuracy-related_penalty attributable to a substantial_understatement_of_income_tax or in the alternative due to negligence or disregard of rules or regulations with regard to the substantial_understatement_of_income_tax respondent has met his burden of production under sec_7491 the tax required to be shown on petitioners’ return is dollar_figure the deficiency or understatement dollar_figure exceeds the greater of percent of the amount required to be shown dollar_figure and dollar_figure petitioners did not offer any authority for not reporting the income from the surrender of the policy on their return consequently we conclude that respondent has met his burden of production for his determination of the accuracy-related_penalty based on substantial_understatement_of_income_tax additionally because petitioners failed to include the amount of income shown on form 1099-r on their return respondent has met his burden of production with regard to negligence petitioners have failed to meet their burden of proving that they acted with reasonable_cause and in good_faith despite being the owner and beneficiary of the policy and receiving numerous letters and statements informing him of the tax consequences of the policy in general and upon surrender petitioner argues that he was unaware that the gain on the policy upon surrender was taxable to him he claims he immediately forwarded all mail related to the policy including form 1099-r to ms barr and that he has no recollection of ever seeing form 1099-r petitioner testified that he believed ms barr was responsible for any_tax obligations arising from the policy and he was unaware that she had not taken care of her own tax_liability these claims to the extent they are relevant do not constitute reasonable_cause petitioner is an experienced attorney admitted to practice before the tax_court petitioner’s testimony that he called ms barr to discuss letters and statements he received in is contradictory to his testimony that he automatically forwarded all mail to ms barr without opening it he received a check for dollar_figure which he did not forward to ms barr but deposited into a bank account even if petitioner forwarded form 1099-r to his mother without viewing it he is not excused negligence does not require a bad intent or a willful act petitioner knew or should have known that because he was the owner and beneficiary of the policy any proceeds paid out or gain recognized would be taxable to him petitioner’s failure to report income shown on form 1099-r was not on account of reasonable_cause and good_faith we therefore sustain respondent’s determination that petitioners are liable for the accuracy-related_penalty on the underpayment associated with petitioners’ failure to report taxable_income from the surrender of the policy discussed above conclusion based on the foregoing petitioners recognized dollar_figure of ordinary_income in from the surrender of a life_insurance_policy petitioners also are liable for the accuracy-related_penalty in reaching all of our holdings herein we have considered all arguments made by the parties and to the extent not mentioned above we find them to be irrelevant or without merit to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si 1-plr-104017-00 date date legend x date date date trust this responds to your letter dated date and subsequent correspondence written on behalf of x requesting inadvertent termination relief under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated on date subsequent to incorporation x made an s_corporation_election effective date that was accepted by the applicable service_center x has always reported as an s_corporation on date x stock was transferred to trust x represents that trust is a qualified_subchapter_s_trust a qsst as defined in sec_1361 due to an oversight trust’s beneficiary did not make a timely qsst election under sec_1362 thereby terminating x's s_corporation_election on date when x's counsel discovered the oversight x submitted this private_letter_ruling request plr-104017-00 x represents that the transfer of stock to trust and subsequent failure_to_file the qsst election were not motivated by tax_avoidance or retroactive tax planning further x represents that from date until the present that x the sole beneficiary of trust and all other shareholders of x have filed or will file returns consistent with x’s status as an s_corporation x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation law and analysis sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect sec_1361 defines small_business_corporation as a domestic_corporation that is not an ineligible_corporation and that does not a have more than shareholders b have as a shareholder a person other than an estate other than a_trust described in sec_1361 and other than an organization described in c who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1361 provides that a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a subchapter_s_corporation shareholder sec_1361 states that a qsst whose beneficiary makes an election under sec_1361 will be treated as a_trust described in sec_1361 and the qsst's beneficiary will be treated as the owner for purposes of sec_678 of that portion of the qsst's s_corporation stock to which the election under sec_1361 applies under sec_1361 the beneficiary of a qsst may elect to have sec_1361 apply under sec_1361 this election will be effective up to days and two months before the date of the election under sec_1362 an election to be an s_corporation will be terminated whenever the corporation ceases to be a small_business_corporation sec_1362 provides that a corporation is treated as continuing to be an s_corporation during the period specified by the secretary if an election under sec_1362 by any corporation was terminated under paragraph or of sec_1362 the secretary determines that the termination was inadvertent no later than a reasonable period of time after discovery of the terminating event steps were taken so that the corporation is once more 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 any plr-104017-00 adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to that period s rep no 97th cong 2d sess 1982_2_cb_718 in discussing sec_1362 of the code provides in part as follows if the internal_revenue_service determines that a corporation’s subchapter_s_election is inadvertently terminated the service can waive the effect of the terminating event for any period if the corporation timely corrects the event and if the corporation and the shareholders agree to be treated as if the election had been in effect for such period the committee intends that the internal_revenue_service be reasonable in granting waivers so that corporations whose subchapter_s eligibility requirements have been inadvertently violated do not suffer the tax consequences of a termination if no tax_avoidance would result from the continued subchapter_s treatment in granting a waiver it is hoped that taxpayers and the government will work out agreements that protect the revenues without undue_hardship to taxpayers it is expected that the waiver may be made retroactive for all years or retroactive for the period in which the corporation again became eligible for subchapter_s treatment depending on the facts conclusions based solely on the facts submitted and representations set forth above we conclude that x’s s_corporation_election was terminated on date the termination was inadvertent within the meaning of sec_1362 no later than a reasonable_time after discovery of the terminating event steps were taken to acquire the required shareholder consents and no tax_avoidance was intended or will result from the continued treatment of x as an s_corporation therefore under sec_1362 x will be treated as an s_corporation from date and thereafter assuming x’s s_corporation_election is valid and is not otherwise terminated under sec_1362 however this ruling is contingent of the beneficiary of trust filing a qsst election with an effective date of date with the appropriate service_center within days of the date of this ruling a copy of this letter must be attached to the qsst election if trust files a valid qsst election trust will be treated as a_trust described in sec_1361 and the beneficiary will be treated under sec_678 as the owner of the portion of trust consisting of x stock during the period from date and thereafter assuming trust satisfies the qsst requirements accordingly the shareholders of x must include their pro_rata share of the separately and nonseparately computed items of x under sec_1366 make any adjustments to stock basis under plr-104017-00 sec_1367 and take into account any distributions made by x to shareholders under sec_1368 if x trust or any of x’s shareholders fail to treat x as described above this ruling will be null and void except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed on whether x's original election to be an s_corporation was a valid election under sec_1362 or whether trust is a qsst within the meaning of sec_1361 this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer sincerely signed dianna k miosi dianna k miosi chief branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes