t c no united_states tax_court marianne hopkins petitioner v commissioner of internal revenue respondent docket no filed date p and h filed joint returns for and adjustments to partnership deductions and nol deductions resulted in tax deficiencies for and the partnership deductions are attributable to h’s partnership the nol deductions are attributable to p’s property p and h reported taxes due on their joint returns for and however they failed to pay those amounts after p and h were separated p filed a request for relief under sec_6015 i r c with respect to her joint_and_several tax_liabilities for and held p is not entitled to relief under sec_6015 i r c for and because the nol deductions are p’s tax items and because she has not established that in signing the returns she had no reason to know that there were understatements attributable to h’s partnership deductions held further p is entitled to relief under sec_6015 i r c to the extent the deficiencies for and are allocable to h under sec_6015 i r c for purposes of applying sec_6015 i r c items are generally allocated as if p and h had filed separate returns thus deficiencies resulting from h’s erroneous partnership deductions are generally allocated to h and deficiencies resulting from p’s erroneous nol deductions are generally allocable to p see sec_6015 i r c however pursuant to sec_6015 i r c an item otherwise allocable to an individual shall be allocated to the other individual filing the joint_return to the extent the item gave rise to a tax_benefit to the other individual as a result p is relieved of liability for deficiencies attributable to h’s erroneous partnership deductions except for the portion if any that offsets her income likewise p is liable for deficiencies attributable to her erroneous nol deductions to the extent they offset her income and she is relieved of liability for any remaining portion of the deficiencies attributable to the nol that offsets h’s income held further p is not entitled to relief under sec_6015 i r c for the remaining portions of the deficiencies for and held further p is not entitled to relief under sec_6015 c or f i r c for the underpay- ments of tax in and sandra g scott for petitioner thomas m rohall for respondent ruwe judge the issue for decision is whether petitioner is entitled to relief from joint_and_several_liability under sec_6015 c or f for her and 1unless otherwise indicated all section references are to continued income_tax liabilities those tax_liabilities which include deficiencies interest penalties and underpayments are as follows year liability dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time of filing the petition petitioner resided in kentfield california petitioner was born in germany while in germany petitioner completed the equivalent of a ninth-grade education she has never taken any business or tax classes her native language is not english in date petitioner married donald k hopkins petitioner and mr hopkins were separated on date and subsequently divorced mr hopkins was an airline pilot during the relevant periods and he earned a substantial salary petitioner did not work outside her home during her marriage continued the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure petitioner has resided in a house located pincite diablo drive kentfield california since petitioner was the sole owner of the house during the tax years at issue petitioner filed joint income_tax returns with mr hopkins from to they reported mr hopkins’s wages of dollar_figure dollar_figure and dollar_figure as income on their joint returns for and respectively they reported income from a state tax_refund of dollar_figure on their joint_return for the refund matches the amount of state income taxes withheld from mr hopkins’s wages for they reported interest_income of dollar_figure dollar_figure and dollar_figure on their joint returns for and respectively the evidence does not show who owned the principal that generated the interest petitioner and mr hopkins reported ordinary_income of dollar_figure from san sierra investment on their joint_return for the evidence does not show who owned the partnership_interest they reported ordinary_income of dollar_figure from ecc leveraged drilling on their joint_return for the evidence does not show who owned the 2the real_property located pincite diablo drive consists of two parcels petitioner and mr hopkins acquired parcel in on date mr hopkins quitclaimed his interest in parcel which included the house to petitioner petitioner is still the sole owner of parcel parcel has been held by petitioner and mr hopkins as joint_tenants since it was acquired in 3on the joint returns for through petitioner’s occupation is listed as investor interest in this entity they reported a dollar_figure sec_1231 gain from shelter associates iii on their joint_return for petitioner and mr hopkins’s reported income for through was significantly offset by partnership losses a casualty_loss and net_operating_loss nol carrybacks and carryforwards that they claimed as deductions petitioner and mr hopkins claimed deductions on their joint returns for and which related to far west drilling partnership the far west drilling partnership deductions were attributable to mr hopkins’s investment in that partnership the deductions related to the far west drilling partnership were erroneous petitioner and mr hopkins signed a closing_agreement under sec_7121 in which they agreed to adjustments to the far west drilling partnership deductions in a separate opinion hopkins v commissioner t c ___ we held that 4a schedule_k-1 partner’s share of income credits deductions etc for reports petitioner as a partner in shelter associates iii 5petitioner and mr hopkins deducted substantial losses from various partnership activities on their and joint income_tax returns the first page of each of the and joint returns showed losses on schedule e supplemental income and loss of dollar_figure dollar_figure and dollar_figure respectively the partnership activities included circle t racing stable shelter associates iii san sierra investment ecc leveraged drilling and far west drilling 6they claimed a loss deduction of dollar_figure on their joint_return for they claimed a loss deduction of dollar_figure and a depletion deduction of dollar_figure on their joint_return for petitioner is not precluded by the closing_agreement which was entered into before the enactment of sec_6015 or the doctrines of res_judicata and collateral_estoppel from claiming relief under sec_6015 with respect to the tax_liabilities attributable to the disallowance of deductions related to the far west drilling partnership petitioner and mr hopkins reported a casualty_loss of dollar_figure on their joint_return for the casualty_loss was attributable to a mudslide that destroyed petitioner’s house petitioner and mr hopkins erroneously claimed nol carryforward deductions for and which were attributable to the casualty_loss petitioner agrees that the erroneous and nol carryforward deductions are her items respondent assessed deficiencies in petitioner and mr hopkins’s taxes for and those deficiencies were attributable to the disallowance of the far west drilling partnership deductions and the disallowance of the nol carryforward deductions that petitioner and mr hopkins claimed on their joint returns for and 7petitioner and mr hopkins’s tax_liability for is attributable to adjustments to the nol carryforward deduction resulting from the casualty_loss and the far west drilling partnership deduction for that year the tax_liability for is attributable solely to the far west drilling adjustments for that year the tax_liability for arises solely from the disallowance of the nol carryforward deduction for that year those deficiencies are not in issue petitioner and mr hopkins reported but did not pay taxes due of dollar_figure and dollar_figure on their joint income_tax returns for and respectively respondent assessed those amounts on date petitioner filed with respondent a form_8857 request for innocent spouse relief with respect to her and joint tax_liabilities on date petitioner filed a petition for relief from joint_and_several_liability with this court at the time the petition was filed respondent had not made a determination with respect to petitioner’s request opinion a tax_liabilities for and petitioner claims that she is entitled to relief from joint_and_several_liability under sec_6015 c or f for the tax_liabilities attributable to the disallowance of the far west drilling partnership deductions and the disallowance of the nol carryforward deductions for and 8pursuant to sec_6015 a petition may be filed with this court after the passage of months from the date the taxpayer elected sec_6015 relief if the commissioner has made no determination regarding the election sec_6015 to qualify for relief under sec_6015 the electing spouse must establish inter alia that a a joint_return has been made for a taxable_year b there is an understatement_of_tax on the return which is attributable to the erroneous items of the nonelecting spouse c in signing the return the electing spouse did not know and had no reason to know that there was such an understatement and d taking into account all the facts and circumstances it is inequitable to hold the electing spouse liable for the deficiency in tax for the taxable_year attributable to the understatement see 119_tc_306 petitioner is not entitled to relief under sec_6015 with respect to the understatements attributable to the disallowed nol carryforward deductions those items are attributable to the residence pincite diablo drive which she owned petitioner agrees that the casualty_loss and the nol carryforward deductions are her tax items for purposes of sec_6015 petitioner cannot be granted relief under sec_6015 for understatements that are attributable to her own erroneous items see sec_6015 the far west drilling partnership deductions are mr hopkins’s tax items with respect to those deductions petitioner bears the burden of proving that in signing the joint returns she had no reason to know that there were understatements attributable to those items see sec_6015 117_tc_279 an individual has reason to know of the understatement if a reasonably prudent taxpayer in her position at the time she signed the return could be expected to know that the return contained the understatement see 887_f2d_959 9th cir mora v commissioner supra pincite petitioner claims that in signing the returns she had no reason to know of the understatements on the returns because she was unaware of mr hopkins’s investments in far west drilling and the other partnerships petitioner’s testimony at trial did not convince us that she was unaware that those investments were made or that mr hopkins concealed his investments from her further even a cursory review of the joint returns for and would reveal that there were investments in partnerships for those years and that large_partnership deductions were claimed the partnership deductions substantially reduced petitioner and mr hopkins’s tax_liabilities for those years and together with other deductions 9petitioner’s testimony suggests that none of the partnership investments reported on the joint returns were her own however a schedule_k-1 for shelter associates iii lists petitioner as a partner in that entity in reduced their reported tax_liabilities to zerodollar_figure the losses from the partnership activities for and were largely attributable to the far west drilling deductions the joint_return for showed a far west drilling partnership deduction of dollar_figure the joint_return for showed a far west drilling partnership deduction of dollar_figure and a depletion deduction of dollar_figure those amounts far exceeded other partnership deductions which were claimed in the joint returns petitioner at the very least understood the general concepts of federal income_taxation and she demonstrated to us no discernible difficulty in understanding english petitioner was involved in the audit process with respect to the and joint returns at some point during the internal_revenue_service irs audit of those returns petitioner and mr hopkins were represented by john e lahartdollar_figure mr lahart spoke with petitioner on more than one occasion and he testified that she 10however in prior years petitioner and mr hopkins reported relatively large tax_liabilities dollar_figure in and dollar_figure in but reported insignificant partnership deductions 11an individual cannot rely solely on ignorance of the attendant tax or legal consequences of an item giving rise to a deficiency to satisfy his or her burden under sec_6015 see 887_f2d_959 9th cir 12petitioner and mr hopkins signed a form_2848 power_of_attorney and declaration of representative dated date in which they appointed mr lahart to represent them before the internal_revenue_service irs did not appear confused about the subject matter that was being discussed and that she did not appear to have a problem with english petitioner subsequently hired david m hellman to represent her and mr hopkins in prior tax_court litigation concerning the disallowance of the nols related to the casualty lossdollar_figure petitioner mr hopkins their tax_return_preparer and mr hellman had a face-to-face meeting to discuss the issues involved in that case in an date letter to respondent’s counsel in that case mr hellman represented that the records concerning the investment in san sierra investment ii apparently were lost in the mud slide mrs hopkins recalls a payment to them of approximately dollar_figure also in a date letter to this court he represented that from what i understand preliminarily upon brief discussions with mrs hopkins it appears the position taken on their income_tax returns for the years in question was a correct position petitioner was actively involved in the prior tax_court litigation concerning the disallowance of the nols related to the casualty_loss she was the only person other than her expert to 13respondent issued notices of deficiency to petitioner and mr hopkins for their and taxable years on the basis of the disallowance of the nols related to the casualty_loss that they had claimed on their joint_return for petitioner and mr hopkins filed a petition with the tax_court and the matter went to trial during the trial the parties agreed to settle the case that case did not involve a claim for relief from joint_and_several_liability testify on her behalf in that proceeding also she was the person who dealt with the insurance_company after it initially denied coverage for the loss of her house in the record reflects that petitioner dealt with third parties with respect to her family’s financial tax and legal matters for example respondent’s revenue_officer who was assigned to the collection of the income_tax liabilities of petitioner and mr hopkins testified that except for one occasion he dealt almost exclusively with petitioner when he would request information or a response from petitioner and mr hopkins it was always petitioner who would respond petitioner performed numerous financial functions within her family exercised considerable discretion and was ultimately responsible for the family’s principal asset the house pincite diablo drive she spent considerable sums in remodeling the house before and in rebuilding the house after the mudslide in dollar_figure petitioner directed the remodeling and rebuilding she hired contractors and she paid those individuals by check or in cash given the size of the partnership deductions the change in petitioner and mr hopkins’s reported taxes in and and petitioner’s involvement in the family’s financial 14the rebuilt residence included four bedrooms and four baths and occupied big_number square feet with a four-car 920-square- foot carport affairs we believe that she as a reasonably prudent taxpayer should have at least made inquiries concerning the large_partnership deductions ‘tax returns setting forth large deductions such as tax_shelter losses offsetting income from other sources and substantially reducing or eliminating the couple’s tax_liability generally put a taxpayer on notice that there may be an understatement_of_tax liability ’ mora v commissioner t c pincite quoting 992_f2d_1256 2d cir affg t c memo we are not convinced that mr hopkins exercised such dominance over petitioner that she could not question the reporting of significant deductions petitioner has failed to establish that she did not have reason to know of the understatements attributable to the far west drilling deductions for and dollar_figure petitioner is not entitled to relief under sec_6015 for the tax_liabilities attributable to those items sec_6015 under sec_6015 if an individual who has made a joint_return for any taxable_year elects the application of this subsection the individual’s liability for any deficiency which is assessed with respect to the return shall not exceed the 15petitioner and mr hopkins have maintained close ties to one another he still uses a portion of petitioner’s house as an office and he also performs maintenance services portion of the deficiency properly allocable to the individual under sec_6015dollar_figure the purpose of sec_6015 is to allocate the tax_liability between the individuals who filed a joint_return in approximately the same way it would have been had the individuals filed separately an individual shall be eligible to elect the application of sec_6015 only if at the time the election is filed the electing individual is no longer married to or is legally_separated from the other individual who filed the joint_return or the electing individual was not a member of the same household as the other individual at any time during the 12-month_period ending on the date the election is filed sec_6015 respondent concedes that petitioner has met the requirements of sec_6015 pursuant to sec_6015 an election under sec_6015 for any taxable_year may be made at any time after a sec_6015 provides sec_6015 procedures to limit liability for taxpayers no longer married or taxpayers legally_separated or not living together in general --except as provided in this subsection if an individual who has made a joint_return for any taxable_year elects the application of this subsection the individual’s liability for any deficiency which is assessed with respect to the return shall not exceed the portion of such deficiency properly allocable to the individual under subsection d deficiency for such year is asserted but not later than years after the date on which the secretary has begun collection activities with respect to the individual making the election the applicable 2-year election_period shall not expire before the date that i sec_2 years after the first collection activity taken by the irs after the date of enactment internal_revenue_service restructuring and reform act of publaw_105_206 112_stat_740 petitioner elected relief on date within the specified period a allocation of the items making up the deficiency sec_6015 provides that the allocation of a deficiency should be made as provided in sec_6015 under sec_6015 the portion of any deficiency on a joint_return allocated to an individual shall be the amount which bears the same ratio to such deficiency as the net amount of items taken into account in computing the deficiency and allocable to the individual under sec_6015 bears to the net amount of all items taken into account in computing the deficiencydollar_figure sec_6015 provides sec_6015 allocation of deficiency --for purposes of subsection c -- in general --the portion of any deficiency on a joint_return allocated to an individual shall be the amount which bears the same ratio to such deficiency as the net amount of items taken into account in computing the continued each individual who elects the application of sec_6015 shall have the burden_of_proof with respect to establishing the portion of any deficiency allocable to such individual sec_6015 respondent argues that a portion of the far west drilling deductions is attributable to petitioner he relies upon petitioner’s testimony in a prior tax_court case that did not concern petitioner’s or mr hopkins’s investments in partnerships petitioner testified under cross-examination in that case isn’t it a fact mrs hopkins that during q you invested money into far west drilling a q a yes and wasn’t that at least dollar_figure yes in the instant case petitioner testified that she misunderstood the question that she understood the question to refer to both her and mr hopkins and that she personally invested nothing in far west drilling petitioner’s testimony is supported by correspondence from far west drilling and a note that mr hopkins signed in favor of the partnership which indicates that mr hopkins invested in far west drilling the record also contains continued deficiency and allocable to the individual under paragraph bears to the net amount of all items taken into account in computing the deficiency a schedule_k-1 partner’s share of income credits deductions etc for which reports mr hopkins as a partner in far west drilling we find that the far west drilling deductions are mr hopkins’s items on brief respondent argues that petitioner is not entitled to relief under sec_6015 for the disallowed casualty losses due to the fact that petitioner owned the residence thus the deficiencies arising from the disallowed casualty losses were due to her own item and she remains liable sec_6015 requires an allocation of the items giving rise to a deficiency to be made under sec_6015 generally any item giving rise to a deficiency on a joint_return shall be allocated to individuals filing the return in the same manner as it would have been allocated if the individuals had filed separate returns for the taxable_year sec_6015dollar_figure however sec_6015 provides an sec_6015 provides in part sec_6015 allocation of deficiency --for purposes of subsection c -- allocation of items giving rise to the deficiency --for purposes of this subsection-- a in general --except as provided in paragraphs and any item giving rise to a deficiency on a joint_return shall be allocated to individuals filing the return in continued exception to this general_rule where the other individual receives a tax_benefit from the item giving rise to a deficiency sec_6015 provides b exception where other spouse benefits --under rules prescribed by the secretary an item otherwise allocable to an individual under subparagraph a shall be allocated to the other individual filing the joint_return to the extent the item gave rise to a tax_benefit on the joint_return to the other individual sec_6015 provides an alternative method of allocating items giving rise to a deficiency between the individuals filing a joint_return regardless of whether the items would otherwise be allocable to one individual its purpose is to allocate liability between the individuals who filed a joint_return on the basis of the extent to which each individual received the tax_benefit of an erroneous deduction the language of sec_6015 does not limit its application to only one of the individuals who filed a joint_return it does not refer to items of a requesting or electing individual or to items of a nonrequesting or nonelecting individual it uses the terms an individual and the other individual filing the joint_return sec_6015 requires an allocation between individuals who filed a joint_return no matter who is requesting or electing continued the same manner as it would have been allocated if the individuals had filed separate returns for the taxable_year relief indeed under sec_6015 either or both of the individuals who filed a joint_return may elect reliefdollar_figure the senate report discussing the allocation rule in sec_6015 states items of loss or deduction are allocated to a spouse only to the extent that income attributable to the spouse was offset by the deduction or loss any remainder is allocated to the other spouse s rept pincite 1998_3_cb_537 the conference_report likewise states if the deficiency arises as a result of the denial of an item of deduction the amount of the deficiency allocated to the spouse to whom the item of deduction is allocated is limited to the amount of income allocated to such spouse that was offset by the deduction the remainder of the liability is allocated to the other spouse to reflect the fact that income allocated to that spouse was originally offset by a portion of the disallowed deduction h conf rept pincite 1998_3_cb_747 see mora v commissioner t c pincite the examples in the senate and conference reports illustrate the application of sec_6015 and divide the liability for a deficiency in proportion to the amount of income offset for each individual s rept supra pincite c b pincite h conf rept 19the final regulations issued under sec_6015 provide that relief may be available to both spouses filing the joint_return if each spouse is eligible for and elects the application of sec_6015 sec_1_6015-3 income_tax regs however only a requesting spouse may receive relief under sec_6015 a spouse who does not also elect relief under sec_6015 remains liable for the entire amount of the deficiency sec_1 d ii income_tax regs supra pincite c b pincite7 the following examples are provided in the conference_report for example a married couple files a joint_return with wage income of dollar_figure allocable to the wife and dollar_figure of self employment income allocable to the husband on examination a dollar_figure deduction allocated to the husband is disallowed resulting in a deficiency of dollar_figure under the provision the liability is allocated in proportion to the items giving rise to the deficiency since the only item giving rise to the deficiency is allocable to the husband and because he reported sufficient income to offset the item of deduction the entire deficiency is allocated to the husband and the wife has no liability with regard to the deficiency regardless of the ability of the irs to collect the deficiency from the husband if the joint_return had shown only dollar_figure instead of dollar_figure of self employment income for the husband the income offset limitation rule discussed above would apply in this case the disallowed dollar_figure deduction entirely offsets the dollar_figure of income of the husband and dollar_figure remains this remaining dollar_figure of the disallowed deduction offsets income of the wife the liability for the deficiency is therefore divided in proportion to the amount of income offset for each spouse in this example the husband is liable for of the deficiency dollar_figure and the wife is liable for the remaining dollar_figure h conf rept supra pincite c b pincite7 the allocation in the above example is made without reference to whether the husband the wife or both elect relief under sec_6015 on date the commissioner published final regulations under section dollar_figure sec_1_6015-3 income_tax regs of the final regulations provides in part allocation of erroneous items for purposes of allocating a deficiency under this section erroneous items are generally allocated to the spouses as if separate returns were filed subject_to the following four exceptions i benefit on the return --an erroneous item that would otherwise be allocated to the nonrequesting spouse is allocated to the requesting spouse to the extent that the requesting spouse received a tax_benefit on the joint_return while the above-quoted portion of the regulations does not specifically address the situation at issue where an erroneous item of deduction of the electing individual offsets income of the nonelecting individual it does not purport to preclude application of sec_6015 to that situation indeed the final regulations provide an example which supports our application of the alternative allocation method in sec_6015 in sec_1_6015-3 example income_tax regs both individuals who filed a joint_return elect relief under sec_6015 the erroneous deduction is initially h’s item however in the example only a portion of 20these regulations are applicable for all elections or requests for relief filed on or after date 120_tc_137 n sec_1_6015-9 income_tax regs petitioner’s election was filed on date before the effective date of the regulations h’s deduction is used to offset h’s income the remaining portion offsets w’s income the example limits w’s liability to the portion of the deficiency attributable to her income offset however with respect to h the regulations conclude that h’s election to be relieved of the portion of the deficiency attributable to w’s income offset would be invalid because h had actual knowledge of the erroneous items if the final regulations were intended to limit application of sec_6015 to erroneous deductions of a nonrequesting spouse sec_1_6015-3 example income_tax regs provides example requesting spouse receives a benefit on the joint_return from the nonrequesting spouse’s erroneous item i in h reports gross_income of dollar_figure from his business on schedule c and w reports dollar_figure of wage income on their joint federal_income_tax return h deducts dollar_figure of business_expenses resulting in a net_loss from his business of dollar_figure h and w divorce in date and on date a dollar_figure deficiency is assessed with respect to their joint_return w elects to allocate the deficiency the deficiency on the joint_return results from a disallowance of all of h’s dollar_figure of deductions ii since h used only dollar_figure of the disallowed deductions to offset gross_income from his business w benefitted from the other dollar_figure of the disallowed deductions used to offset her wage income therefore dollar_figure of the disallowed deductions are allocable to h and dollar_figure of the disallowed deductions are allocable to w w’s liability is limited to dollar_figure of dollar_figure if h also elected to allocate the deficiency h’s election to allocate the dollar_figure of the deficiency to w would be invalid because h had actual knowledge of the erroneous items emphasis added as respondent argues the regulations could have simply said that but example of the final regulations indicates that the alternative allocation method of sec_6015 is applied to both w and h even though the erroneous deduction is initially h’s item this is illustrated by the fact that h is denied relief under the actual knowledge exception the actual knowledge exception contained in sec_6015 denies relief only if the commissioner proves that the electing individual had actual knowledge of an item allocable to the other individualdollar_figure thus before the actual knowledge exception can be applied there must be an allocation of the items giving rise to a deficiency in example actual knowledge would have no relevance if the erroneous deduction was an item entirely allocable to h the example makes sense only if a portion of h’s item is reallocated to w pursuant to sec_6015 unless respondent establishes that petitioner had actual knowledge of the items giving rise to the deficiencies petitioner is entitled to relief to the extent the deficiencies are attributable to mr hopkins 22the actual knowledge exception contained in sec_6015 applies only in the case of any item giving rise to a deficiency or portion thereof which is not allocable to such individual under subsection d b actual knowledge exception does not apply to petitioner as previously indicated if the commissioner demonstrates that an individual making the election under sec_6015 had actual knowledge at the time such individual signed the return of any item giving rise to a deficiency or portion thereof which is not allocable to such individual under sec_6015 the election under sec_6015 will not apply to such deficiency or portion sec_6015 the commissioner must prove actual knowledge by a preponderance_of_the_evidence 116_tc_189 actual knowledge in the case of disallowed deductions consists of actual knowledge of the factual circumstances which made the item unallowable as a deduction 116_tc_198 actual knowledge of the tax laws or legal consequences of the operative facts are not required id 115_tc_183 affd 282_f3d_326 5th cir respondent concedes that he has not proven actual knowledge with respect to the far west drilling adjustments that are allocable to mr hopkins respondent makes no argument on brief with respect to petitioner’s actual knowledge of the nol carryforward deductions for and attributable to the casualty lossdollar_figure we hold that respondent has not proven that petitioner had actual knowledge of the factual circumstances which made the nol carryforward and the far west drilling deductions unallowable c conclusion we hold that petitioner is relieved of liability for deficiencies attributable to mr hopkins’s erroneous partnership deductions except for the portion if any of the erroneous partnership deductions that offsets her income we also hold that petitioner is liable for deficiencies attributable to her erroneous nol deductions to the extent the nol deductions may have offset her income and she is relieved of liability for any portion of the deficiencies attributable to the erroneous nol deductions which offset mr hopkins’s income most of the income for the years and was mr hopkins’s income however the record is not clear about some of the items of income such as interest we expect the parties to resolve this uncertainty as part of the rule computation 23the nol deductions were disallowed because of overstatements of the nol_carryback and carryforward deductions attributable to the casualty_loss a certified_public_accountant prepared the joint tax returns for and he testified that he dealt with mr hopkins and could not recall whether he discussed the tax returns with petitioner he did not testify regarding what petitioner did or did not know in signing the joint returns sec_6015 after we grant relief to petitioner under sec_6015 she may still have some liability for portions of the deficiencies for and that are allocable to her under sec_6015 we will therefore consider her eligibility for relief under sec_6015 under sec_6015 the secretary is authorized to grant equitable relief where the taxpayer is not entitled to relief under sec_6015 or c and taking into account all the facts and circumstances it is inequitable to hold the individual liable for any unpaid tax or any deficiency or any portion of either see cheshire v commissioner f 3d pincite we review for an abuse_of_discretion the commissioner’s decision not to grant equitable relief 114_tc_276 the far west drilling deductions and the overstated nol carryforward deductions greatly reduced petitioner and mr hopkins’s joint tax_liabilities in and in or about those years considerable amounts were spent to rebuild petitioner’s house pincite diablo drive petitioner was and still is the sole owner of that residence and she was the person who received the most comfort and benefit from the use of that residence before and after those years the reduced tax_liabilities for and enhanced petitioner’s ability to rebuild the residence petitioner did not present evidence regarding her inability to pay her reasonable basic living_expenses see sec_301_6343-1 proced admin regs or any other unique circumstances which might lead us to conclude that she will suffer economic hardship if after application of sec_6015 she remains jointly and severally liable for any remaining portions of the liabilities for and we hold that respondent did not abuse his discretion in deciding that it is not inequitable to hold petitioner jointly and severally liable for any remaining portions of the joint income_tax liabilities for and petitioner is not entitled to relief for those liabilities under sec_6015 b underpayments in and petitioner claims relief under sec_6015 c or f for her joint_and_several tax_liabilities for and subsections b and c of sec_6015 apply only in the case of an understatement_of_tax or any deficiency in tax and do not apply in the case of underpayments of taxes reported on joint tax returns sec_6015 and c see also 120_tc_62 118_tc_494 n we hold that petitioner is not entitled to relief under sec_6015 or c for her and tax_liabilities in determining an individual’s entitlement to relief under sec_6015 for an underpayment the commissioner considers the requesting spouse’s knowledge or reason to know that the liability would be unpaid at the time the return was signed as a factor weighing against relief revproc_2000_15 sec_4 b 2000_1_cb_447 petitioner has not shown to our satisfaction that she had no knowledge or reason to know that the taxes reported on the joint returns for and would not be paid the record indicates that she was involved in the preparation of the returns for those years indeed the joint tax_return contains an attached form_2688 application_for additional extension of time to file u s individual_income_tax_return dated date which states at present we are not able to meet more demands of the irs than we have already on hand we are physically ill and emotionally sick all of us are suffering from post traumatic stress syndroms in spite of our conditions we are currently dealing with the irs on a major scale our casualty_loss investigation our home and all of our belongings were destroyed by a huge mudslide we barely escaped with our lives we are financially devastated we can not do more please honor our request for an extension of this matter until the casualty_loss investigation is concluded thank you signed marianne hopkins petitioner has not established that she did not know or had no reason to know that the reported tax_liabilities on the and joint tax returns would be unpaid at the time she signed those joint tax returns see revproc_2000_15 sec_4 d c b pincite petitioner has not established that she will suffer economic hardship if relief is not granted on the record before us petitioner has not demonstrated that respondent’s failure to grant equitable relief for the unpaid and joint tax_liabilities was an abuse_of_discretion decision will be entered under rule


internal_revenue_service number release date index number -------------------------------- ---------------------- ----------------------------- re ----------------------------------------------------- department of the treasury washington dc person to contact ------------------------------ id no ------------- ------------------------------------------------------ telephone number ---------------------- refer reply to cc psi b04 - plr-120847-12 date november date grantor_trust trustee son son son son dear ------------------------ ------------------------ ---------------------------- ------------------------------------------------------------------------------ -------------------------- ------------------------------ ------------------------------ ----------------------------- -------------------------------- this letter responds to correspondence dated date and prior correspondence requesting rulings under sec_671 sec_2501 and sec_2514 of the internal_revenue_code the facts submitted and representations made are as follows on date grantor created an irrevocable_trust trust for the benefit of himself and his issue son son son and son and their issue a corporate trustee trustee is the sole trustee during grantor’s lifetime trustee must distribute such amounts of net_income and principal to grantor and his issue as directed by the distribution committee and or grantor as follows at any time trustee pursuant to the direction of a majority of the distribution committee members with the written consent of grantor shall distribute to grantor or grantor’s issue such amounts of the net_income or principal as directed by the distribution committee grantor’s consent power at any time trustee pursuant to the direction of all of the distribution committee members other than grantor shall distribute to grantor or grantor’s issue such amounts of the net_income or principal as directed by the distribution committee unanimous member power and at any time grantor in a nonfiduciary capacity may but shall not be required to distribute to any one or more of grantor’s issue such amounts of the principal including the whole thereof as grantor deems advisable to provide for the health maintenance support and education of grantor’s issue grantor’s sole power the distribution committee may direct that distributions be made equally or unequally plr-120847-12 and to or for the benefit of any one or more of the beneficiaries of trust to the exclusion of others any net_income not distributed by trustee will be accumulated and added to principal the distribution committee is initially composed of grantor and son sec_1 through the distribution committee will cease to exist upon grantor’s death trust provides that at all times at least two eligible individuals must be members of the distribution committee an eligible_individual means a member of the class consisting of the adult issue of grantor the parent of a minor issue of grantor and the legal guardian of a minor issue of grantor a vacancy on the distribution committee must be filled by the eldest of grantor’s adult issue other than any issue already serving as a member of the distribution committee or if none of grantor’s issue not already serving as a member of the distribution committee is an adult then the legal guardian of the eldest minor issue shall serve or if such minor issue does not have a legal guardian then the parent of such minor issue if at any time fewer than two eligible individuals are members of the committee the distribution committee shall be deemed not to exist trustee pursuant to the direction of the distribution committee shall at any time or times prior to or upon the distribution date distribute to the trustee or trustees of any one or more qualified trusts such amounts of the net_income and or principal of trust including the whole thereof as the distribution committee determines any such distribution shall be added to the principal of such qualified_trust and disposed of in accordance with the terms of such qualified_trust no distribution or transfer may be made to a qualified_trust unless made pursuant to the direction of the distribution committee upon grantor’s death the remaining balance of trust shall be distributed to or for the benefit of any person or persons or entity or entities other than grantor’s estate grantor’s creditors or the creditors of grantor’s estate as grantor may appoint by will in default of the exercise of this limited power to appoint grantor’s testamentary power the balance of trust will be distributed per stirpes to grantor’s then living issue in further trust if none of grantor’s issue is then living such balance shall be distributed per stirpes to the then living issue of grantor’s deceased father you have requested the following rulings during the period the distribution committee is serving no portion of the items of income deductions and credits against tax of trust shall be included in computing the taxable_income deductions and credits of grantor under sec_671 the contribution of property to trust by grantor is not a completed_gift subject_to federal gift_tax plr-120847-12 any distribution_of_property by the distribution committee from trust to grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee any distribution_of_property by the distribution committee from trust to any beneficiary of trust other than grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee ruling sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter in computing taxable_income or credits against the tax of an individual sec_672 provides that for purposes of subpart e the term adverse_party means any person having a substantial_beneficial_interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust sec_673 through specify the circumstances under which the grantor is treated as the owner of a portion of a_trust sec_673 provides that the grantor shall be treated as the owner of any portion of a_trust in which the grantor has a reversionary_interest in either the corpus or the income therefrom if as of the inception of that portion of the trust the value of such interest exceed sec_5 percent of the value of such portion sec_674 provides in general that the grantor shall be treated as the owner of any portion of a_trust in respect of which the beneficial_enjoyment of the corpus or the income therefrom is subject_to a power of disposition exercisable by the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to the power in sec_674 regardless of by whom held sec_674 describes a power to distribute corpus to or for a beneficiary provided that the power is limited by a reasonably_definite_standard which is set forth in the trust instrument sec_674 provides that sec_674 shall not apply to a power exercisable only by will other than a power in the grantor to appoint by will the income of the trust where the income is accumulated for such disposition by the grantor or may be so plr-120847-12 accumulated in the discretion of the grantor or a nonadverse_party or both without the approval or consent of any adverse_party under sec_675 and applicable regulations the grantor is treated as the owner of any portion of a_trust if under the terms of the trust agreement or circumstances attendant to its operation administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiary of the trust sec_676 provides that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under any other provision of part i subchapter_j chapter where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a nonadverse_party or both sec_677 provides in general that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under sec_674 whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a nonadverse_party or both may be distributed to the grantor or the grantor’s spouse held or accumulated for future distribution to the grantor or the grantor’s spouse or applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse sec_678 provides that a person other than the grantor shall be treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself or such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would within the principles of inclusive subject a grantor of a_trust to treatment as the owner thereof based solely on the facts submitted and representations made we conclude an examination of trust reveals none of the circumstances that would cause grantor to be treated as the owner of any portion of trust under sec_673 sec_674 sec_676 or sec_677 because none of the other distribution committee members has a power exercisable solely by himself to vest trust income or corpus in himself none shall be treated as the owner of any portion of the trust under sec_678 we further conclude that an examination of trust reveals none of the circumstances that would cause administrative controls to be considered exercisable primarily for the benefit of grantor under sec_675 thus the circumstances attendant on the operation of trust will determine whether grantor will be treated as the owner of any portion of trust under sec_675 this is a question of fact the determination of which must be deferred until the federal_income_tax returns of the parties involved have been examined by the office with responsibility for such examination ruling sec_2 and plr-120847-12 sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident sec_2511 provides that the tax imposed by sec_2501 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_2511-2 of the gift_tax regulations provides that a gift is complete 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 the donor no power to change its disposition whether for the donor's own benefit or for the benefit of another but if upon a transfer of property whether in trust or otherwise the donor reserves any power over its disposition the gift may be wholly incomplete or may be partially complete and partially incomplete depending upon all the facts in the particular case accordingly in every case of a transfer of property subject_to a reserved power the terms of the power must be examined and its scope determined sec_25_2511-2 also provides an example where the donor transfers property to another in trust to pay the income to the donor or accumulate it in the discretion of the trustee and the donor retains a testamentary power to appoint the remainder among the donor's descendants the regulation concludes that no portion of the transfer is a completed_gift however if the donor had not retained a testamentary_power_of_appointment but instead provided that the remainder should go to x or his heirs the entire transfer would be a completed_gift sec_25_2511-2 provides that a gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title in himself or herself a gift is also incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed_or_ascertainable_standard sec_25_2511-2 provides that a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom sec_25_2511-2 provides that the relinquishment or termination of a power to change the beneficiaries of transferred property occurring otherwise than by death of the donor is regarded as the event which completes the gift and causes the gift_tax to apply sec_25_2511-2 provides that if a donor transfers property to himself as trustee or to himself and some other person not possessing a substantial adverse_interest as trustees and retains no beneficial_interest in the trust property and no power over it except fiduciary powers the exercise or nonexercise of which is limited by plr-120847-12 a fixed_or_ascertainable_standard to change the beneficiaries of the transferred property the donor has made a completed_gift and the entire value of the transferred property is subject_to the gift_tax sec_25_2511-2 does not define substantial adverse_interest sec_25_2514-3 provides in part that a taker in default of appointment under a power has an interest that is adverse to an exercise of the power sec_25_2514-3 also provides that a coholder of a power is considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in 308_us_39 the taxpayer created a_trust for the benefit of named beneficiaries and reserved the power_to_revoke the trust in whole or in part and to designate new beneficiaries other than himself six years later in the taxpayer relinquished the power_to_revoke the trust but retained the right to change the beneficiaries in the taxpayer relinquished the right to change the beneficiaries the court stated that the taxpayer’s gift is not complete for purposes of the gift_tax when the donor has reserved the power to determine those others who would ultimately receive the property accordingly the court held that the taxpayer's gift was complete in when he relinquished his right to change the beneficiaries of the trust a grantor’s retention of a power to change the beneficial interests in a_trust causes the transfer to the trust to be incomplete for gift_tax purposes even though the power may be defeated by the actions of third parties 37_tc_897 see also 51_tc_352 in this case grantor retained the grantor’s consent power over the income and principal of trust under sec_25_2511-2 a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom the distribution committee members are not takers in default for purposes of sec_25_2514-3 they are merely coholders of the power the distribution committee ceases to exist upon the death of grantor under sec_25_2514-3 a coholder of a power is only considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in this case the distribution committee ceases to exist upon grantor’s death accordingly the distribution committee members do not have interests adverse to grantor under sec_25_2514-3 and for purposes of sec_25_2511-2 therefore grantor is considered as possessing the power to distribute income and principal to any beneficiary himself because he retained the grantor’s consent power the retention of this power causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes grantor also retained the grantor’s sole power over the principal of trust under sec_25_2511-2 a gift is incomplete if and to the extent that a reserved power gives the plr-120847-12 donor the power to name new beneficiaries or to change the interests of the beneficiaries in this case grantor’s sole power gives grantor the power to change the interests of the beneficiaries accordingly the retention of the grantor’s sole power causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes further grantor retained grantor’s testamentary power to appoint the property in trust to any person or persons or entity or entities other than grantor’s estate grantor’s creditors or the creditors of grantor’s estate under sec_25_2511-2 the retention of a testamentary power to appoint the remainder of a_trust is considered a retention of dominion and control_over the remainder accordingly the retention of this power causes the transfer of property to trust to be incomplete with respect to the remainder in trust for federal gift_tax purposes finally the distribution committee possesses the unanimous member power over income and principal this power is not a condition_precedent to grantor’s powers grantor’s powers over the income and principal are presently exercisable and not subject_to a condition_precedent grantor retains dominion and control_over the income and principal of trust until the distribution committee members exercise their unanimous member power accordingly this power does not cause the transfer of property to be complete for federal gift_tax purposes see 37_tc_897 51_tc_352 accordingly based on the facts submitted and the representations made we conclude that the contribution of property to trust by grantor is not a completed_gift subject_to federal gift_tax any distribution from trust to grantor is merely a return of grantor’s property therefore we conclude that any distribution_of_property by the distribution committee from trust to grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee further upon grantor’s death the fair_market_value of the property in trust is includible in grantor’s gross_estate for federal estate_tax purposes ruling sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power sec_2514 provides that the term general_power_of_appointment means a power which is exercisable in favor of the individual possessing the power possessor the possessor’s estate the possessor’s creditors or the creditors of the individual’s estate plr-120847-12 sec_25_2514-1 provides in part that a power_of_appointment is not a general power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the possessor or his creditors or the possessor’s estate or the creditors of the estate sec_2514 provides that in the case of a power_of_appointment created after date if the power is exercisable by the possessor only in conjunction with the creator of the power such power is not deemed a general_power_of_appointment sec_2514 provides that in the case of a power_of_appointment created after date if the power is not exercisable by the possessor except in conjunction with a person having a substantial interest in the property subject_to the power which is adverse to the exercise of the power in favor of the possessor such power shall not be deemed a general_power_of_appointment for purposes of sec_2514 a person who after the death of the possessor may be possessed of a power_of_appointment with respect to the property subject_to the possessor’s power which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the possessor’s power sec_25_2514-3 provides in part that a coholder of a power has no adverse_interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power however a coholder of a power is considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate thus for example if x y and z held a power jointly to appoint among a group of persons which includes themselves and if on the death of x the power will pass to y and z jointly then y and z are considered to have interests adverse to the exercise of the power in favor of x similarly if on y’s death the power will pass to z z is considered to have an interest adverse to the exercise of the power in favor of y the powers held by the distribution committee members under the grantor’s consent power are powers that are exercisable only in conjunction with the creator grantor accordingly under sec_2514 the distribution committee members do not possess general powers of appointment by virtue of possessing this power further the powers held by the distribution committee members under the unanimous member powers are not general powers of appointment as in the example in sec_25_2514-3 the distribution committee members have substantial adverse interests in the property subject_to this power accordingly any distribution made from trust to a beneficiary other than grantor pursuant to the exercise of these powers the grantor’s consent power and the unanimous member powers are not gifts by the distribution committee members instead such distributions are gifts by grantor plr-120847-12 based upon the facts submitted and representations made we conclude that any distribution_of_property by the distribution committee from trust to any beneficiary of trust other than grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee further we conclude that any distribution_of_property from trust to a beneficiary other than grantor will be a completed_gift by grantor except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code specifically we express no opinion on the trust provisions permitting trustee to distribute income or principal to trustees of other qualified trusts decanting in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours ______________________________ lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes cc


t c memo united_states tax_court estate of rosa b neff deceased chris hunt executor petitioner v commissioner of internal revenue respondent docket no filed date vernon d hyde for petitioner elizabeth downs for respondent memorandum findings_of_fact and opinion vasquez judge respondent determined a deficiency in petitioner's federal estate_tax in the amount of dollar_figure all section references are to the internal_revenue_code in effect as of the date of decedent's death and all rule references are to the tax_court rules_of_practice and procedure the sole issue for decision is whether transfers of decedent's property shortly before her death were incomplete gifts the value of which should be included in her estate findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time the petition was filed the legal residence of the executor was keyes oklahoma rosa b neff decedent died on date at the age of decedent was a resident of keyes oklahoma most of her adult life and at the time of her death decedent executed her last will and testament on date a federal estate_tax_return was filed on behalf of petitioner on date the federal estate_tax_return was signed by chris hunt the estate's executor on date a federal gift_tax_return for the tax_year was filed on behalf of the estate by chris hunt petitioner claims that respondent erred in her determination that a charitable_contribution to willowbar cemetery association in the amount of dollar_figure did not qualify as a deduction petitioner did not present any evidence at trial regarding this issue nor did it argue this point on brief we cannot be sure that petitioner intended to abandon the issue but in any case respondent's determination with respect to this issue must be sustained as petitioner has not met its burden_of_proof on this matter the federal gift_tax_return showed gifts to relatives of decedent made on august or or date these gifts included separate annuities series_e_bonds and dollar_figure in cash with a total reported value of dollar_figure the estate claimed nineteen dollar_figure exclusions under sec_2503 in the total amount of dollar_figure resulting in a net taxable gift of dollar_figure after the gifts in issue were made the total gross_estate as reported on the estate_tax_return exceeded dollar_figure rosa neff purchased the separate annuities in from delta life and annuity co delta life the annuitants were decedent's nephews and nieces a sister-in-law and a former brother-in-law chris hunt on each of the annuities decedent was listed as the owner and the annuitant was listed as the contingent owner the contingent owner would become the owner at the death of decedent jess murphy was the selling agent on behalf of delta life with respect to the annuities the annuities were transferred to their respective annuitants on or about date according to the schedules attached to the federal estate and gift_tax returns the three series_e_bonds were transferred on date the dollar_figure in cash was transferred on date these gifts of annuities bonds and cash were executed by chris hunt melvin hammontree and mildred williams who at the time jointly held a durable_power_of_attorney on behalf of decedent mr hunt mr hammontree and ms williams were each recipients of one of the annuities in issue the durable_power_of_attorney contained broad grants of authority which stated inter alia my attorneys-in-fact shall have all of the powers discretions elections and authorities granted by statute common_law and under any rule_of court my attorneys-in-fact may sell convey lease exchange mortgage pledge release hypothecate or otherwise deal with dispose_of exchange or encumber any of my property either real or personal my attorneys-in-fact may act in all matters with respect to all powers described herein as freely fully and effectively as i could or might do personally if present and of sound and disposing mind the power_of_attorney did not however contain an explicit grant of gift-giving authority decedent executed the durable_power_of_attorney by her own hand on date and her signature was notarized prior to initiating the transfer of the annuities mr murphy consulted the attorney who had drafted the durable_power_of_attorney regarding whether the attorneys in fact had the power to make the transfers under the durable_power_of_attorney mr murphy was told that the attorneys in fact did have the power to make such transfers the rosa neff living_trust the trust a revocable_trust was created on date by mr hunt mr hammontree and ms williams acting as decedent's attorneys in fact decedent did not personally sign the trust documents they were executed by her attorneys in fact on date decedent's property was distributed according to the provisions of the trust rather than the provisions of decedent's will during the period august through date decedent was hospitalized due to a fall which resulted in a broken hip on date decedent returned to her home where she was under the care of home health care nurses and family members until her death on date decedent died of acute heart failure as a result of chronic cardiovascular hypertensive disease and bronchitis from which she had suffered for approximately years decedent's death was not unexpected rosa neff did not file any federal gift_tax returns during the 10-year period preceding her death in the only gifts made by rosa neff to relatives during this 10-year period which can be shown by documents bearing her signature are checks of small amounts with respect to which gift_tax returns were not required to be filed decedent also made several gifts of bonds and certificates of deposit during the 10-year period preceding her death the amounts of which did not require the filing of federal gift_tax returns decedent was mentally competent to manage her affairs at all times decedent was concerned about retaining control of her property at the time that she was considering executing a power_of_attorney decedent was present when the power_of_attorney was discussed with the attorney who drafted the document decedent was capable of signing her name in spite of failing eyesight if directed where to sign prior to her injury and hospitalization decedent informed several individuals that she was considering making a gift of the annuities sometime during the summer of decedent told betty aaron her accountant that she was considering giving the annuities to the respective annuitants presently rather than after her death decedent also talked to mr murphy about the possibility of giving the annuities to the annuitants prior to meeting with the attorney regarding the drafting of a durable_power_of_attorney decedent indicated to chris hunt that she wanted to give the annuities to the annuitants prior to her last illness decedent cashed in two delta life_annuities whose contingent owners had died these annuities are not included in the in issue at the time that decedent cashed in the two annuities she told mr murphy that she intended to pay the taxes resulting from the transaction and give a portion of the proceeds of the annuities in the amount of the principal or face_amount of dollar_figure each to the heirs of the deceased annuitants contingent owners ultimate finding of fact decedent intended to make a present inter_vivos gift of the annuities in issue to the respective recipients opinion sec_2038 provides that a decedent's gross_estate includes any interest in property transferred by the decedent for less than full consideration if at the time of the decedent's death the transferred interest was subject_to the decedent's power_to_revoke alter amend_or_terminate sec_2033 provides that the gross_estate includes the value of all property to the extent that the decedent had an interest in it at the time of her death state law determines the extent of a decedent's interest in property 287_us_103 we will follow the decisions of the highest state court but in the absence of a decision by that court we may look to the state's lower courts' rulings and holdings 387_us_456 respondent contends that because the durable_power_of_attorney did not specifically grant the attorneys in fact the authority to make gifts of decedent's property such gifts were incomplete invalid or revocable by decedent and thus includable in decedent's gross_estate we disagree the elements of a completed_gift under oklahoma law are intention to give complete delivery and acceptance by the donee in re estate of carano p 2d okla mcspadden v mahoney p 2d okla in order to establish an inter_vivos gift after the death of the alleged donor the evidence must be clear explicit and convincing in support of every element necessary to constitute a gift estate of stinchcomb v stinchcomb p 2d okla there does not seem to be any dispute that the annuities were delivered and accepted by the donees thus if petitioner can prove donative_intent the transfers will be considered to be completed gifts which are not includable in decedent's gross_estate respondent claims that the required donative_intent cannot be supplied by a written durable_power_of_attorney absent an express written gift authorization petitioner contends that the required donative_intent is present because decedent authorized her attorneys in fact to make the gifts because decedent ratified the gifts after the transfers and because a written durable_power_of_attorney even absent an express gift authorization is adequate to allow decedent's attorneys in fact to make effective inter_vivos gifts in order to determine whether the requisite donative_intent existed we must first look to the record as a whole to determine whether decedent possessed the requisite intent taking into account the authority granted to decedent's attorneys in fact see estate of goldman v commissioner tcmemo_1996_29 decedent's intent to make gifts the transfers of property which are in issue in this case were executed shortly before decedent's death by decedent's attorneys in fact chris hunt testified that in the summer of decedent specifically instructed him and melvin hammontree to transfer the annuities in question to the respective annuitants we found mr hunt's testimony to be credible and supported by the record as a whole shortly before the gifts were made some of decedent's nephews became sick and they needed money at that time decedent decided to give all of the annuities to the annuitants mr hunt testified that after he completed the transfers and so informed decedent she was well pleased that the transfers were taken care of the record provides additional reasons to believe mr hunt's testimony the annuities were transferred to the annuitants who had been chosen by decedent when she originally purchased the annuities these annuitants would have become the owners of their respective annuities upon the death of decedent jess murphy testified that when contingent owners of two annuities not in issue predeceased decedent it was decedent's desire that a portion of the funds from the annuities go to the heirs of the contingent owners mr murphy described decedent as generous in we focus our inquiry on the annuities in question because the parties have so focused their arguments the annuities in issue are each valued at dollar_figure and that is the amount of the annual exclusions in question if we find that the transfers of the annuities were valid inter_vivos gifts we need not discuss the validity of the other transfers presented here giving additionally betty aaron decedent's accountant since approximately testified that decedent had talked to her in the summer of about transferring the annuities in question to the annuitants at that time rather than waiting until her death mr murphy and ms aaron were not contingent owners of any of the annuities lastly even after the transfers in question decedent was left with over dollar_figure in assets cf in re estate of rolater p 2d okla ct app involving circumstances which discourage the image of a woman capable of suddenly initiating a program aimed at divesting herself of over percent of her estate by giving it to her brother we are cognizant that some states have a flat prohibition against attorneys in fact making gifts to themselves or to third parties absent express written authorization see 889_fsupp_369 d neb fender v fender s e 2d s c oklahoma however has not adopted such a rule we believe that if the oklahoma supreme court were to rule on this issue it would look for clear explicit and convincing evidence of intent estate of stinchcomb v stinchcomb supra pincite in in re estate of rolater supra pincite when presented with an issue similar to that found here the court_of_appeals of oklahoma found lacking any hard evidence or cogent circumstances that the decedent intended for her attorney in fact to make gifts those circumstances however are not lacking in the instant case given the facts and circumstances of this case we conclude that under oklahoma law the transfers in question would be valid gifts this is consistent with the way the court_of_appeals for the fourth circuit resolved a similar issue in 36_f3d_332 4th cir affg tcmemo_1993_41 in that case the court found that a durable_power_of_attorney could impliedly include the authority to make irrevocable gifts during the principal's life if the surrounding circumstances indicated such an intent prior to estate of ridenour the virginia legislature passed a statute which specifically provides for an implied gift power in certain circumstances va code ann sec michie supp the court in estate of ridenour v commissioner supra pincite stated that the statute expanded and clarified the legal standard applied in 948_f2d_895 4th cir revg tcmemo_1989_511 the court went on to say that estate of casey stands for the proposition that to infer an implied gift power the court must look to the intent of the person granting power_of_attorney estate of ridenour v commissioner supra pincite the power_of_attorney which decedent executed does not restrict the attorneys in fact from making gifts the power_of_attorney which decedent executed authorized her attorneys in fact to convey any of my property either real or personal the power_of_attorney authorizes the attorneys in fact to act in all matters as freely fully and effectively as i could or might do personally if present this language evidences an intent to permit the attorneys in fact to make gifts of decedent's property see taylor v vernon a 2d pa super ct finding similar language evidenced an intent to allow the attorney in fact to make gifts of the principal's property cf whitford v gaskill s e 2d n c finding that the power to transfer real_estate authorized the attorney in fact to make gifts of the property in dispute respondent argues that this court should not allow decedent's intent to make a gift or decedent's ratification of a gift to be proved by the oral testimony of interested parties namely mr hunt respondent points to various factors which she contends show that decedent did not intend to make present inter_vivos gifts at the time of the transfers we disagree as we have already found petitioner's witnesses were credible and their testimony was supported by the record see 58_tc_560 basing analysis upon evaluation of the entire record and the credibility of witnesses cf estate of goldman v commissioner tcmemo_1996_29 in determining the intent of decedent we have looked at the facts and circumstances surrounding the parties their relationship and the direct expressions of the decedent foster v rose p 2d okla based on the record as a whole we conclude that decedent acting through her attorneys in fact made completed inter_vivos gifts of the annuities in question therefore the value of the gifts is not includable in decedent's gross_estate to reflect the foregoing decision will be entered under rule


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 4-plr-117338-00 date may re legend settlor son son son spouse spouse daughter trust trustee date date court year dear this is in response to your letter of date and prior correspondence in which you request a ruling on the application of the generation-skipping_transfer gst tax provisions of chapter of the internal_revenue_code to the proposed modification to trust decedent died testate on date survived by son son and son article iii of decedent’s will provides that all the residue of decedent’s estate is bequeathed to trustee as trustee of a testamentary_trust trust article iii paragraph provides that trustee is to pay all the net_income of trust to decedent’s descendants per stripes article iii paragraph provides that if a male descendant dies leaving a surviving widow a portion of the net_income may be paid to the widow until her death or until the termination of trust whichever occurs first trustee may in its sole discretion distribute up to one-half of the income to a widow the term widow does not plr-117338-00 include a divorced wife of any beneficiary article iii paragraph provides that as to any beneficiary of trust other than son son or son or the widows of decedent’s descendants who has attained forty-five years of age trustee may pay over at any time after the death of his or her predecessor in interest all or a part of a beneficiary’s share of trust principal together with any undistributed or accumulated net_income held for the benefit of such beneficiary if a withdrawal of principal occurs trustee must make adjustments in the proportion of the net_income thereafter accruing to such beneficiary no trustee who is a beneficiary under trust may participate in any_action taken by trustees with respect to any distribution in favor of such beneficiary article iii paragraph provides that unless sooner terminated trust shall cease and terminate upon the expiration of a period of twenty years after the death of the last to survive of son son and son and their children living at the time of settlor’s death on termination trustee will divide and distribute the entire principal of trust to the beneficiaries who are then entitled to the current net_income in the same proportions to which they are entitled to such current income provided that should any widow of a descendant be surviving the principal that would otherwise be distributed to any such widow will be distributed to the persons who would be entitled to the principal had the widow been deceased at the time of termination of trust trustee is further directed to distribute any undistributed or accumulated net_income to the beneficiary for whom such undistributed_net_income is then held article iii paragraph provides that until any beneficiary attains the age of twenty-one or in the event that trustee deems any beneficiary unable to apply to his or her best interest any payments under trust trustee may withhold such portion of the net_income and either accumulate it for the beneficiary or expend it for the proper care support maintenance and education of a beneficiary article iii paragraph provides that upon the death of a beneficiary all unpaid net_income which has accrued or been accumulated for the benefit of a beneficiary shall be administered for the benefit of his or her successors and shall not be considered part of the estate of the deceased beneficiary article iii paragraph provides that if the income of trust is insufficient to provide the beneficiary with suitable support education and maintenance then trustee may expend such part of the principal as is proportionate to the share of the current income that beneficiary is entitled to receive upon any encroachment on the principal trustee will make an adjustment to that beneficiary’s share of income so that no other beneficiary’s interest will be prejudiced no trustee who is a beneficiary may participate in any_action taken by trustee with respect to encroachment on principal son died in year survived by spouse and four children after son 1's plr-117338-00 death a dispute arose regarding whether one of these children daughter was a descendant of son son had been married twice during his life first to spouse and subsequently to spouse daughter claimed to be a descendant of son through his marriage to spouse spouse and other descendants of son claimed that she is not a descendant or issue of son and is not entitled to a share of trust litigation ensued the parties then entered into settlement negotiations with the assistance of a mediator the parties entered into a settlement agreement under the agreement daughter and her descendants will be declared beneficiaries of trust and will be entitled to receive income and principal distributions from trust under the terms of trust however daughter and her descendant’s right to receive trust income and principal distributions will be limited to percent of the share in trust they would have been entitled to as son 1's daughter and descendants daughter’s and daughter’s descendant’s share of trust will be partitioned and held in a separate trust daughter will be entitled to choose her own trustees to manage the partitioned trust the partitioned trust will be administered under the identical terms of trust except that daughter and her descendants will be the only beneficiaries of the share none of daughter’s share will be diverted to other beneficiaries spouse and the other descendants of son the partitioned trust will terminate at the same time as trust on date court approved the settlement agreement it is represented that trust was created and irrevocable before date and that no additions have been made to trust since date you have requested the following rulings trust is exempt from application of the generation-skippping transfer_tax the partition of trust will not result in a generation-skipping_transfer under chapter following the partition contemplated by the settlement agreement trust and the partitioned trust will be exempt from chapter no distributions from or termination of trust or the partitioned trust will be subject_to chapter sec_2601 imposes a tax on every generation-skipping_transfer section b a of the act and sec_26_2601-1 of the generation- skipping transfer_tax regulations provide that the generation-skipping_transfer_tax shall not apply to any generation-skipping_transfer under a_trust that was irrevocable on plr-117338-00 date but only to the extent that such transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added sec_26_2601-1 provides that any trust in existence on date will be considered an irrevocable_trust except as provided in sec_26_2601-1 b or c relating to property includible in the grantor’s gross_estate under sec_2038 and sec_2042 sec_26_2601-1 provides that if an addition is made after date to an irrevocable_trust which is excluded from the application of chapter by b a of the act a pro_rata portion of subsequent distributions from and terminations of interests in property held in the trust is subject_to the provisions of chapter sec_26_2601-1 provides rules for determining under what circumstances a modification judicial construction settlement agreement or trustee action with respect to a_trust that is otherwise exempt from gst tax under sec_26 b and will not cause the trust to lose its exempt status under sec_26_2601-1 a court approved settlement of a bona_fide issue regarding the administration of a_trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject_to the provisions of chapter if - the settlement is the product of arm’s length negotiations and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing issues resolved in the settlement a settlement that results in a compromise between the positions of the litigating parties and reflects the parties’ assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes in this case trust was created and irrevocable before date also it is represented that no additions have been made to trust since date consequently trust is currently exempt from gst tax further after reviewing the facts presented and applicable law we believe the settlement satisfies the requirements of sec_26_2601-1 accordingly based on the representations made we conclude as follows trust is currently exempt from application of the generation-skipping_transfer_tax plr-117338-00 the partition of trust pursuant to the settlement agreement will not result in a generation-skipping_transfer under chapter the partition of trust pursuant to the settlement agreement will not cause trust or the partitioned trust to lose exempt status for generation-skipping_transfer_tax purposes no distribution from or termination of trust or the partitioned trust will be subject_to chapter in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent enclosure copy for purposes sincerely yours george masnik chief branch office of the associate chief_counsel passthroughs and special industries


internal_revenue_service number release date index numbers -------------------------------- ------------------------------------------------------------ - ------------------------------ ---------------- -------------------------- --------------------------- ------------- 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 b3 plr-103124-18 date date x --------------------------------------------------------------------------------------------------- ----------------------- legend country ----------------------- date ---------------------- dear ----------------- this letter responds to a letter dated date submitted on behalf of x by its authorized representatives requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a partnership for federal tax purposes facts the information submitted discloses that x was organized on date under the laws of country x intended to be classified as a partnership effective date however due to inadvertence form_8832 entity classification election was not timely filed law and analysis plr-103124-18 sec_301_7701-3 provides in part 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 as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301 b unless the entity 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 in part that for purposes of sec_301 b i a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301 c i will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed if an election specifies an effective date more than days prior to the date on which the election is filed it will be effective days prior to the date it was filed sec_301_9100-1 provides that the commissioner in exercising the commissioner’s discretion 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 not more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code 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_9100-2 provides the standards the commissioner will use to determine whether to grant an automatic_extension of time for making certain elections plr-103124-18 sec_301_9100-3 provides the guidelines for granting extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301 a provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 as a result we grant x an extension of time of one hundred twenty days from the date of this letter to file form_8832 with the appropriate service_center to elect to be classified as a partnership effective date a copy of this letter should be attached to the form_8832 this ruling is contingent on x and the owners of x filing within days of this letter all required returns for all open years consistent with the requested relief these returns may include but are not limited to the following forms i form_5471 information_return of u s persons with respect to foreign_corporations ii form_8865 return of u s persons with respect to foreign_partnerships and iii form_8858 return of u s persons with respect to disregarded entities such that these forms reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code in addition sec_301_9100-1 provides that the granting of an extension of time for making an election is not a determination that the taxpayer is otherwise eligible to make the election in addition we express no opinion concerning the assessment of any interest additions to tax additional_amounts or penalties for failure_to_file a timely income_tax or information_return with respect to any taxable_year that may be affected by this ruling for example we express no opinion as to whether a taxpayer is entitled to relief from any penalty on the basis that the taxpayer had reasonable_cause for failure_to_file timely any income_tax or information returns we are directing the ruling only to the taxpayer who 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 we are sending a copy of this letter to x’s authorized representatives plr-103124-18 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely associate chief_counsel passthroughs special industries by _______________________ caroline e hay assistant to the branch chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc