internal_revenue_service number release date index number --------------------------------- ------------------------------------------------------ ------------------------ ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------- id no ----------------- telephone number --------------------- refer reply to cc psi b01 plr-139682-11 date date legend x ------------------------------------------ -------------------------------------------------------- d1 d2 ----------------------- ---------------------- state ------------------- dear -------------- this responds to a letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated on d1 under the laws of state x intended to be treated as an s_corporation for federal tax purposes effective d2 but the proper election was not timely filed law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s plr-139682-11 corporation for the year in which the election is made if the election is made after the first two and one-half months of a corporation's taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no election is made pursuant to sec_1362 or if made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such election as timely made for such taxable_year and effective as of the first day of that year x did not file a timely election to be treated as an s_corporation under sec_1362 effective d2 x has however established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d2 if within days from the date of this letter x submits a properly completed form_2553 with a copy of this letter attached to the appropriate service_center except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied concerning whether x otherwise qualifies as an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer’s authorized representative sincerely joy spies joy spies acting senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes


internal_revenue_service number release date index number ---------------------------------------------------- ----------------------------------------- --------------------------------------------- ---------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ----------------- telephone number --------------------- refer reply to cc psi b03 plr-152307-12 date may x y ----------------------------------------------------------------------------------------------------------------------------- ----------------------------------------- state ------------- dear --------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representatives requesting a ruling concerning the qualifying_income exception to the publicly_traded_partnership rules of sec_7704 of the internal_revenue_code facts x is a limited_liability_company organized under the laws of state x intends to form y under the laws of state and cause y to become a publicly_traded_partnership within the meaning of sec_7704 x represents that y will earn income by providing services to oil and natural_gas producers critical to the producers’ ability to retrieve otherwise inaccessible oil_and_gas reserves specifically y will earn income by providing essential fluid solids and other oilfield waste handling treatment and disposal services necessary for its customers’ use of the fracturing technique of oil and natural_gas extraction x intends that y provide such services through affiliated operating limited_partnerships limited_liability companies or disregarded entities fracturing is a technique by which fluids are pumped into an oil or gas well at high pressure to fracture geologic formations and open up pathways for the oil or gas to flow up for extraction y will earn fees from the supply of water chemicals and other solutions used in the fracturing process y will provide transportation services for those plr-152307-12 fluids via trucks tanks and in some cases pipelines y also will provide heating services with respect to such fluids using superheaters and hot oilers in addition y will treat and dispose_of completion fluids drilling muds drill cuttings contaminated soil tank bottoms produced water pit water fracturing fluid and flowback which result from the use of the fracturing process in compliance with environmental regulations y will also remove and treat fluids used to wash and remove debris from containers trucks and equipment used by the oil_and_gas producers in addition to its provision of fluids and waste removal treatment recycling and disposal services y will earn income from hydrocarbon remediation services y will remove such hydrocarbons from drilling waste at its treatment facilities during the waste treatment and disposal process y will then sell such reclaimed hydrocarbons on relevant markets x represents that y does not intend to market reclaimed hydrocarbons to end users at the retail level and to the extent that y earns income from the marketing of reclaimed hydrocarbons to end-users at the retail level y will treat such income as non-qualifying income under sec_7704 x also represents that y will provide what it refers to as further miscellaneous services related to and in support of its primary fluid handling business y will earn income from the provision of refined fuels such as diesel to oil and natural_gas producers for use in their exploration and production activities x represents that y does not intend to provide refined fuels to end-users at the retail level and to the extent that y earns income from the provision of refined fuels to end users at the retail level y will treat such income as non-qualifying income under sec_7704 furthermore to support this business y will design own manage and operate rail and rail transportation assets y also will design develop own operate license and manage communications technology which will provide remote monitoring capabilities to oil and natural_gas producers and early detection of problems with the pumps and recovery facilities used in the production activities finally because oil and natural_gas companies as well as oil_and_gas pipeline operators are required_by_law at both the federal and the state level to inspect their oil_and_gas pipelines and gathering systems on a regular basis to protect the environment and ensure public safety y will provide infrastructure inspection services law sec_7704 provides that a publicly_traded_partnership shall be treated as a corporation sec_7704 provides that the term publicly_traded_partnership means any partnership if interests in that partnership are traded on an established_securities_market or interest in that partnership are readily_tradable on a secondary market or substantial equivalent thereof plr-152307-12 sec_7704 provides that sec_7701 shall not apply to any publicly_traded_partnership for any taxable_year if such partnership met the gross_income requirements of sec_7704 for such taxable_year and each preceding_taxable_year beginning after date during which the partnership or any predecessor was in existence sec_7704 explains that a partnership meets the gross_income requirements of sec_7704 for any taxable_year if percent or more of the gross_income of such partnership for such taxable_year is qualifying_income sec_7704 provides that the term qualifying_income includes income or gains derived from the exploration development mining or production processing refining transportation including pipelines transporting gas oil or products thereof or the marketing of any mineral_or_natural_resource including fertilizer geothermal_energy or timber the conference_report accompanying the omnibus budget reconciliation act of in discussing the type of qualifying_income described in sec_7704 provides the following income and gains from certain activities with respect to minerals or natural_resources are treated as passive-type income specifically natural_resources include fertilizer geothermal_energy and timber as well as oil gas or products thereof for this purpose oil gas or products thereof means gasoline kerosene number fuel oil refined lubricating oils diesel_fuel methane butane propane and similar products which are recovered from petroleum refineries or oil field facilities oil gas or products thereof are not intended to encompass oil or gas products that are produced by additional processing beyond that of petroleum refineries or field facilities such as plastics or similar petroleum derivatives income of certain partnerships whose exclusive activities are transportation and marketing activities is not treated as passive-type income for example the income of a partnership whose exclusive activity is transporting refined petroleum products by pipeline is intended to be treated as passive-type income but the income of a partnership whose exclusive activities are transporting refined petroleum products by truck or retail marketing with respect to refined petroleum products eg gas station operations is not intended to be treated as passive type income h_r rep no 100th cong 1st sess c b the senate report accompanying the technical_and_miscellaneous_revenue_act_of_1988 provides the following plr-152307-12 with respect to marketing of minerals and natural_resources eg oil_and_gas and products thereof the committee intends that qualifying_income be income from marketing at the level of exploration development processing or refining oil_and_gas by contrast income from marketing minerals and natural_resources to end users at the retail level is not intended to be qualifying_income for example income from retail marketing with respect to refined petroleum products eg gas station operations is not intended to be treated as qualifying_income s rep no 100th cong 2d sess conclusion based solely on the facts presented and representations made we conclude that y’s gross_income from the removal treatment recycling and disposal of fracturing flowback produced water and other residual waste products generated by oil_and_gas wells during the fracturing process is qualifying_income within the meaning of sec_7704 we further conclude that the income derived from the marketing and distribution of salvaged hydrocarbons excluding income earned from marketing minerals and natural_resources to end users at the retail level will also constitute qualifying_income within the meaning of sec_7704 finally we conclude that to the extent the miscellaneous services described above are provided to customers engaged in drilling exploration and production transportation or mining of a mineral_or_natural_resource for use in those activities excluding income earned from providing such services with respect to end users at the retail level y’s gross_income from the provision of those services is qualifying_income within the meaning of sec_7704 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed as to whether y meets the percent gross_income requirement in sec_7704 to the extent that y’s gross_income from its activities described above are not attributable to its customer’s sec_7704 activities ie to activities of the customer such as drilling exploration and production transportation or mining of a mineral or natural_resources that would generally be expected to produce gross_income that is qualifying under sec_7704 regardless of the customer’s federal tax classification this letter will not apply in determining whether the income that may be derived by x from such other uses constitutes qualifying_income under sec_7704 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-152307-12 in accordance with the power_of_attorney on file with this office we are sending copies of this letter to your authorized representatives 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 sincerely s richard t probst senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number ---------------------------------- -------------------- -------------------------------- ------------------------------------------------------------ -------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ---------------- telephone number -------------------- refer reply to cc corp b05 plr-122144-18 date date legend corporation ------------------------------------------ ----------------------------------------------------- -------------------------------------------- shareholder ---------------------------- -------------------------------------------- state c ------------- date ------------------- d e f g h i ----- ------------- ----- ---------- ------- -------- j ------------- - k ------- plr-122144-18 amount -------------------- dear ---------------- this letter responds to your authorized representative’s letter dated date requesting a ruling under sec_302 of the internal_revenue_code the code the information provided in that request and in subsequent correspondences is summarized below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the ruling_request verification of the facts representations and other information may be required as part of the audit process facts corporation is a privately held state c_corporation corporation has two classes of common_stock outstanding class a and class b the two classes of common_stock are identical except that the class a shares are voting_stock and the class b shares are nonvoting_stock immediately prior to date shareholder directly owned d shares of class a common_stock and e shares of class b common_stock shareholder does not own any stock of corporation by attribution pursuant to sec_318 on date corporation redeemed f shares of class a common_stock and g shares of class b common_stock together the redeemed stock from shareholder for amount the redemption the redemption reduced shareholder’s class a stock ownership of corporation from h to i and shareholder’s class b stock ownership from j to k representations a except as noted in the submission there are no outstanding options or warrants to purchase corporation stock nor are there any outstanding debentures or other obligations that are convertible into corporation stock or would be considered corporation stock b corporation has not and will not distribute notes or other obligations to the shareholder c no shareholder of corporation has been or will be obligated to purchase any of the redeemed stock d the redemption described in this ruling_request is an isolated transaction and is not related to any other past or future transaction plr-122144-18 e none of the redeemed stock is sec_306 stock within the meaning of sec_306 nor was the redeemed stock received in exchange for preferred_stock f there are no declared but unpaid dividends or funds set apart for dividends on any of the redeemed stock g at the time of the exchange the fair_market_value of the consideration received by the shareholder was approximately equal to the fair_market_value of corporation’s stock exchanged therefor h the price paid for the redeemed stock did not result in a loss with respect to those shares of stock ruling based solely on the information submitted and the representations made the redemption will qualify as a redemption that is not essentially_equivalent_to_a_dividend within the meaning of sec_302 the amount distributed will be treated as a distribution in full payment in exchange for the class a common and class b common shares redeemed as provided in sec_302 see 397_us_301 revrul_75_502 1975_2_cb_111 revrul_75_512 1975_2_cb_112 revrul_76_385 1976_2_cb_92 revrul_77_426 1977_2_cb_87 caveats except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter plr-122144-18 procedural statements this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling plr-122144-18 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely maurice m labrie maurice m labrie assistant to the branch chief branch office of associate chief_counsel corporate


internal_revenue_service number release date index number ------------------------------- ------------------- -------------------------------- -------------------------- in re ---------------------------- - - department of the treasury washington dc person to contact -------------------------- id no ---------------- ---------------------------------------------------- telephone number --------------------- refer reply to cc intl - plr-168293-02 date october legend ---------------- ---------------- ------------------------- ----------------------------- --------------------------- taxpayer -------------------------------------------------------------------------- foreign_country foreign city date one individual a cpa firm dear ------------ this replies to a letter dated date in which taxpayer requests an extension of time under sec_301_9100-3 to submit a ruling_request under sec_877 as provided by section iv of notice_97_19 as modified by notice_98_34 the information submitted for consideration is substantially as set forth below the ruling contained in this letter is predicated upon facts and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by taxpayer this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as a part of the audit process --------------------------------------------------- in re plr-168293-02 taxpayer is a citizen and resident of foreign_country taxpayer surrendered his green card at the american consulate in foreign city on date one individual a was employed by cpa firm during the tax_year at issue and never worked with a client to whom sec_877 applied the affidavit of individual a and the facts submitted indicate that individual a was not aware of the existence of notice_97_19 and the relief available under the notice when advising taxpayer about sec_877 at the time taxpayer was surrendering his green card sec_301 -1 b provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the standards set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides that requests for relief subject_to this section 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 in the present situation section iv of notice_97_19 fixes the time for an individual to submit a ruling_request under sec_877 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the standards set forth in sec_301_9100-3 based on the facts and circumstances of this case we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time until days from the date of this ruling letter to submit a ruling_request under sec_877 as provided by section iv of notice_97_19 as modified by notice_98_34 no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented specifically no opinion is expressed as to the tax consequences under sec_877 in re plr-168293-02 a copy of this ruling letter should be associated with the ruling_request filed pursuant to notice_97_19 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to taxpayer and the other representative sincerely associate chief_counsel international by s allen goldstein allen goldstein reviewer enclosure copy for purposes


t c summary opinion united_states tax_court george a and hilda quintero petitioners v commissioner of internal revenue respondent docket no 8364-o0s filed date larry fedro for petitioners john t lortie for respondent carluzzo special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for rule references are to the tax_court rules_of_practice and procedure the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority - - respondent determined an dollar_figure deficiency in and a dollar_figure penalty under sec_6662 with respect to petitioners’ federal_income_tax the court must decide the amount of compensation george a quintero earned and received from aaa transmissions service_center of north miami florida aaa during whether such compensation constitutes self- employment income subject_to the tax imposed by sec_1401 and whether the underpayment_of_tax required to be shown on petitioners’ federal_income_tax return is a substantial_understatement_of_income_tax background some of the facts have been stipulated and are so found petitioners are husband and wife they filed a timely joint federal_income_tax return at the time the amended petition was filed petitioners resided in pompano beach florida references to petitioner are to george a quintero during petitioner was a student at the ft lauderdale campus of keiser college from the beginning of the year until sometime in december he was also employed as a trainee-helper by aaa an automobile transmission repair shop petitioner was not a certified mechanic during his duties at aaa included the removal and replacement of automobile transmissions but he did not repair or rebuild transmissions when at work he wore a uniform provided by aaa he used tools borrowed from coworkers and he was supervised by stuart smith aaa’ss general manager as general manager mr smith performed the majority of aaa’s bookkeeping functions including the preparation of monthly payroll sheets mr smith on behalf of aaa and petitioner signed an independent_contractor agreement dated date the agreement according to the agreement petitioner agreed to perform services for aaa as an independent_contractor and not as an employee petitioner’s work schedule at aaa varied during at the direction of aaa generally he worked days a week monday through friday during business hours some weeks he worked full-time or more hours but often he worked fewer hours because there was no work for him to do or so that he could attend classes petitioner’s work hours on any given day were set by aaa and noted on a calendar maintained by a shop supervisor mr smith used the calendar to prepare monthly payroll sheets that list the days and hours that petitioner worked during and the amount of compensation he received aaa compensated petitioner at the rate of dollar_figure per hour he was paid in cash usually once a week on friday the monthly payroll sheet indicates that petitioner was paid a total of dollar_figure according to the schedule included at appendix i q4e- during petitioner maintained a checking account at nationsbank the checking account the checking account was not a joint account he deposited some of his earnings from aaa into the checking account during total deposits of dollar_figure were made to the checking account as set forth in appendix ii during mrs quintero was employed part-time as a housekeeper she earned wages of dollar_figure from this position as reflected on a form_w-2 issued to her by her employer aaa issued a form 1099-misc miscellaneous income reporting nonemployee compensation earned by petitioner during in the amount of dollar_figure aaa’s accountant prepared the form 1099-misc based on information contained on aaa’s monthly payroll sheets petitioners’ return was prepared by h_r block eastern tax service inc the return lists mrs quintero’s occupation as housekeeping and petitioner’s as unemployed the only income reported on petitioners’ return is the income earned by mrs quintero there is no income_tax_liability either under sec_1 or sec_1401 reported on the return a refund of dollar_figure attributable entirely to a sec_32 earned_income_credit is claimed on the return in the notice_of_deficiency respondent relying upon the form 1099-misc issued to petitioner by aaa increased petitioners’ income by dollar_figure respondent further determined that the compensation that petitioner received from aaa - - constitutes self-employment_income subject_to tax under sec_1401 respondent also determined that the underpayment_of_tax required to be shown on petitioners’ is a substantial_understatement_of_income_tax and imposed a penalty under sec_6662 other adjustments made in the notice_of_deficiency are not in dispute discussion unreported income petitioners acknowledge that petitioner received compensation from aaa during that was not reported on their return but claim that petitioner received less than the amount reported on the form 1099-misc issued by aaa according to petitioners aaa’s monthly payroll sheets which were used to prepare the form 1099-misc issued to petitioner overstate the number of hours petitioner worked during and therefore overstate the compensation he was paid on their return petitioners expressly represented that petitioner was unemployed during and implicitly represented that he earned no income during that year neither representation is true in the petition filed in this case petitioners represent that their records indicate that petitioner’s gross earnings from aaa during amounted to less than dollar_figure if maintained no such records were presented at trial at trial petitioners estimated that -- - petitioner’s earnings from aaa amounted to dollar_figure computed by subtracting gifts from family members plus the income earned by mrs quintero reported on their return from the total deposits made to the checking account we consider petitioners’ various claims as to the amount of income petitioner earned during against the amount reflected on aaa’s records ’ the accuracy of aaa’s monthly payroll records although not beyond guestion is supported by the pattern of deposits into petitioner’s checking account all things considered we find aaa’s records more reliable than petitioners’ various and inconsistent claims as to the amount of compensation that petitioner received from aaa during accordingly respondent’s determination that petitioner earned and received compensation totaling dollar_figure from aaa during is sustained self-employment_tax in addition to the income_tax imposed by sec_1 sec_1401 imposes a tax upon a taxpayer's self-employment_income disregarding irrelevant exceptions self-employment_income is defined as net_earnings_from_self-employment which in turn is defined as the gross_income derived by an individual from any ' we note that at trial respondent did not exclusively rely upon the form_1099 aaa’s payroll records as well as the testimony of the person responsible for maintaining those records were also admitted into evidence see sec_6201 trade_or_business carried on by such individual less the deductions allowed which are attributable to such trade_or_business sec_1402 and b other than under circumstances not present in this case services performed by an individual as an employee do not constitute a trade_or_business for self- employment_tax purposes sec_1402 according to respondent the compensation that petitioner received from aaa during constitutes self-employment_income subject_to tax under sec_1401 petitioners having failed to report any such income on their return did not report any sec_1401 tax on that return they now claim that petitioner performed services for aaa during as an employee rather than an independent_contractor the question of whether an individual performs services for another as an employee or independent_contractor is generally considered a question of fact 63_tc_621 in resolving such questions this and other federal courts apply what is commonly referred to as the common_law test embodied in sec_31_3121_d_-1 and c - b employment_tax regs 907_f2d_1173 d c cir affg 92_tc_351 packard v commissioner supra an employee is defined as any individual who under the usual common_law rules applicable in determining the employer-employee relationship has the status of an - - employee sec_3121 the relevant factors taken into account to determine the status of an individual as an employee or independent_contractor include the degree of control exercised by the principal over the details of the work which party invests in the facilities used in the work the opportunity of the hired party for profit or loss whether the type of work is part of the principal's regular business the permanency of the relationship between the parties to the relationship whether the principal has the right to discharge the individual whether the principal provides benefits to the hired party typical of those provided to employees and the relationship the parties believe they are creating 89_tc_225 affd 862_f2d_751 9th cir see also 331_us_704 although no single factor is determinative employer control_over the manner in which the work is performed is the basic test gen inv corp v united_states 823_f2d_337 9th cir respondent’s position that petitioner was not an employee of aaa during seems to be entirely based upon the agreement which in fact does undermine petitioners’ position to the contrary nevertheless the application of the other_relevant_factors leads to the conclusion that aaa possessed and exercised sufficient control_over the services performed by petitioner so as to consider him an employee it follows that the compensation that petitioner received from aaa during does not constitute self-employment_income within the meaning of sec_1401 substantial_understatement_of_income_tax sec_6662 imposes an accuracy-related_penalty of percent of any portion of an underpayment_of_tax that is attributable to a substantial_understatement_of_income_tax sec b d an understatement of income_tax is a substantial_understatement_of_income_tax if it exceeds the greater of dollar_figure or percent of the tax required to be shown on the taxpayer’s return sec_6662 ignoring conditions not relevant here for purposes of sec_6662 an understatement is defined as the excess of the amount of the tax required to shown on the taxpayer’s return over the amount of the tax which is shown on the return sec_6662 d a in this case for purpose of sec_6662 the amount of tax required to be shown on petitioners’ return is dollar_figure the amount of tax_shown_on_the_return is zero because the difference between these two amounts is less than this is the sec_1 income_tax that results from including in petitioners’ income the compensation that petitioner received from aaa during that year unlike the computation of a deficiency under sec_6211 or the computation of an understatement for purposes of sec_6694 the earned_income_credit claimed on petitioners’ return and disallowed in the notice_of_deficiency is not taken into account in the computation of the understatement of income_tax for purposes of sec_6662 - dollar_figure the underpayment_of_tax required to be shown on their return is not a substantial_understatement_of_income_tax consequently they are not liable for the accuracy-related_penalty imposed by sec_6662 a reviewed and adopted as the report of the small_tax_case division based on the foregoing decision will be entered under rule summary of aaa’s monthly payroll records week of week of appendix i daily hours worked mon tues wed thurs fri o daily hours worked total hour sec_4 ooo oo ann uo a7 oo 4l annn a7 total hours for petitioner wages s647 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure wages ' total hours multiplied by petitioner’s hourly rate of dollar_figure mon tues wed thurs fri o o o o a7 total earnings for to nearest dollar appendix ii dollar_figure s17 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure rounded dollar_figure schedule of deposits into petitioner’s checking account date of deposit amount jan s400 feb feb feb feb march march april april april april may may may june june june june july july july july aug aug aug sept sept sept oct oct oct oct date of deposit amount nov nov dec dec dec big_number


internal_revenue_service number release date index number -------------------------------------------------- ------------------------- ------------------------------------- ------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ----------------- telephone number --------------------- refer reply to cc psi b03 plr-133050-11 date date company ------------------------------------------------------------------------------------------------- ----------------------- legend state date date date ---------- ---------------------- ---------------------- ------------------- trust ------------------------------------------------------------- trust ---------------------------------------------------------------- trust ------------------------------------------------------------ trust ------------------------------------------------------------ trust ------------------------------------------------------- dear ------------------- this letter responds to a letter dated date submitted on behalf of company by company’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code plr-133050-11 facts company incorporated in state on date and elected to be an s_corporation effective date shares of company stock were transferred to trust trust trust trust and trust together the trusts on date company represents that the trusts qualify to be qualified subchapter_s trusts qssts under sec_1361 except that the beneficiary of each respective trust failed to make the election under sec_1361 therefore these trusts were not eligible s_corporation shareholders and company’s s_corporation_election terminated on date company represents that company and company’s shareholders have filed tax returns consistent with company being an s_corporation company further represents that the circumstances resulting in the termination of company’s s_corporation_election were inadvertent and were not motivated by tax_avoidance or retroactive tax planning company and its shareholders agree to make any adjustments consistent with the treatment of company as an s_corporation as may be required by the secretary with respect to the period specified by sec_1362 law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that for purposes of subchapter_s the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for the purposes of sec_1362 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be an s_corporation shareholder sec_1361 provides that in the case of a qsst with respect to which a beneficiary makes an election under sec_1361 a such trust will be treated as a_trust described in sec_1361 and b for purposes of sec_678 the beneficiary of such trust shall be treated as the owner of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1361 provides that a beneficiary of a qsst or his legal_representative may elect to have sec_1361 apply plr-133050-11 sec_1361 provides that for purposes of sec_1361 the term qualified_subchapter_s_trust means a_trust a the terms of which require that i during the life of the current income_beneficiary there shall be only income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary's death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to such beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to individual who is a citizen or resident_of_the_united_states a substantially separate and independent share of a_trust within the meaning of sec_663 shall be treated as a separate trust for purposes of sec_1361 and sec_1361 sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that if an election under sec_1362 by any corporation was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or was terminated under sec_1362 or the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken so that the corporation for which the election was made or the termination occurred is a small_business_corporation or to acquire the required shareholder consents and the corporation for which the election was made or the termination occurred and each person who was a shareholder in such corporation at any time during the period specified pursuant to f agrees to make such adjustments consistent with the treatment of such corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination such corporation shall be treated as an s_corporation during the period specified by the secretary sec_1_1362-4 of the income_tax regulations provides that for purposes of sec_1_1362-4 the determination of whether a termination or invalid election was inadvertent is made by the commissioner the corporation has the burden of establishing that under the relevant facts and circumstances the commissioner should determine that the termination or invalid election was inadvertent the fact that the terminating event or invalidity of the election was not reasonably within the control of the corporation and in the case of a termination was not part of a plan to terminate the election or the fact that the terminating event or circumstance took place without the plr-133050-11 knowledge of the corporation notwithstanding its due diligence to safeguard itself against such an event or circumstance tends to establish that the termination or invalidity of the election was inadvertent conclusion based solely on the facts submitted and the representations made we conclude that company's s_corporation_election terminated on date when stock in company was transferred to impermissible shareholders we further conclude that the termination was inadvertent within the meaning of sec_1362 pursuant to the provisions of sec_1362 company will be treated as continuing to be an s_corporation on and after date unless company’s s_corporation_election is otherwise terminated under sec_1362 provided that the respective income beneficiaries for trust trust trust trust and trust file a qsst election with the appropriate service_center within days following the date of this letter to be effective date a copy of this letter should be attached to each of the qsst elections except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied regarding company’s eligibility to be treated as an s_corporation or the trusts’ eligibility to be qssts this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to company’s authorized representative 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 james a quinn senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-105042-10 date july internal_revenue_service number release date index number ------------------------------------- --------------------------- ------------------ ---------------------------- in re -------------------------------------------- ------------------------------------------------------------- --------------------- legend ---------------------------- testator -------------------------------------- child a ----------------------------- child b --------------------------------------- child c -------------------------------- stock stock trust ------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------- residuary_trust ------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------ children’s agreement ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------- state state a date date date date date date a b c d stock trust a ----------------------------------------------------------------------------------------------------------------- ------------------ ---------- -------------------- ------------------- -------------------------- ------------------------- ------------------------- ----------------------- ------ ------- ------ ------ ------------------------------------------------------------------------ plr-105042-10 --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------------------------------ residuary_trust a ----------------------------------------------------------------------------------------------------------------------- cite ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------- cite ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------ cite cite ------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------- cite ----------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------ cite ------------------------------------------------------------------------ ------------------------------------------------------ cite cite ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------- highest court highest court of state a state court ---------------------------------------------------------------------------------------------------------------- state statute ------------------------------------------------------------------------------------------ --------------------------------------------- state governing statute a -------------------------------------------------- state governing statute b --------------------------------- state a statute q ---- ---- r ---- s ---- t u -------- -------- v --------- x y ------ ------------ z ------------------------------------------- ----------------------------------- ------------------------------------------------------------------------ --------------------------------------------------------------------------------- dear ------------- this responds to the date letter from your authorized representative requesting rulings on the income gift estate and generation-skipping_transfer gst tax consequences of a proposed settlement agreement plr-105042-10 the facts and representations are as follows testator died a resident of state on date he was survived by three children child a child b and child c the children five grandchildren the five grandchildren were then living there were no great-grandchildren at the time under articles third and eighth of testator’s will the will his shares of stock were to be held in trust the stock trust trust income was to be divided equally among the children on a child’s death the child’s income share was to be divided equally among the child’s then living children testator’s grandchildren the stock trust was to terminate twenty-one years after the death of testator’s last surviving grandchild when the principal would be divided equally per capita among testator’s then living great-grandchildren and deceased great-grandchildren whose then living descendants would take by representation under article twenty-second of the will the residue of testator’s estate was to be held in another trust the residuary_trust the residuary_trust provisions were identical to those of the stock trust except that the residuary_trust was to terminate when testator’s youngest great-grandchild reached age twenty-one the rule_against_perpetuities under the state rule_against_perpetuities in effect at testator’s death a bequest of a future_interest was void if considered prospectively at the testator’s death there was a possibility that the interest would not vest by the end of twenty-one years after the death of a life or lives in being at the testator’s death the permissible period a bequest to a class was void if there was a possibility that all the members of the class would not be ascertained and take vested interests within the permissible period a void specific_bequest passed to the testator’s residuary_estate if the testator’s disposition of the residuary_estate was void as well the residuary_estate passed as a reversion by intestacy cite in this case at testator’s death it was possible for the children to have additional children so that there could be grandchildren whose lives were not then in being this was the pivotal factor in determining whether his bequests of stock trust and residuary_trust income and remainders to his grandchildren and great-grandchildren violated the rule_against_perpetuities testator’s bequest of lifetime income interests to the grandchildren was to all of his grandchildren as a class a grandchild born after testator’s death would be part of the grandchildren’s class and would receive stock trust income_for_life based on this it was considered possible that not all of the grandchildren’s income interests would vest during lives in being at testator’s death certain annuities were also created that have since terminated plr-105042-10 testator’s bequests of remainders to his great-grandchildren were to vest only after all of testator’s grandchildren died the life of a grandchild born after testator’s death would also be a measuring life therefore at testator’s death it was possible that the time for vesting of the great-grandchildren’s remainders would be based on a life not in being at testator’s death accordingly the validity of these bequests was in doubt the bequests in the stock trust if void passed to the residuary_trust at testator’s death the bequests in the residuary_trust if void passed to testator’s intestate estate as a reversionary_interest the children’s agreement the children were testator’s heirs at law they acquired his property passing by intestacy consequently on date shortly after testator died the children entered into an agreement the children’s agreement revising the time when the great-grandchildren’s remainders were to vest under the children’s agreement the trusts were to terminate and the great-grandchildren’s remainders were to take effect on the death of the survivor of the children and five grandchildren that is lives in being at testator’s death the children’s agreement also changed the will’s pro_rata distribution of the stock trust and residuary_trust remainder to a per stirpes distribution on termination trust principal would be divided into three equal parts and distributed per stirpes under this revision the great-grandchildren descended from child a would share one third of the principal per stirpes those descended from child b would share a second third per stirpes and those descended from child c would share the last third per stirpes in all other respects the terms of the revised stock trust stock trust a and residuary_trust residuary_trust a were the same as those provided in testator’s will on a date before date testator’s shares of stock were transferred to stock trust a residuary_trust a was not funded it is represented that no additions have been made since then the litigation over more than x decades the trust beneficiaries and others have instituted actions for state court determinations regarding testator’s will and the children’s agreement specifically in cite the highest court of state highest court considered testator’ sec_2 each trust considered herein ie stock trust and residuary_trust in the will and stock trust a and residuary_trust a under the children’s agreement provided for distribution of the remainder at the end of twenty-one years following the death of the last survivor of the persons whose lives measured the duration of that trust because the perpetuities issue in this case centers on the lives measuring a respective trust’s duration and not on the twenty-one year period following the death of the last survivor the twenty-one year period is hereafter assumed to be a part of each trust’s duration even though it is not specifically stated plr-105042-10 bequests of income interests to the grandchildren the court reasoned that under testator’s will a grandchild’s income_interest would vest when his or her parent child a child b or child c died thus the grandchildren’s class would necessarily close at the death of the last survivor of the children who were in being at testator’s death highest court held that therefore the bequest of lifetime income interests to the grandchildren as a class did not violate the rule_against_perpetuities the court held the stock trust created in the will to be valid through the lives of the grandchildren highest court then considered testator’s bequest of remainders to his great-grandchildren the court reasoned that the grandchildren’s life estates preceded the remainders and the grandchildren’s class was not limited to lives in being at testator’s death because the remainders would take effect only after all of those including afterborn grandchildren died it was possible that the remainders would not vest within lives in being at testator’s death therefore highest court held the stock trust remainders to be void and illegal as violating the rule_against_perpetuities cite state statute the wait and see rule nearly y decades after highest court rendered its decision in cite the state legislature enacted state statute state statute provides a wait and see rule in determining whether a future_interest satisfies the rule_against_perpetuities or is void under the wait and see rule a future_interest does not violate the rule_against_perpetuities if actual events demonstrate that the interest did in fact vest by the end of the permissible period state statute applies retroactively to all interests heretofore created following the enactment of state statute highest court considered the statute’s retroactivity cite in the case before the court the trust was created many decades before state statute was enacted at the time of creation certain interests were void as violating the rule_against_perpetuities however highest court applied state statute’s wait and see rule to conclude in retrospect that the interests were not void and did not violate the rule_against_perpetuities testator’s bequest to the grandchildren though valid did not provide for distribution of a grandchild’s income share when the grandchild died before the trust ended on the death of the first grandchild to die on date the trustees petitioned the state court for instructions the state court held that based on testator’s intent a deceased grandchild’s children succeeded to the income share for the duration of the trust cite by inference highest court also considered testator’s bequest of the residuary_trust remainders highest court in effect confirmed that the stock trust remainder and residuary_trust remainder passed by intestacy to the children however the court did not rule on how the remainder would pass to the great-grandchildren plr-105042-10 as a result the courts of state now apply the wait and see rule retroactively to conclude that a future_interest that was void when created many years before state statute was enacted is not void because in hindsight it vested before the permissible period ended accordingly such otherwise void interests are retroactively sustained as not violating the rule_against_perpetuities cite however highest court has not yet addressed due process issues that may be presented the actualities in this case no additional grandchildren were born after testator’s death the lives of the children and the five grandchildren were all in being at testator’s death all of the children have died the last survivor of the five grandchildren died on date at the time there were z great-grandchildren of testator the trust will terminate twenty-one years after date which is date of testator’s z great-grandchildren a descended from child a b descended from child b and c descended from child c if the wait and see rule is applied to validate testator’s bequest of remainders to his great-grandchildren the principal would be divided into z equal shares and distributed under the will alternatively if testator’s disposition of the remainders is considered void the principal would be divided into three equal shares and distributed per stirpes under the children’s agreement the portion of a one-third share distributable to a great-grandchild would depend on the framework of the family line ie child a’s child b’s or child c’s to which that great-grandchild belongs great-grandchildren’s litigation there is a substantial difference between what a great-grandchild would receive in a per capita distribution and what he or she would receive in a per stirpes distribution on date the great-grandchildren benefitting from a per capita distribution the per capita parties instituted their action in state court for adjudication on the distribution of the stock trust remainder the great-grandchildren benefitting from a per stirpes distribution the per stirpes parties opposed the suit and also requested adjudication in addition an action was instituted concerning the distribution of income during the twenty-one year period state court combined the proceedings to consider the income and principal issues together cite in contrast the legislature of state a enacted state a statute which like state statute retroactively applies a wait and see rule to determine whether a future_interest that was void at the time it was created before the state a statute was enacted did in fact vest during the permissible period highest court of state a refused to apply the wait and see rule retroactively despite the relevant language in state a statute instead that court addressed issues of constitutionality and held that state a statute could not be applied retroactively to destroy vested or substantive rights created before state a statute was enacted cite plr-105042-10 over a d-year period guardians ad litem were appointed there was extensive discovery counsel filed three voluminous sets of briefs and the court heard two days of oral arguments the per capita parties argued that the wait and see test of state statute now applies under that test testator’s the will’s disposition of the stock trust remainder does not violate the rule_against_perpetuities therefore the stock trust principal is distributable per capita to testator’s living great-grandchildren and deceased great-grandchildren whose living descendants would take by representation the per stirpes parties argued that the highest court’s determinations were final and those rulings can not now be constitutionally impaired by a later-in-time state statute or judicial_ruling because highest court determined the remainders in the will to be void they passed as reversionary interests by intestacy to the children as such the remainders passed per stirpes under the children’s agreement some parties argued that trust income should be distributed per stirpes through the roots of the children for the duration of the stock trust others argued that the income is distributable per capita the court encouraged the parties to explore ways to resolve their differences through negotiation and compromise rather than through continued litigation among the potential outcomes regarding trust principal was a judicial_ruling that i ii iii principal is distributable per capita on date under the terms of the stock trust in the will or principal is distributable per stirpes on date under the terms of the children’s agreement or principal was distributable as of the last surviving grandchild’s death under the residuary_trust in the will which vested or will vest in the takers under the residuary_trust among the potential outcomes regarding trust income was a judicial_ruling that iv v vi income is distributable per stirpes from the death of the last surviving grandchild to date under either the will or the children’s agreement or income is distributable per capita from the death of the last surviving grandchild to date under the will or the children’s agreement or all rights to receive stock trust income terminated when the last surviving grandchild died at which time the stock trust principal was distributable under the residuary_trust of the will plr-105042-10 the great-grandchildren’s settlement agreement the parties negotiated extensively at the outset they agreed that the issues could be settled using a fractional difference settlement based on an assessment of the relative strengths of their adverse positions under the general framework of the compromise the great-grandchildren’s settlement agreement the ggc agreement provides for the stock trust principal to be divided into z separate shares based on the number of testator’s then living great-grandchildren and deceased great-grandchildren with then living children the share of a deceased great-grandchild will be divided per stirpes among that great-grandchild’s living descendants the stock trust assets will be divided in accordance with certain percentages the formula of the compromise provides for a q per stirpes r per capita fractional difference as to income and an s per stirpes t per capita fractional difference as to principal after the division into separate shares u of each great-grandchild’s share will be distributed outright to the great-grandchild if living or if the great-grandchild is deceased to his or her living descendants per stirpes the remaining v of each share will continue in trust for such great-grandchild or such descendants until the termination_date date each share will be a separate trust the respective great-grandchild or deceased great-grandchild’s descendants will be the sole beneficiary of the share for distributions of income and principal a sophisticated algorithm taken to thirteen decimal places will be used in the pro_rata division and outright distributions the division will take into account both the market_value and respective tax bases of the assets the ggc agreement was presented to state court for consideration the state court approved the settlement and ordered the division and distribution of the stock trust as set forth in the ggc agreement the ggc agreement is subject_to a favorable ruling from the internal_revenue_service you have asked for the following rulings the terms of the ggc agreement will not cause distributions from the stock trust or the continuing separate settlement trusts to become subject_to the generation-skipping_transfer_tax the terms of the ggc agreement will not cause any party to the agreement to make a gift to any other party to the ggc agreement for purposes of describing the ggc agreement the stock trust and stock trust a are considered to be the same trust plr-105042-10 the terms of the ggc agreement will not cause any party to the agreement to be required to include trust assets in his or her gross_estate unless such assets are distributable or have been distributed to such party prior to his or her death the terms of the ggc agreement will not cause any party to the agreement to realize income from the sale_or_exchange of any trust assets or interests ruling generation-skipping_transfer gst tax sec_2601 of the internal_revenue_code imposes a tax on every generation-skipping_transfer which is defined under sec_2611 as a taxable_distribution a taxable_termination or a direct_skip under of the tax_reform_act_of_1986 the act gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer under a_trust that was irrevocable on date except to the extent the transfer is made out of corpus added to the trust by an actual or constructive_addition after date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 will not cause the trust to lose its exempt status these rules are applicable only for purposes of determining whether an exempt trust retains exempt status for gst tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a court-approved settlement of a bona_fide issue regarding the administration of the trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject_to chapter if the settlement is the product of arm's length negotiations and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement a settlement that results in a compromise between the positions of the litigating parties and reflects the parties' assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes in this case the stock trust was irrevocable on date further it is represented that there have been no actual or constructive additions to the stock trust after date accordingly the stock trust is exempt from gst tax under sec_26_2601-1 plr-105042-10 the terms of the ggc agreement including the proposed division of the stock trust into separate shares and partial distributions of principal are the result of a settlement of substantial issues between the per capita parties and the per stirpes parties these issues have been tenaciously litigated over more than x decades highest court rendered opinions regarding these trusts many years ago however state statute has since been enacted with retroactive effect and highest court has affirmed state statute’s retroactive application to a similarly-created trust in light of this that court’s earlier determinations of the issues in this case are now in question we conclude that the ggc agreement constitutes a settlement of bona_fide issues concerning the provisions of the stock trust and its administration we also conclude that the terms of the ggc agreement are the product of arm's length negotiations they represent a compromise between the positions of the parties and reflect the parties' assessments of the relative strengths of their positions we further conclude that the ggc agreement is within the range of reasonable outcomes under the governing instruments and the applicable state law addressing the issues resolved in the ggc agreement accordingly based upon the facts submitted and the representations made we rule that the division of the stock trust into the z separate great-grandchildren’s trusts and the distributions to the living great-grandchildren and the descendants by representation of a deceased great-grandchild made in accordance with the ggc agreement will not cause the stock trust the continuing separate stock trusts or the distributions as described above to be subject_to the generation-skipping_transfer_tax ruling gift_tax issue sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year sec_2511 provides that the gift_tax applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-1 of the gift_tax regulations provides that as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in him or her no power to change its disposition whether for his or her own benefit or for the benefit of another the gift is complete sec_25_2511-1 provides that any transaction in which an interest in property is gratuitously passed or conferred upon another regardless of the means or device employed constitutes a gift subject_to tax whether an agreement settling a dispute is effective for gift_tax purposes depends on plr-105042-10 whether the settlement is based on a valid enforceable claim asserted by the parties and to the extent feasible produces an economically fair result see 674_f2d_761 9th cir citing 387_us_456 thus state law must be examined to ascertain the legitimacy of each party's claim if it is determined that each party has a valid claim the service must determine that the distribution under the settlement reflects the result that would apply under state law if there is a difference it is necessary to consider whether the difference may be justified because of the uncertainty of the result if the question were litigated the proposed settlement is a mediated settlement and is based on arm's length negotiations among all the parties all interested parties who hold or may hold an interest in the trusts including any minors and unborn heirs have been represented in the negotiations as discussed above the ggc agreement represents the resolution of a bona_fide controversy between the parties the terms of the ggc agreement are the product of arm's length negotiations and represent i a compromise between the positions of the per capita parties and the per stirpes parties and ii reflect the parties' assessments of the relative strengths of their positions we further conclude that the ggc agreement is within the range of reasonable outcomes under the governing instruments and applicable state law accordingly based on the facts submitted and representations made we conclude that the terms of the ggc agreement as described above will not cause any of the beneficiaries to have made a taxable gift_for purposes of the federal gift_tax under sec_2501 ruling estate_tax issue sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2033 provides that the value of the gross_estate includes the value of all property to the extent of the interest therein of the decedent at the time of death sec_2035 provides that if the decedent transferred an interest in property or relinquished a power with respect to any property during the 3-year period ending on the date of death and the value of the property or interest therein would have been included in the gross_estate under sec_2036 sec_2037 sec_2038 or sec_2042 if the interest or power had been retained by the decedent on the date of death then the value of the gross_estate includes the value of the property or interest that would have been so included sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time plr-105042-10 made a transfer except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period that does not in fact end before his death possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income from the property sec_2037 provides that the value of the gross_estate includes the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise if possession or enjoyment of the property can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property and the value of such reversionary_interest immediately before the death of the decedent exceed sec_5 percent of the value of such property sec_2038 provides that the value of the gross_estate includes the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona fine sale for adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power either by the decedent alone or in conjunction with any person to alter amend or revoke or where the decedent relinquished any such power during the 3-year period ending on the date of the death sec_2041 provides that the value of the gross_estate shall include the value of all property with respect to which the decedent possessed a general_power_of_appointment at the time of death sec_2041 defines the term general_power_of_appointment as a power that is exercisable in favor of the decedent the decedent's_estate the decedent's creditors or the creditors of the decedent's_estate in order for sec_2035 through to apply a decedent must have made a transfer of property or an interest therein except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth under which the decedent retained an interest in or power over the income or corpus of the transferred property as discussed above the ggc agreement represents the resolution of a bona_fide controversy between the parties it is a settlement of bona_fide issues and is the product of arm's length negotiations it reflects the parties' assessments of the relative strengths of their positions no great-grandchild or deceased great-grandchild’s descendants by representation has made a transfer to the stock trust or to any other great-grandchild by reason of the settlement agreement accordingly based upon the facts submitted and representations made we conclude that the terms of the ggc plr-105042-10 agreement will not cause any party to the agreement to have made a transfer within the meaning of sec_2035 through however once the ggc agreement becomes effective any trust property actually distributed or receivable by a beneficiary or his or her assignee would generally be included in the beneficiary’s federal transfer_tax base see eg sec_2033 sec_2041 sec_2501 ruling income_tax issue sec_61 provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1001 provides that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained 499_us_554 addresses the issue of whether a sale_or_exchange that has taken place results in the realization of gain_or_loss under sec_1001 in cottage savings a financial_institution exchanged its interests in one group of residential mortgage loans for another lender's interests in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution the supreme court in cottage savings u s pincite concluded that sec_1_1001-1 reasonably interprets sec_1001 and stated that an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent cottage savings u s pincite the court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans cottage savings u s pincite plr-105042-10 in the present case state governing statute a allows the court for cause shown to authorize the division of a_trust into two separate trusts on such terms and conditions and with such notice as the court directs in addition state governing statute b gives trustees the power to distribute in cash or in_kind or partly in each and allocate particular assets in proportionate or disproportionate shares in this case the court order approving the ggc agreement orders the division and distribution of the stock trust as set forth in the ggc agreement accordingly the court approved the non-pro rata distributions called for in the ggc agreement and further authorized the trustees to make the necessary transfers and assignments of the unconverted investment securities t herein awarded in_kind accordingly the submission concludes that the distribution scheme in this case is authorized by state law we agree the stock trust will be divided into z trusts on a non pro-rata basis under the state statutes cited above the court has the authority to authorize the trustees to make this type of non pro-rata apportionment thus the proposed division and distribution of the stock trust assets among the z trusts will not result in a material difference in_kind or extent of the legal entitlements enjoyed by the beneficiaries within the meaning of cottage savings accordingly based upon the facts submitted and representations made we conclude that the division of the stock trust into the z great-grandchildren’s trusts will not result in the recognition of gain_or_loss under sec_1001 by the stock trust any beneficiary of the stock trust or any separate great-grandchild’s trust the rulings in this letter pertaining to the federal estate and or generation-skipping_transfer_tax apply only to the extent that the relevant sections of the internal_revenue_code are in effect during the period at issue except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours leslie h finlow acting senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosure copy for purposes