t c memo united_states tax_court kathleen a brown petitioner v commissioner of internal revenue respondent docket no filed date kathleen a brown pro_se t alan friday for respondent memorandum findings_of_fact and opinion scott judge respondent determined deficiencies in petitioner's federal income taxes and accuracy-related_penalties under sec_6662 the deficiencies were in the amounts of all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated dollar_figure and dollar_figure and the accuracy-related_penalties were in the amounts of dollar_figure and dollar_figure for the calendar years and respectively the issues for decision are the amount of income from tips that petitioner is required to report for each of the years here in issue and whether petitioner is liable for the accuracy-related_penalties as determined by respondent some of the facts have been stipulated and are found findings_of_fact accordingly during the years and and for a number of years prior thereto petitioner worked as a waitress at angelo's steak pit restaurant angelo's in panama city beach florida petitioner's legal residence at the time she filed her petition in this case was in panama city florida petitioner filed her federal_income_tax returns for the years and reporting both wage income and tip_income petitioner was an experienced waitress during the years here in issue she had been working as a waitress for approximately years angelo's was a seasonal restaurant open only during the months march through september in petitioner worked at angelo' sec_147 days during the months march through september and in she worked days at angelo's during these months petitioner worked the dinner shift from approximately p m until or p m each day she worked about percent of petitioner's customers charged their food and the remaining percent of her customers paid cash for their food the customers who charged food generally put an amount for a tip on the charge slip but the restaurant would give the amount of such tips to petitioner in cash before she left for the day during the years and petitioner kept a record of her tips in a notebook petitioner would place in her pocket the cash tips she received and the cash she received from tips that were charged before she left the restaurant she generally gave a portion of her tips to the busboys the bartenders sometimes the cooks and if she had been unusually busy other waitresses from whom she had received help although the amounts she gave varied she always gave a portion of her tips to these employees except on the rare occasions when she had a very slow night and received minimal tips occasionally she would have a misorder of food or would break some dishes when this happened petitioner would be required to pay the restaurant the amount of the misordered food or the value of the items broken petitioner was a good waitress and did not often misorder food or break plates occasionally one of petitioner's customers would walk out without paying for the food he had been served and petitioner was required to pay the restaurant the amount due by the customer petitioner would take the amounts she paid busboys bartenders cooks and other waitresses and any amount she had to pay for misordered food breakage or unpaid orders from the cash in her pocket from tips to make the payments before she left the restaurant for the evening busboys who served a station in which petitioner worked in angelo's would stand when not busy at a place in the restaurant where they could see all the tables petitioner served and would attempt to remove used dishes promptly most waitresses at angelo's as did petitioner regularly shared their tips with busboys bartenders and cooks however because a few waitresses did not regularly follow this practice in angelo's put in a requirement that each waitress turn over to the manager each evening before she left dollar_figure of her tips to be divided among the employees after this practice was put into effect petitioner as did a number of other waitresses would give an amount to these employees in addition to the dollar_figure angelo's was a family restaurant occasionally a group of to persons would come in as a party and be seated at separate tables but the entire check would be paid_by one person on such occasions if different waitresses served the different tables the waitresses would split the tip although petitioner paid out different amounts to the busboys bartenders and cooks depending on how much she had received in tips during the evening the average of her payout to these other employees was dollar_figure a day when petitioner arrived home after work each evening she would enter in a notebook the date day of the week number of customers she had served her hours worked and the amount of cash she had left in her pocket when she got home which amount she listed as tips it was from these records that her return preparer computed her tip_income reported on her income_tax return in each of the years and the amount of tips she computed from these records was dollar_figure for and dollar_figure for these amounts are substantially the sums resulting from an addition of the amounts that petitioner entered in the notebooks she kept as a record of her tips the system petitioner used to record her tips was one that had been suggested to her and she had followed it for many years respondent determined that petitioner had earned dollar_figure and dollar_figure in tips for the years and respectively these amounts were determined based on a report of a revenue_agent who had used the mcquatters formula to determine the amount of the tips respondent gave this name to the formula because this formula had been accepted in the case of mcquatters v commissioner tcmemo_1973_240 in general the formula i sec_2 it should be noted that the court in mcquatters v commissioner tcmemo_1973_240 did not approve the amount determined by respondent by the formula in full but reduced the applied by obtaining from the restaurant the total sales each individual waitress had made and reducing those sales for stiffs which in this case was based on dollar_figure percent of sales to arrive at sales subject_to tips the tip rate was then determined by the average tips as shown on charge sales reduced by approximately percent with the resulting percent which was dollar_figure percent in this case applied to the sales subject_to tips on her income_tax returns filed for and petitioner claimed the standard_deduction of dollar_figure for and dollar_figure for in lieu of itemized_deductions on certain days the tips petitioner showed on her records were less than the tips shown on the charge slips of her customers it is petitioner's position that at least a substantial amount if not all of the difference in the amount that respondent determined to be her tips and the amount she showed on the records she kept was due to her payout of tips to the busboys bartenders cooks and other waitresses and her payment for breakage walkouts and similar items opinion the record here shows that except for mistakes petitioner might have made her records reported only the cash that she had amount stating we are convinced that petitioners gave to percent of their tips to the captains and that to account for this and other factors respondent's formula should be applied with a percent rather than a percent rate of tipping left in her pocket when she got home from work after paying for any breakage or the like and sharing tips with other employees although based on petitioner's testimony these payments might not account for the complete difference in the amounts determined by respondent and the amounts that petitioner reported they would account for a substantial amount of the difference respondent recognizes that it was customary for waitresses to share tips with other employees and also to pay for breakage walkouts and misordered food and that petitioner did use part of her tips for this purpose however it is respondent's position that these items do not reduce petitioner's gross_income in arriving at adjusted_gross_income but are itemized_deductions which petitioner is not entitled to take since she used the standard_deduction in computing her income respondent claims that these amounts are employee business_expenses that are not deductible because of the provisions of sec_62 in arriving at adjusted_gross_income but are itemized_deductions subject_to certain limitations and not deductible when the taxpayer uses the standard_deduction sec_62 provides for the deduction by an individual taxpayer of trade_or_business_expenses of that taxpayer if such trade_or_business does not consist of the performance of services by the taxpayer as an employee respondent does not deny that it was customary for waitresses to share tips with busboys bartenders cooks and sometimes other waitresses and that they were required to pay for any breakage and food that was misordered or for bills not sec_62 adjusted_gross_income defined a general_rule --for purposes of this subtitle the term adjusted_gross_income means in the case of an individual gross_income minus the following deductions trade and business deductions --the deductions allowed by this chapter other than by part vii of this subchapter which are attributable to a trade_or_business carried on by the taxpayer if such trade_or_business does not consist of the performance of services by the taxpayer as an employee certain trade and business deductions of employees -- a reimbursed expenses of employees --the deductions allowed by part vi sec_161 and following which consist of expenses paid_or_incurred by the taxpayer in connection with the performance by him of services as an employee under a reimbursement or other expense allowance arrangement with his employer the fact that the reimbursement may be provided by a third party shall not be determinative of whether or not the preceding sentence applies b certain expenses of performing artists -- the deductions allowed by sec_162 which consist of expenses paid_or_incurred by a qualified_performing_artist in connection with the performances by him of services in the performing arts as an employee paid_by walkouts or mistakes they made on the bills but contends that these items are deductions and not an offset that results in a reduction in the gross_income received from tips at the conclusion of the evidence the court called the attention of respondent's counsel to the fact that many cases had allowed a waitress's tips to be reduced by payouts to busboys and bartenders in determining her gross_income from tips and requested a memorandum explaining any distinction between those cases and this case the memorandum filed discusses none of these cases in 43_tc_824 respondent in computing tip_income of a waiter at whyte's restaurant in new york city reduced the tips computed on the charge payment or left in cash by percent paid out to busboys in approving the formula we specifically referred to the reduction of the income from tips by percent for sharing by the waiter of tips with busboys meneguzzo v commissioner t c pincite this same type reduction has been used by this court in numerous other cases some of the cases in which tip_income was reduced by an amount shared by the waitress with busboys are the following guadron v commissioner tcmemo_1994_553 nika v commissioner tcmemo_1991_335 butler v commissioner tcmemo_1991_118 williams v commissioner tcmemo_1985_476 mcleod v commissioner tcmemo_1984_658 zibilich v commissioner tcmemo_1972_92 and chippi v commissioner tcmemo_1971_236 in chippi v commissioner tcmemo_1971_236 we found that the tip_income of certain waiters should be reduced by percent for tips to busboys these cases do not specifically state whether the taxpayer used the standard_deduction or itemized_deductions no such statement was necessary since the reduction was in the gross_income required to be reported and therefore would not affect itemized_deductions or the taking of the standard_deduction the law with respect to expenses that an employee may deduct from gross_income to arrive at adjusted_gross_income has not changed since in a way to affect the issue here since the enactment of the revenue code an employee has been entitled to claim business_expense deductions except those in specified categories only as itemized_deductions and not as deductions from gross_income in arriving at adjusted_gross_income the revenue code of as originally enacted provided-- sec_62 adjusted_gross_income defined for purposes of this subtitle the term adjusted_gross_income means in the case of an individual gross_income minus the following deductions trade and business deductions --the deductions allowed by this chapter other than by part vii of this subchapter which are attributable to a trade_or_business carried on by the taxpayer if such trade_or_business does not consist of the performance of it is clear therefore that both respondent and this court have for many years consistently reduced computed tip_income by the amount of the tips a waiter or waitress shared with busboys bartenders and similar employees there is no specific discussion in any case we have found of why this is a necessary adjustment to the amount of tips placed on charge slips or left services by the taxpayer as an employee trade and business deductions of employees -- a reimbursed expenses --the deductions allowed by part vi sec_161 and following which consist of expenses paid_or_incurred by the taxpayer in connection with the performance by him of services as an employee under a reimbursement or other expense allowance arrangement with his employer b expenses for travel away from home --the deductions allowed by part vi sec_161 and following which consist of expenses of travel meals_and_lodging while away from home paid_or_incurred by the taxpayer in connection with the performance by him of services as an employee c transportation_expenses --the deductions allowed by part iv sec_161 and following which consist of expenses of transportation paid_or_incurred by the taxpayer in connection with the performance by him of services as an employee d outside salesmen --the deductions allowed by part vi sec_161 and following which are attributable to a trade_or_business carried on by the taxpayer if such trade_or_business consists of the performance of services by the taxpayer as an employee and if such trade_or_business is to solicit away from the employer's place of business business for the employer on a table in cash to arrive at the gross tip_income of a waiter or waitress however the inference from the cases is that the tip is left to be shared by all who have served the customer clearly when more than one waitress works at a table and one waitress receives the tip the tip is intended for all waitresses who served that table unquestionably where petitioner shared her tip with another waitress who helped her the tip she shared was really intended in part for the other waitress and the other waitress's part is not income to petitioner whether the person leaving a tip intended a pass- through for the busboys bartenders and cooks is not as clear the testimony in this record shows that the busboys stood in full view and helped in various ways with serving and clearing the table the bartender might not be directly in sight but people who ordered drinks were certainly aware of the work of the bartender therefore in our view the sharing by a waitress of tips with busboys bartenders and cooks is merely to carry out the pass-through intent of the customer and the gross amount of the tip is not intended to be hers to keep in its entirety for over years this has been the rationale of respondent in determining tip_income and of this court in approving or modifying that determination in this case even though respondent's counsel was requested to explain the change in position from prior cases no such explanation has been forthcoming under these circumstances we do not consider this an appropriate case to discuss in further detail the correctness of the long-standing method of computing gross_income from tips by reducing the tips left on a waitress's table by the payout she makes to busboys bartenders and other waitresses respondent apparently does not dispute petitioner's testimony that on the average she paid out dollar_figure a day to busboys bartenders cooks and other waitresses this amount is in line with the to percent of tips allowed as payouts to other employees in some recent cases we therefore hold that the amount of tip_income of petitioner as determined by respondent should be reduced in each year by dollar_figure a day for payouts to other employees the situation with respect to the cash payments to the restaurant for breakage misordered food walkouts and similar items is different we did not find nearly as many cases dealing with this question as we did cases dealing with payouts to busboys and similar employees also we found no case making a specific adjustment for these items although some cases referred in general to a consideration of the items in this case for instance in applegate v commissioner tcmemo_1980_497 we stated we also hold that the petitioner failed to sustain her burden of proving that she is entitled to deductions for the 'walkouts' in sanders v commissioner tcmemo_1979_352 we stated finally petitioner argues that respondent has not petitioner's testimony is very imprecise as to the amount she might have been required to pay in either year here in issue for misordered food breakage or walkouts since petitioner claimed the standard_deduction on her income_tax returns she is not entitled to itemized_deductions therefore if her payment for misordered food breakage and walkouts is an employee_business_expense the amount is immaterial unless it would exceed the standard_deduction which clearly it would not the evidence in this case does not show enough of the nature of the payments for breakage misordered food and walkouts for us to determine whether these payments are itemized business_expense deductions for petitioner or whether some other adjustment for these amounts would be necessary if petitioner had shown with any exactitude the amount of such payments since the evidence does not show the amounts if any petitioner paid in the years here in issue for breakage misordered food and walkouts we need not decide whether such allowed enough of an offset for amounts paid to busboys and amounts she had to pay for breakages and checks that her customers did not pay respondent allowed percent as paid to busboys this amount computes to be larger than the fifty cents daily she paid the busboys and thus leaves a margin for breakages and unpaid checks petitioner has not shown nor is there anything in the record from which we can estimate the amount of breakage or unpaid checks we must therefore find for respondent on the amount of offset to be made to gross tips payments would be itemized_deductions or some other type of adjustment if they had been proven the testimony shows that except for failing to reduce petitioner's tips for payouts to busboys and other employees respondent's computation of petitioner's tip_income is reasonable in fact petitioner though not stating that she accepted it did not truly question the amounts respondent showed for various items she herself thought the difference in her records and respondent's computation was due to the amount of the tips she passed on to others in the restaurant who also served the customers and amounts she paid for breakage and other items certainly these differences in method of computation of tip_income account for a substantial portion of the difference in petitioner's and respondent's computations in our view petitioner has shown that she should not be held liable in either year here in issue for the accuracy-related_penalty under sec_6662 although respondent did not state what subsection of sec_6662 she contended required the penalty it is apparent that the penalty must have been intended as one for negligence petitioner had her tax returns prepared by a preparer she considered competent she kept records in a way she believed to be in accordance with the instructions from her return preparer certainly for someone with petitioner's lack of tax knowledge it would be normal to expect that her tips were the amount received less what she had paid out to other employees and had paid for breakage and the like the difference in what she showed on her records and the amounts determined by respondent with only these adjustments is difficult to determine from this record however if petitioner had kept the records to substantiate all items she paid from tips the difference might have been relatively small for a person of petitioner's understanding of bookkeeping she kept a reasonable set of books petitioner explained that she now kept better records showing all items separately she stated that she now accounts for the total amount which comes into her hands as tips from her testimony apparently she started her new system after the revenue_agent called her attention to inaccuracies in the system she was using however in our view petitioner followed what she understood the instructions to be as to the records she should keep and we therefore conclude that she should not be charged with the accuracy-related_penalty decision will be entered under rule


internal_revenue_service department of the treasury index number u i l no washington dc number release date legend person to contact telephone number refer reply to cc dom p si plr-106781-99 date date company state shareholders a b c dear this letter responds to a letter dated date requesting a ruling on behalf of company under sec_1362 of the internal_revenue_code the information submitted discloses that company was incorporated on a in state company had two shareholders shareholders it is represented that company intended to be an s_corporation since its incorporation believing itself to be an s_corporation company operated accordingly beginning on b after the end of its first taxable_year ending on c however company discovered that its s election had not been timely filed accordingly company filed a c return for its first taxable_year plr-106781-99 company requests a ruling that its sec_1362 election will be treated as timely made for its taxable_year that ends on c sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 explains when an s election will be effective generally if an s election is made within the first two and one half months of a corporation's taxable_year then that corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year following the year in which the s election is made sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply sec_1378 provides that for purposes of subtitle a the term permitted_year means a taxable_year which is a year ending december or any other accounting_period for which the corporation establishes a business_purpose to the satisfaction of the secretary for purposes of paragraph any deferral of income to shareholders shall not be treated as a business_purpose section a of the temporary income_tax regulations provides that no corporation may make an election to be an s_corporation for any taxable_year unless the taxable_year is a permitted_year in addition an s_corporation shall not change its taxable_year to any taxable_year other than a permitted_year a permitted_year is a taxable_year ending on december or is any other taxable_year for which the corporation establishes a business_purpose within the meaning of sec_1_442-1 to the satisfaction of the commissioner applying the relevant law to the facts submitted and representations made we rule that company's sec_1362 election will be treated as timely made for its year that begins on b however this ruling is contingent on company adopting a permitted_year for its taxable_year filing s returns based on its permitted_year and reporting income to shareholders based on that permitted_year this ruling is also conditioned on the representation that shareholders’ affected taxable years are open years this ruling is contingent on company filing form_2553 election by a small_business_corporation with an effective date of b with the appropriate service_center within days from the date of this ruling a copy of this letter should be attached to the form_2553 except as specifically set forth above we express no opinion concerning the federal tax consequences of the foregoing facts specifically we express no opinion on plr-106781-99 whether company otherwise qualifies as an s_corporation 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 william p o’shea chief branch office of the assistant chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp plr-118492-00 date date legend parent sub purchaser seller target target sub country x country y country z date a date b date c business t business w company official tax professionals plr-118492-00 authorized representatives dear this letter responds to your authorized representative’s letter dated date requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file elections parent the common parent of the consolidated_group that includes sub the united_states_shareholder of purchaser the foreign purchasing company and of new target the deemed foreign purchasing company is requesting the extension to file elections under sec_338 of the internal_revenue_code and sec_1_338-1 and sec_1_338-1 of the income_tax regulations with respect to the acquisition of the stock of target and deemed acquisition of the stock of target sub sometimes hereinafter referred to as the elections all citations in this letter to regulations under sec_338 are to the regulations in effect on date a additional information was submitted in a letter dated date the information submitted for consideration is summarized below parent is the common parent of an affiliated_group that files a consolidated federal_income_tax return sub is a member of the group purchaser is a wholly owned country x subsidiary of sub parent and the members of its affiliated_group are involved in business t prior to the acquisition described below target was wholly owned by a foreign_corporation seller a country z corporation target sub is a wholly owned subsidiary of target target is a country x holding_company and target sub is a country y corporation target sub is engaged in business w prior to the acquisition target and target sub did not file u s income_tax returns and they were not subject_to u s income_taxation on date a purchaser acquired all of the stock of target from seller in a fully taxable transaction parent intended to file the elections the elections were due on date b however for various reasons the elections were not filed on date c which is after the due_date for the elections company official discovered that the elections had not been filed and engaged authorized representatives for assistance it is represented that purchaser was not related to seller within the meaning of sec_338 the acquisition of the stock of target qualified as a qualified_stock_purchase as defined in sec_338 and the period of limitations on assessments under sec_6501 has not expired for parent's purchaser’s target’s or target sub’s taxable_year s in which the acquisition occurred the taxable_year s in which the elections should have been filed or any taxable_year s that would have been affected by the elections had they been timely filed it is further represented that target and target sub were not controlled_foreign_corporations within the meaning of sec_957 passive foreign investment companies for which an election was made under sec_1295 plr-118492-00 foreign investment companies or foreign_corporations the stock ownership of which is described in sec_552 or required under sec_1_6012-2 to file a united_states income_tax return sec_338 permits certain stock purchases to be treated as asset purchases if the purchasing_corporation makes or is treated as having made a sec_338 election under sec_338 and the acquisition is a qualified_stock_purchase sec_338 defines a qualified_stock_purchase as any transaction or series of transactions in which stock meeting the requirements of sec_1504 of one corporation is acquired by another corporation by purchase during the 12-month_acquisition_period sec_338 provides that the term purchase means any acquisition of stock but only if i the basis of the stock in the hands of the purchasing_corporation is not determined in whole or in part by reference to the adjusted_basis of such stock in the hands of the person from whom acquired or under sec_1014 relating to property_acquired_from_a_decedent ii the stock is not acquired in an exchange to which sec_351 sec_354 sec_355 or sec_356 applies and is not acquired in any other transaction described in the regulations in which the transferor does not recognize the entire amount of the gain_or_loss realized on the transaction and iii the stock is not acquired from a person the ownership of whose stock would under sec_318 be attributed to the person acquiring such stock sec_1_338-1 provides that a purchasing_corporation makes a sec_338 election for target by filing a statement of sec_338 election on form_8023 in accordance with the instructions on the form the sec_338 election must be filed not later than the 15th day of the ninth month beginning after the month in which the acquisition_date occurs a sec_338 election is irrevocable sec_1_338-1 provides that the united_states_shareholders as defined in sec_951 of a foreign purchasing_corporation that is a cfc as defined in sec_957 taking into account sec_953 may file a statement of sec_338 election on behalf of the purchasing_corporation if the purchasing_corporation is not required under sec_1_6012-2 other than sec_1_6012-2 to file a united_states income_tax return for its taxable_year that includes the acquisition_date form_8023 must be filed in accordance with the instructions to the form and a copy of the form must be attached to form_5471 information_return of u s persons with respect to certain foreign_corporations filed with respect to the purchasing_corporation by each united_states_shareholder for the purchasing_corporation the term target_affiliate has the same meaning as in sec_338 applied without sec_338 thus a corporation described in sec_338 is considered a target_affiliate for all purposes of sec_338 if a target_affiliate is acquired in a qualified_stock_purchase it is also a target see sec_1_338-1 if an election under sec_338 is made for target old target is deemed to sell target’s assets and new target is deemed to acquire those assets sec_1_338-2 under sec_338 new target’s plr-118492-00 deemed purchase of stock of another corporation is a purchase for purposes of sec_338 on the acquisition_date of target if new target’s deemed purchase causes a qualified_stock_purchase of the other corporation and if a sec_338 election is made for the other corporation the acquisition_date for the other corporation is the same as the acquisition_date of target however the deemed sale and purchase of the other corporation’s assets is considered to take place after the deemed sale and purchase of target’s assets see sec_1_338-2 sec_1_1502-77 provides that the common parent for all purposes other than for several purposes not relevant here shall be the sole agent for each subsidiary in the group duly authorized to act in its own name in all matters relating to the tax_liability for the consolidated_return_year see also form_8023 and the instructions thereto under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the elections is fixed by the regulations ie sec_1 d and g therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for parent to file the elections provided parent shows it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by tax professionals and authorized representatives explain the circumstances that resulted in the failure_to_file valid elections the information establishes that a tax professional was responsible for the elections that parent relied on the tax professional to timely make the elections and that the government will not be prejudiced if relief is granted sec_301 b v plr-118492-00 based on the facts and information submitted including the representations that have been made we conclude that parent has established that it acted reasonably and in good_faith in failing to timely file the elections the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly we grant an extension of time under sec_301_9100-1 until days from the date_of_issuance of this letter for parent to file the election with respect to the acquisition of the stock of target as described above the above extension of time is conditioned on the filing within days of the issuance of this letter of all returns and amended returns if any necessary to report the transaction in accordance with the elections and the taxpayers' parent's consolidated group's purchaser’s target’s and target sub’s tax_liability if any being not lower in the aggregate for all years to which the elections apply than it would have been if the elections had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers’ tax_liability for the years involved a determination thereof will be made by the director upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers' tax_liability is lower sec_301_9100-3 parent should file the elections in accordance with sec_1_338-1 and sec_1_338-1 that is new elections on form sec_8023 must be executed on or after the date of this letter which grants an extension and filed in accordance with the instructions on the election form a copy of this letter should be attached to the election forms parent purchaser target and target sub must file or amend if and as applicable its applicable returns to report the acquisition as a sec_338 transaction and to attach a copy of the form_8023 and a copy of this letter no opinion is expressed as to whether the acquisition or deemed acquisition of target's or target sub’s stock qualifies as a qualified_stock_purchase whether the acquisition of the stock qualifies for sec_338 treatment and if the acquisition of the stock qualifies for sec_338 treatment as to the amount of gain_or_loss recognized if any by such target_corporation on its deemed asset sale in addition no opinion is expressed as to the tax effects or consequences of filing the elections late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the elections late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by the taxpayer its employees and representatives however the director should verify all essential facts upon audit of the federal_income_tax returns involved in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the elections penalties and interest that would otherwise be applicable if any continue to apply plr-118492-00 this letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to the powers of attorney on file in this office copies of this letter are being sent to authorized representatives sincerely yours associate chief_counsel corporate by mark s jennings chief branch


t c memo united_states tax_court daniel j sides petitioner v commissioner of internal revenue respondent docket no filed date daniel j sides pro_se stephen p baker for respondent memorandum opinion vasquez judge respondent determined a dollar_figure deficiency in and a dollar_figure penalty pursuant to section on petitioner’s federal_income_tax on date respondent filed a motion for sanctions under sec_6673 unless otherwise indicated all section references are to the applicable internal_revenue_code after concessions the sole issue for decision is whether to impose a penalty pursuant to sec_6673 background petitioner i sec_26 years old in the petition petitioner made tax_protester type arguments at calendar call petitioner appeared and admitted that he received income as determined in the notice_of_deficiency petitioner stated that he realized that the arguments he made in the petition were inappropriate petitioner conceded that he owed the deficiency and the sec_6662 penalty petitioner admitted that respondent previously assessed the sec_6702 frivolous_return penalty against him petitioner stated that this was the first time he pursued these arguments in administrative or legal proceedings petitioner further stated that he did not intend to make these arguments in the future he understood he owed taxes on income he earned and income taxes are constitutional and he does not intend to appear in the court again petitioner indicated his willingness to sign a document attesting to his concessions petitioner promptly signed a document stipulation of settlement that was filed with the court at the hearing on the sec_6673 penalty in the stipulation of settlement petitioner agreed that there was a deficiency of dollar_figure and a sec_6662 penalty of dollar_figure due from petitioner for the stipulation of settlement also provided that the court may enter a decision for these amounts interest will be assessed on the deficiency and penalty and petitioner waived the restrictions on assessment and collection of the deficiency penalty and interest discussion we consider whether petitioner has engaged in behavior that warrants imposition of a penalty pursuant to sec_6673 sec_6673 authorizes the tax_court to require a taxpayer to pay to the united_states a penalty not in excess of dollar_figure whenever it appears that proceedings have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer’s position in such proceeding is frivolous or groundless petitioner now admits that his position was frivolous and groundless this was the first time petitioner pursued these arguments in administrative or legal proceedings petitioner stated to the court that he did not intend to make these arguments in the future or appear in the court again and petitioner understood he owed taxes on income he earned and income taxes are constitutional petitioner agreed to sign the stipulation of settlement which listed the amount of deficiency and addition_to_tax owed and petitioner promptly signed the stipulation of settlement upon the basis of the facts of this case we shall not now impose a penalty pursuant to sec_6673 we take this opportunity however to warn petitioner that the court shall impose such a penalty if he returns to the court and proceeds in a similar fashion in the future to reflect the foregoing an appropriate order and decision will be entered


tcmemo_2008_44 united_states tax_court raymond j and maria v zbylut petitioners v commissioner of internal revenue respondent docket no filed date ellin vicki palmer for petitioners valerie l makarewicz for respondent memorandum findings_of_fact and opinion cohen judge respondent determined a deficiency of dollar_figure and an addition_to_tax of dollar_figure for failure_to_file a timely return pursuant to sec_6651 with regard to petitioners’ federal_income_tax liability for after concessions the issues to be decided are whether for the years in issue petitioners may deduct at federal per_diem rates meal expenses that raymond j zbylut petitioner did not pay or incur whether petitioners are entitled to deductions for expenses related to petitioner’s travel to union halls in and whether petitioners are entitled to deductions claimed for other job-related expenses in unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioners resided in nebraska at the time they filed their petition petitioner was employed as a merchant sailor at various times in by american ship management l l c american ship and by matson navigation co matson navigation during that year american ship provided meals_and_lodging without cost to petitioner whenever he was on active status and assigned to a vessel for that company petitioner worked for american ship aboard a container vessel called the president wilson for approximately consecutive days between july and date petitioner incurred expenses traveling to union halls in san francisco california and honolulu hawaii in order to seek temporary employment in petitioner traveled to and remained at the union hall in san francisco in order to seek employment from march through petitioner did not obtain a job during his date trip to san francisco petitioner traveled to the union hall in honolulu in order to seek employment on date he remained in honolulu until at least date during which time he was able to secure several temporary jobs on the following dates in petitioner served as a port relief engineer in honolulu for matson navigation which provided petitioner with meals when he was serving aboard one of its vessels vessel ss chief gadao ss maui ss manulani dates june 19-june june june 24-june petitioner incurred lodging_expenses on all but the last days of his trip to honolulu during which petitioner was employed exclusively on the ss manulani petitioner incurred necessary meal expenses on the days he was in honolulu looking for work but not employed on a matson navigation vessel petitioner did not receive a per_diem cash allowance or reimbursement for lodging meals or incidental_expenses from american ship or matson navigation in he was not a permanent or indefinite employee of either employer or of any other company during he served only in temporary positions on various vessels that year and then returned to his home in nebraska for vacation and during periods of unemployment in addition to wages from american ship and matson navigation petitioner received unemployment_compensation in from the new york state department of labor-unemployment insurance petitioners filed their form_1040 u s individual_income_tax_return for over months late on date petitioners did not request an extension of time to file their return under job expenses and most other miscellaneous deductions on their schedule a itemized_deductions for petitioners claimed the following deductions unreimbursed employee_expenses other expenses dollar_figure big_number petitioners attached an extensive compilation of documents entitled sailor travel statement to substantiate their claim for unreimbursed employee_expenses the sailor travel statement included among other things the supplemental sailor travel schedule reproduced below authorities upon which petitioners rely in support of their tax position and documentation showing the respective locations of petitioner and the president wilson on particular dates in the supplemental sailor travel schedule with original emphases that petitioners attached to their return is reproduced in part below taxpayer is a merchant sailor assigned to work aboard a cargo ship traveling between ports located around the entire pacific ocean and therefore qualifies per attached rev_proc 2001-47’s transportation industry employees and attached marin johnson tax_court decision irs publication chapter page to compute his deemed substantiated out-of-town travel costs by using attached pub 1542’s foreign oconus rates and domestic conus rates for each city as follows big_number days x dollar_figure yokohama japan big_number days x dollar_figure guam island of big_number days x dollar_figure qingdao beijing china days x dollar_figure pusan south korea days x dollar_figure san pedro l a california days x dollar_figure nagoya japan days x dollar_figure naha okinawa japan days x dollar_figure san pedro l a california days x dollar_figure oakland california -------- total sailor travel costs allowed per oconus conus rates big_number taxpayer also took a sailor continuing education program this additional rating is deductible since he already has other sailor ratings and this course does not qualify him for a new occupation note the union paid the tuition in full this is related educational travel_expenses only days x dollar_figure easton st michaels maryland big_number airfare other education related costs big_number less union education reimbursement per big_number as a merchant sailor taxpayer was forced by his attached union letter to personally show up at his union hall to look for his next work assignment he was not allowed to simply phone his union hall to see what new jobs were currently available per attached irs publication auto mileage and possibly other travel-related costs back and forth to his union hall looking sic for work are fully deductible as follows days x dollar_figure honolulu oahu hawaii days x dollar_figure san francisco california total u s tax_court other sailor travel_expenses allowed big_number big_number ------- big_number in another statement attached to their return petitioners listed their other expenses as follows sailor required medical_expenses sailor required supplies sailor uniforms cleaning sailor union dues dollar_figure big_number opinion sec_162 permits taxpayers to deduct all ordinary and necessary business_expenses paid_or_incurred during the taxable_year and specifically includes traveling expenses including amounts expended for meals_and_lodging other than amounts that are lavish_or_extravagant under the circumstances while away from home in the pursuit of a trade_or_business sec_162 sec_274 generally disallows any deduction under sec_162 for among other things any traveling expense including meals_and_lodging while away from home unless the taxpayer complies with stringent substantiation requirements as to the amount time and place and business_purpose of the expense sec_274 sec_274 authorizes the secretary to provide by regulations that some or all of these substantiation requirements shall not apply in the case of an expense which does not exceed an amount prescribed pursuant to such regulations under the applicable sec_274 regulations the commissioner is authorized to prescribe rules under which optional methods of computing expenses including per_diem allowances for ordinary and necessary expenses for traveling away from home may be regarded as satisfying the substantiation requirements of sec_274 sec_1_274-5 income_tax regs under this authority the commissioner issued revproc_2001_47 2001_2_cb_332 applicable to petitioner’s travel january through date and revproc_2002_63 2002_2_cb_691 applicable to petitioner’s travel october through date collectively the applicable revenue procedures under the applicable revenue procedures taxpayers may elect to use in lieu of substantiating actual expenses certain authorized methods for deemed substantiation of employee lodging meal and incidental_expenses incurred while traveling away from home revproc_2002_63 sec_1 c b pincite provides the following introduction sec_1 purpose this revenue_procedure updates revproc_2001_47 2001_2_cb_332 by providing rules under which the amount of ordinary and necessary business_expenses of an employee for lodging meal and incidental_expenses or for meal and incidental_expenses incurred while traveling away from home will be deemed substantiated under sec_1_274-5 of the income_tax regulations when a payor the employer its agent or a third party provides a per_diem_allowance under a reimbursement or other expense allowance arrangement to pay for the expenses in addition this revenue_procedure provides an optional method for employees and self-employed individuals who pay or incur meal costs to use in computing the deductible costs of business meal and incidental_expenses paid_or_incurred while traveling away from home this revenue_procedure also provides an optional method for use in computing the deductible costs of incidental_expenses paid_or_incurred while traveling away from home by employees and self-employed individuals who do not pay or incur meal costs and who are not reimbursed for the incidental_expenses use of a method described in this revenue_procedure is not mandatory and a taxpayer may use actual allowable expenses if the taxpayer maintains adequate_records or other_sufficient_evidence for proper substantiation revproc_2001_47 sec_1 c b pincite is almost identical to the passage quoted above but the following sentence is omitted this revenue_procedure also provides an optional method for use in computing the deductible costs of incidental_expenses paid_or_incurred while traveling away from home by employees and self-employed individuals who do not pay or incur meal costs and who are not reimbursed for the incidental_expenses revproc_2002_63 sec_4 c b pincite expressly provides that taxpayers who do not pay or incur meal expenses when traveling away from home may use in lieu of providing actual receipts to substantiate incidental_expenses an established rate of dollar_figure per day revproc_2001_47 sec_4 c b pincite which provides specific rules for the per_diem substantiation method does not contain a similar provision however we have held previously that the incidental portion of the per_diem rates for meals and incidental_expenses m ie may be used as deemed substantiation of incidental_expenses when meals are provided by a taxpayer’s employer 115_tc_210 revproc_2001_47 sec c b pincite and revproc_2002_63 sec c b pincite each provide that the federal m ie rate will be applied with stated exceptions in the same manner as applied under the federal travel regulations c f_r sec in effect at the time each respective revenue_procedure was released deductions for meals and incidental_expenses american ship furnished petitioner with lodging and meals without charge while he worked on the president wilson in matson navigation provided meals to petitioner without charge while he worked as a relief port engineer on its vessels docked in honolulu for several days in although petitioner did not pay for his meals while at sea or while docked in ports petitioners deducted the full m ie rate for each day that petitioner worked aboard a vessel in petitioners argue that the applicable revenue procedures which are cited above in conjunction with the federal travel regulations permit them to deduct the full applicable m ie rate for work-related travel even though all of petitioner’s meals were provided to him free of charge by his employers section 301-dollar_figure of the federal travel regulations provides that a meal provided by a common carrier or a complimentary meal provided by a hotel or motel does not affect a taxpayer’s otherwise allowable per_diem expense deduction for meals c f_r sec 301-dollar_figure c f_r sec 301-dollar_figure none of the vessels on which petitioner worked were common carriers and he did not receive meals from a hotel or motel additionally the federal travel regulations require that a federal employee’s m ie rate be adjusted for meals provided by the government by deducting appropriate amounts for each meal provided johnson v commissioner supra pincite federal travel regulations c f_r sec 301-dollar_figure c f_r sec 301-dollar_figure because as petitioners acknowledge the revenue procedures regarding m ie rate deductions for non-government employees are to be applied according to the federal travel regulations for federal employees the regulations require that petitioner decrease the m ie rate deduction otherwise allowable to account for meals provided by petitioner’s employers petitioners also argue that this issue is novel to the court we disagree in johnson v commissioner supra the taxpayer also a merchant seaman deducted the full federal m ie rates on his return even though all of his meals were provided to him free of charge by his employer we held that because the taxpayer’s actual expenses consisted solely of incidental_expenses his use of the m ie rates to calculate his deductions for business_expenses due to travel away from home was limited to the incidental portion of those rates id pincite the taxpayer in that case established that he had incurred incidental_expenses during his travel away from home and was allowed to use the incidental portion of the m ie rates to substantiate those expenses in lieu of providing actual receipts the purpose of the federal per_diem rates is to ease the burden of substantiating travel_expenses away from home not to eliminate the requirement that those expenses be incurred before they can be claimed as deductions from income although petitioners contend that the court has not yet addressed this issue we explicitly stated in johnson v commissioner supra pincite we do not read the revenue procedures to allow a taxpayer to use the full m ie rates when he or she incurs only incidental_expenses respondent concedes that petitioners are entitled to a miscellaneous itemized incidental_expenses deduction for equal to the per_diem rate then applicable for each day petitioner was traveling away from home for business respondent performed those calculations according to methods established by relevant revenue procedures petitioners may as respondent has conceded deduct the incidental portion of the m ie per_diem rate for days that petitioner worked away from home for which they have substantiated the time place and business_purpose of petitioner’s travel johnson v commissioner supra pincite see also westling v commissioner tcmemo_2000_289 in accordance with the applicable revenue procedures respondent calculated petitioner’s deemed substantiated incidental_expenses using the incidental expense portion of applicable m ie rates based on petitioner’s substantiated work locations for january through date and a fixed per_diem rate of dollar_figure for incidental_expenses for october through date we sustain respondent’s calculations regarding petitioner’s deemed substantiated incidental_expenses for travel to union halls sec_162 generally allows a taxpayer to deduct all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business including travel_expenses while the taxpayer is away from home in the pursuit of a trade_or_business sec_162 a taxpayer’s home for purposes of sec_162 is generally considered as the vicinity of his principal place of employment rather than his personal_residence 74_tc_578 72_tc_190 affd 662_f2d_253 4th cir accordingly expenses_incurred in commuting from a taxpayer’s personal_residence to a taxpayer’s business or place of employment are generally nondeductible personal expenses 55_tc_611 sec_1_262-1 income_tax regs where a taxpayer does not have a permanent place of business but rather is employed temporarily by various employers at different locations we generally deem the situs of the taxpayer’s permanent residence to be his or her tax_home and the taxpayer’s traveling expenses from his residence to those temporary places of employment may be deductible johnson v commissioner t c pincite 54_tc_663 see case v commissioner tcmemo_1985_530 holding that taxpayer a merchant sailor who incurred expenses traveling to a union hall in order to seek employment could deduct traveling expenses related to his business affairs at the union hall because he was not employed by the union hall his employment with each employer that he met through the union hall was temporary and thus his expenses were not related to commuting petitioner testified at trial that he took trips to san francisco and honolulu to seek work in and that obtaining a job in his field required being present physically at union halls when job opportunities were announced petitioner incurred expenses traveling to union halls in san francisco and honolulu in order to seek temporary employment he was not a permanent or indefinite employee of american ship matson navigation or any other company he served only in temporary positions on various vessels and then returned to his home in nebraska for vacations and during periods of unemployment petitioners deducted on their return as unreimbursed employee_expenses the following amounts for auto mileage and possibly other travel-related costs back and forth to his union hall looking for work days x dollar_figure honolulu oahu hawaii days x dollar_figure san francisco california big_number big_number although petitioners’ statement attached to their return attributes the deductions to auto mileage and other travel- related expenses the rate petitioners used to calculate the expenses for honolulu was the applicable m ie rate for date the rate they used to calculate expenses for san francisco was the applicable maximum per_diem rate which includes standard deemed substantiated expense allowances for lodging meals and incidental_expenses respondent argues that petitioners are not entitled to the expense deductions claimed for petitioner’s travels to san francisco and honolulu for several reasons in respondent’s opening brief respondent argues that nebraska was petitioner’s personal_residence and advances the argument that expenses for travel to san francisco and honolulu were nondeductible commuting expenses to and from his places of work respondent argues that petitioners should not be allowed deductions for these commuting expenses because they were free to choose the location of their personal_residence and chose to live far from petitioner’s various places of work respondent’s implicit argument is that petitioner’s union halls rather than his personal_residence in nebraska should be considered petitioner’s tax_home however as we explained in johnson v commissioner supra because petitioner was employed by various employers in various locations he had no principal_place_of_business and his personal_residence is his tax_home see johnson v commissioner supra pincite thus petitioner’s travel between his personal_residence and his union halls and various places of employment is business-related travel away from home in respondent’s reply brief respondent argues that because petitioner received unemployment_compensation from the state of new york and did not testify explicitly that he resided in nebraska during petitioners have not established that nebraska was their permanent residence and tax_home such an argument is inconsistent with arguments in respondent’s opening brief that assume that nebraska was petitioner’s home and permanent residence respondent never questioned petitioner at trial about where he resided in or about his receipt of unemployment_compensation from the state of new york the parties stipulated that petitioners resided in nebraska at the time they filed their petition petitioner’s permanent residence was not an issue presented before or during trial and the argument that nebraska was not petitioner’s permanent residence was first made in respondent’s reply brief until respondent’s reply brief neither we nor petitioners were aware that respondent did not consider nebraska petitioner’s permanent residence because their residence was not an issue presented until respondent’s reply brief we are not persuaded by respondent’s argument that because they did not explicitly establish that nebraska was their permanent residence and tax_home at trial petitioners may not treat their personal_residence as their tax_home we find that petitioners did have a permanent residence and tax_home for in nebraska where petitioners maintained their personal_residence and we hold that petitioner’s traveling and living_expenses related to trips to union halls in order to seek temporary employment are not commuting expenses but may be deductible expenses for business- related travel away from home respondent also argues that petitioner’s trips to san francisco and honolulu do not constitute ordinary and necessary business trips and thus are not deductible under sec_162 because petitioners have not shown that petitioner’s employers required petitioner to stop at the union halls petitioner testified credibly that he was notified of job opportunities only if he was physically present at a union hall where potential employers announced their current needs petitioners have adequately established that petitioner’s trips to union halls in were ordinary and necessary business_expenses respondent also argues that petitioners have failed to substantiate petitioner’s expenses related to his trips to union halls in petitioners claimed deductions at per_diem rates for days in honolulu and days in san francisco although the per_diem rates serve as an alternative method of substantiating the amount of expenses petitioners must still substantiate the time place and business_purpose of the underlying trip to deduct the per_diem rates as ordinary and necessary business_expenses sec_274 sec_1_274-5t temporary income_tax regs fed reg date petitioner testified that the expenses related to his trips to the union halls to seek employment are accurately represented by credit card statements that petitioners presented as evidence at trial the credit card statements which include an array of expenditures including personal expenses show that petitioner was present in san francisco approximately days in march and incurred expenses there for lodging and meals petitioner asserts and we believe that he traveled to the san francisco area union hall in date in search of a job but it appears that he was unable to secure a job at that time petitioner incurred ordinary and necessary business_expenses related to his trip to san francisco in date and may deduct his expenses for lodging meals and incidental_expenses at the applicable per_diem rates for those days the credit card statements also show that petitioner was present in honolulu at least days in june during which period he incurred expenses including some for lodging and meals petitioner asserts and we believe that he traveled to the honolulu area union hall in date in search of a job in which endeavor he was successful petitioner was employed by matson navigation as a port relief engineer in honolulu on three different ships at various times totaling days matson navigation provided petitioner with meals on the days he was working aboard a vessel and petitioner did not incur necessary meal expenses during the days when he was employed by matson navigation matson navigation generally did not provide housing for port relief engineers and petitioner incurred lodging_expenses for the days that he was employed on two of matson navigation’s ships in honolulu however petitioner did not incur lodging_expenses for the other days he was employed by matson navigation on the ss manulani petitioner also incurred lodging and meal expenses for the remaining days in honolulu during which he was seeking employment petitioners claimed deductions for meals and incidental_expenses for days in honolulu on their return petitioners have shown that petitioner was present in honolulu and seeking employment or working for days in date petitioners are entitled to deductions at the applicable per_diem rate for lodging meals and incidental_expenses for the days that petitioner was not employed but was seeking work at the honolulu area union hall petitioners are entitled only to lodging and incidental expense deductions for the days that petitioner worked on two of matson navigation’s ships and was provided meals but incurred lodging_expenses see federal travel regulations c f_r sec 301-dollar_figure for the days between june and june during which petitioner worked for matson navigation on the ss manulani and did not incur any lodging or meal expenses petitioners may deduct the applicable per_diem rate for incidental_expenses only see johnson v commissioner t c pincite federal travel regulations c f_r sec 301-dollar_figure other job-related and miscellaneous expenses petitioners claimed other job expense deductions in for medical exams supplies uniform expenses and union dues respondent has allowed a deduction of dollar_figure for petitioner’s union dues paid in petitioners have not established that they paid more than the amount respondent has allowed for petitioner’s union dues in petitioners have not substantiated the amount of any of the other miscellaneous expenses they claimed on their return although petitioners presented copies of their credit card statements for the statements do not list any items purchased by petitioner and include charges for patently personal expenses petitioners are not entitled to deductions for other expenses beyond those conceded by respondent in reaching our decision we have considered all arguments made and to the extent not mentioned we conclude that they are irrelevant moot or without merit decision will be entered under rule


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 fip b04 plr-154456-06 date date pursuant to dollar_figure of revproc_2007_1 2007_1_irb_1 this letter is to taxpayer -------------------------------------------------------------------------- dear ---------------------- modify our letter to you of date in which we ruled that the references to sec_264 in sec_807 sec_807 and sec_832 do not take into account the exceptions to the application of the interest disallowance rule_of sec_264 described in revproc_2007_61 - i r b date including the effective date accordingly you may rely on this safe_harbor if your proposed transaction is within its scope specifically our date letter is modified to incorporate the safe_harbor 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 taxpayer sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer’s authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively for a return s filed electronically this requirement is satisfied by attaching a statement to the return s that provides the date and control number of the letter_ruling plr-154456-06 the rulings contained in this letter are based upon information and representations submitted by 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 stephen d hooe stephen d hooe special counsel associate chief_counsel financial institutions and products


internal_revenue_service number release date index number --------------------------- ----------------------------- ------------------------- in re ------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 plr-120255-11 date november legend settlor trust trust trust trust child child child date state state court spouse trustee individual individual company corporation foundation dear ----------------- ---------------------------------------------------------------------------------------- --------------------------------------------------------- -------------------- ------------------------------------------------------------ -------------------------------------------------------------- -------------------------------- ------------------------- --------------------------- -------------------------- -------------- --------- ---------------------------------------------------------------------------------------- ------------------------- ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- ------------------------------ ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- ------------------------------------------------------- this letter responds to the date letter and subsequent correspondence from your authorized representative requesting gift and generation-skipping_transfer gst tax rulings with respect to the proposed modifications and restatement of trust the facts and representations submitted are summarized as follows plr-120255-11 on date a date after date settlor established trust an irrevocable_trust to benefit his three children child child and child and their issue prior to this ruling_request trustee divided trust into three separate and equal trusts trust to benefit child and child 1’s issue trust to benefit child and child 2’s issue and trust to benefit child and child 3’s issue settlor’s spouse spouse is a trustee trustee of trust currently trustee serves as co-trustee of trust with individual and individual this letter_ruling pertains to trust when trust was created settlor and spouse resided in state currently settlor and spouse reside in state the corpus of trust consists entirely of intangible investment_assets it is represented that settlor allocated sufficient gst_exemption to trust to cause trust and trusts created thereunder to have an inclusion_ratio of zero trust is currently administered under the laws of state individual in her capacity as a co-trustee of trust proposes to petition court for a court order to change the situs of trust to state and to modify trust as follows trust will be modified to identify child child and child as the named child of his or her respective trust and references to state will be changed to state throughout trust part one of trust contains the dispositive provisions the trustees propose to modify this part to clarify that the provisions of trust apply to trust sec_1 and this part provides that trust sec_1 and will terminate on the earlier of i the date which is twenty-one years after the death of the survivor of those beneficiaries who are living on the date of the execution of trust or ii the end of the latest time permitted by any rule_against_perpetuities or remote vesting or any other law applicable to such trust this provision will be modified by inserting date in place of on the date of execution this part will also be modified to reflect that both settlor and spouse have irrevocably waived and released any powers that would cause the trusts to be treated as grantor trusts under part one the beneficiaries are entitled to distributions equal to a maintenance allowance which is defined as such sums of money as shall be necessary to provide maintenance support and education in the manner to which the beneficiary has been accustomed the beneficiaries are also entitled to distributions that exceed this allowance the current instrument allows any trustee to make distributions that exceed the maintenance allowance the proposed modification gives only the independent_trustee the power to make these distributions part two contains the administrative provisions article i provides that spouse has the right during her lifetime to remove or appoint any trustee including a corporate trustee spouse may only remove or appoint a trustee with the prior approval of settlor this provision will be modified as follows plr-120255-11 spouse during her lifetime has the power to remove or appoint any trustee of any trust created hereunder including a corporate trustee spouse may only remove a trustee of a_trust if at least one-half of the remaining trustees of the trust are independent trustees and may only appoint a trustee who is an independent_trustee article i provides that at such time as spouse ceases to serve as a trustee of a particular trust each child of settlor who is then a current income_beneficiary of such trust shall automatically become a co-trustee of such trust upon attaining the age of eighteen years the proposed modifications are as follows after the deaths or incapacities of both settlor and spouse or at such time during the life of spouse as she ceases to serve as a trustee of a particular trust created thereunder and no successor trustee appointed by settlor or spouse is serving with respect to such trust all children of settlor who are then living shall automatically become co-trustees of each such trust the trustee who is the named child together with any trustees appointed by the named child or who succeed to the named child’s position as trustee shall collectively have two votes with respect to all matters to be decided by the trustees of such trust and each of the other two children of settlor shall have in his or her capacity as a trustee one vote upon the deaths resignations or ceasing to serve of both children of settlor who are not named children the named child shall serve as sole trustee of such trust the named child may at any time and from time to time name any person to serve in the named child’s place as trustee or to serve as co-trustee with such named child and may remove any person so appointed but all such trustees so appointed by the child shall collectively share the votes or votes allotted to the trustee who is the named child and such appointments shall not increase such vote or votes provided at such time as no child of settlor who is not the named child is serving as trustee of the named child’s trust the named child may only appoint or remove the trustees of such trust in a manner which results in at least one-half of the trustees being independent trustees article i provides that after the death or incapacity of settlor and spouse any current income_beneficiary over the age of twenty-five years or if there be at any time more than one under any separate trust a majority of them may with respect to his separate trust s remove or appoint any trustee or co-trustee including such current income_beneficiary provided following such removal and appointment at least one-half of all trustees of the affected trust shall be independent trustees the proposed modifications are as follows plr-120255-11 upon the death of any current income_beneficiary of a_trust his or her surviving_spouse shall then serve as a co-trustee of any trust of which all succeeding current income beneficiaries are then under the age of twenty-five years if such surviving_spouse would at any time be a sole trustee of such trust no action shall be taken by the trust until foundation appoints a co-trustee who shall serve with the surviving_spouse as the sole trustees of the trust with each having a single vote at such time as any descendant of the named child reaches age and is a current income_beneficiary of a_trust adult descendant such adult descendant shall automatically become a trustee or co-trustee of the trust in place of i children of settlor who are then serving as one or more co-trustees or ii the trustee appointed by foundation such adult descendants shall have the right to serve as the sole trustee or trustees of such trust a majority of adult descendants who are then serving as trustees of such trust may appoint or remove the trustees of such trust in a manner which results in at least one-half of the remaining trustees being independent trustees a trustee appointed by foundation shall serve as sole trustee in the absence of both a surviving_spouse trustee and an adult descendant trustee article i provides that any individual trustee may resign as trustee and appoint a successor or he may appoint a successor by will he may remove any trustee by him named and appointed and resume the office or name and appoint another including a corporate trustee notwithstanding the foregoing any independent_trustee who resigns or is removed by a trustee who is also a beneficiary of such trust or a descendant of settlor shall be replaced by another independent_trustee provided further no trustee who is a beneficiary of a_trust or descendant of settlor shall remove or appoint a trustee of such trust unless immediately following such removal or appointment at least one-half of all trustees of the affected trust are independent trustees the proposed modification replaces this provision with the following provision if at any time a trustee is prohibited by this instrument from acting because that trustee is not an independent_trustee such trustee may appoint an independent_trustee to act in his or her place and exercise such vote as the trustee otherwise would have been able to exercise article ii dollar_figure gives the trustees the authority to do or perform any act with respect to the trust properties which may be done pursuant to state law and to make any election permitted under the code in their sole discretion any investment in corporate stock or bonds or any business association will not be deemed improper for the reason that any trustee may own stock or bonds of the same corporation or have any interests in the business association or be employed in any capacity by such plr-120255-11 corporation or business association the proposed modifications add the following language the trustees will have no liability with respect to any investment they make with settlor’s consent in any corporation partnership general or limited limited_liability_company or other entity that is controlled directly or indirectly by a group consisting of settlor and his descendants so long as the purchase_price is the fair_market_value of the stock partnership_interest membership interest or other_securities the family securities being acquired determined on the basis of either i a qualified independent appraisal or ii a written purchase and sale agreement between the trust and the seller that provides for adjustment of an agreed purchase_price or quantity of the family securities based upon a final agreement with the internal_revenue_service or a final and non-appealable determination of value by a court of appropriate jurisdiction nor shall they have any duty to sell for reasons of diversification or otherwise the family securities article ii k provides that the trustees are authorized to take out and maintain on the life of any beneficiary under trust any trustee and settlor and spouse life_insurance or any other kind of insurance for the benefit of the beneficiary or beneficiaries or the trust estate in such amount as the trustees in their uncontrolled discretion shall deem advisable the proposed modification provides that this provision is subject_to the restrictions in trust regarding payment of premiums and that this power is further limited by settlor’s intent that trust not be includable in settlor’s gross_estate article ii dollar_figure provides that under state law trustees are relieved from all of the duties restrictions and liabilities imposed by state law the proposed modification replaces this provision in its entirety with the following to the fullest extent permitted under state law which states that the provisions of the trust agreement generally govern the duties imposed on trustees with certain exceptions a corporate trustee may lend funds to a corporate trustee or affiliate of the corporate trustee purchase assets from or sell assets to a trustee or an affiliate of the trustee purchase and sell assets between two trusts of which the corporate trustee is the trustee and purchase or sell shares securities or other financial instruments of a corporate trustee or affiliate article ii dollar_figure give the trustees special directions regarding shares held by trust and refers specifically to company this reference is replaced by corporation plr-120255-11 article iv will be modified to provide that trust sec_1 and and trusts created thereunder will be governed construed and administered according to state law article vi provides that each trust created hereby or pursuant hereto shall be irrevocable and settlor shall have no power to alter revoke or terminate this trust agreement this provision will be modified to add that notwithstanding the foregoing the independent trustees of any trust created hereunder shall have the power exercisable in their sole discretion to make such modifications as are reasonably necessary to ensure that such trust continues to qualify as a gst_exemption trust spouse as co-trustee of trust sec_1 and requests the following rulings the change in situs of trust from state to state will not cause trust to lose its exempt status from gst tax the proposed modifications and restatement of trust will not cause any distribution from or termination of any interests in trust to be subject_to the gst tax the proposed modifications and restatement of trust will not cause any beneficiary of trust to have made a gift_for gift_tax purposes law and analysis ruling sec_1 and sec_2601 of the internal_revenue_code imposes a tax on every gst made after date a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2612 provides that the term taxable_termination means a termination by death lapse of time release of a power or otherwise of an interest in property held in a_trust unless a immediately after such termination a non-skip_person has an interest in such property or b at no time after such termination may a distribution including distributions on termination be made from such trust to a skip_person sec_2612 provides that the term taxable_distribution means any distribution from a_trust to a skip_person other than a taxable_termination or a direct_skip under sec_2612 a direct_skip is a transfer subject_to federal estate or gift_tax of an interest in property to a skip_person plr-120255-11 sec_2631 as in effect for applicable years of the trust provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor under sec_2642 the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is defined as the excess if any of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of the gst_exemption allocated to the trust and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip under a of the tax_reform_act_of_1986 act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the gst is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 the gst tax does not apply to a transfer under a_trust that was irrevocable on 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 under sec_26_2601-1 any trust in existence on date will be considered irrevocable unless the settlor had a power that would have caused inclusion of the trust in his or her gross_estate under sec_2038 or sec_2042 if the settlor had died on 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 paragraph b or of this section hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status in general unless specifically provided otherwise the rules contained in this paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes thus unless specifically noted 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 gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy paragraph b i a b or c of this section by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the plr-120255-11 time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust sec_26_2601-1 provides that for purposes of this section a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust sec_26_2601-1 example provides as follows in grantor who was domiciled in state x executed an irrevocable_trust for the benefit of grantor's issue naming a state x bank as trustee under the terms of the trust the trust is to terminate in all events no later than years after the death of the last to die of certain designated individuals living at the time the trust was executed the provisions of the trust do not specify that any particular state law is to govern the administration and construction of the trust in state x the common_law rule_against_perpetuities applies to trusts in a state y bank is named as sole trustee the effect of changing trustees is that the situs of the trust changes to state y and the laws of state y govern the administration and construction of the trust state y law contains no rule_against_perpetuities in this case however in view of the terms of the trust instrument the trust will terminate at the same time before and after the change in situs accordingly the change in situs does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the transfer furthermore the change in situs does not extend the time for vesting of any beneficial_interest in the trust beyond that provided for in the original trust therefore the trust will not be subject_to the provisions of chapter if in this example as a result of the change in situs state y law governed such that the time for vesting was extended beyond the period prescribed under the terms of the original trust instrument the trust would not retain exempt status sec_26_2601-1 example considers the following situation in grantor established an irrevocable_trust for the benefit of grantor's issue naming a bank and five other individuals as trustees in the appropriate local court approves a modification of the trust that decreases the number of trustees which results in lower administrative costs the modification pertains to the administration of the trust plr-120255-11 and does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification in addition the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust therefore the trust will not be subject_to the provisions of chapter no guidance has been issued concerning judicial modifications that may affect the status of trusts that are exempt from gst tax because sufficient gst_exemption was allocated to the trust to result in an inclusion_ratio of zero at a minimum a modification that would not affect the gst status of a grandfathered trust should similarly not affect the exempt status of such a_trust in this case trust provides that state law governs the trust and all trusts created thereunder when settlor executed trust settlor and spouse resided in state currently they reside in state the proposed modification provides that trust will be governed construed and administered according to state law the proposed change in situs and governing law will not change the termination_date of any trust created under trust thus the proposed change in situs will not shift any beneficial_interest in trust and will not extend the time for vesting of any beneficial_interest in trust accordingly based upon the facts submitted and representations made and assuming court issues an order modifying trust as described above we conclude that the change in situs of trust from state to state will not cause trust to lose its exempt status from gst tax the other proposed modifications of trust are administrative in nature and under sec_26_2601-1 will not be considered to shift a beneficial_interest to a lower generation in the trust see example of sec_26_2601-1 further as discussed above the proposed modifications will not change the termination_date of trust accordingly based upon the facts submitted and the representation made and assuming court issues an order modifying trust as described above we conclude that the proposed modifications and restatement of trust will not cause trust to lose its exempt status from gst tax ruling sec_2501 imposes a tax for each calendar_year on the transfer of property by gift during the calendar_year by any individual 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 plr-120255-11 sec_2512 provides that if the gift is made in property the value thereof at the date of the gift is considered the amount_of_the_gift sec_2512 provides that where property is transferred for less than adequate_and_full_consideration in money_or_money's_worth then the amount by which the value of the property exceeded the value of the consideration is deemed to be a gift and is included in computing the amount of gifts made during the calendar_year in this case the beneficiaries of trust will have the same interests after the proposed modifications that they had prior to the modifications because the beneficial interests of the beneficiaries are substantially the same no transfer of property will be deemed to occur as a result of the modifications accordingly based on the facts submitted and the representations made and assuming that court issues an order modifying trust as described above we conclude that the proposed modifications and restatement of trust will not cause any beneficiary of trust to have made a gift_for gift_tax purposes in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives 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 the sec_2601 rulings are based upon a representation that settlor allocated sufficient gst_exemption to trust to cause trust and trusts created thereunder to have an inclusion_ratio of zero this office has not verified whether trust has an inclusion_ratio of zero the proposed modifications will not cause the inclusion_ratio of trust to change whether the inclusion_ratio is zero or between one and zero however trust will be subject_to gst tax on distributions and termination if the inclusion ration is not zero no opinion is express or implied concerning the estate_tax consequences of the taxpayers requesting the rulings in this letter 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 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 plr-120255-11 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely _________________________ lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter cc