t c memo united_states tax_court les b martin and millie a martin petitioners v commissioner of internal revenue respondent docket no filed date les b martin and millie a martin pro sese t keith fogg and veena luthra for respondent memorandum findings_of_fact and opinion jacobs judge in a notice_of_deficiency dated date respondent determined the following deficiencies and penalties with respect to petitioners' federal income taxes accuracy-related_penalty year deficiency dollar_figure big_number sec_6662 dollar_figure big_number following concessions by the parties the issues for decision are whether petitioners properly deducted as job expenses and other miscellaneous deductions on schedule a itemized_deductions of their tax_return dollar_figure in moving_expenses dollar_figure for country club_dues and expenses dollar_figure in unreimbursed employee business_expenses dollar_figure in investment_expenses dollar_figure in job- search expenses and dollar_figure for tax-work audit expenses whether petitioners properly deducted dollar_figure as schedule c business_expenses for whether petitioners properly deducted miscellaneous expenses totaling dollar_figure on schedule a of their tax_return whether petitioners properly deducted dollar_figure as business_expenses on schedule c of their tax_return and whether petitioners are liable for the accuracy- related penalty under sec_6662 for and all section references are to the internal_revenue_code for the years under consideration all rule references are to the tax_court rules_of_practice and procedure all dollar amounts have been rounded findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioners husband and wife resided in charlottesville virginia at the time they filed their petition they timely filed joint returns for and they submitted amended and tax returns form 1040x to respondent's counsel on date which was approximately days prior to trial in date mr martin accepted employment with woodhead industries inc woodhead as president of aero-motive co aero- motive a subsidiary of woodhead as such mr martin was responsible for overseeing a 250-person dollar_figure million manufacturing plant in kalamazoo michigan he was hired to do a turnaround and save the company prior to accepting employment with woodhead mr martin worked for allen bradley co in cleveland ohio mr martin was relieved of his duties as president of aero- motive on date he remained in woodhead's employ as a consultant until date as part of mr martin's severance package woodhead agreed to continue paying mr martin from date until date in the event he found no other employment during that period of time moving_expenses in date mr martin moved from cleveland to kalamazoo living in an apartment made available to him by woodhead the company apartment mrs martin joined her husband in kalamazoo following the sale of their house in cleveland in april or may of because mrs martin brought the family pets a dog and a cat with her to kalamazoo petitioners were required to move from the company apartment to another apartment the furniture and personal belongings of the martins were shipped from cleveland to kalamazoo at the time mrs martin joined her husband most of the furnishings and belongings were placed in storage woodhead paid approximately dollar_figure of the expenses of shipping mr martin paid the expenses_incurred in moving from the company apartment to the second apartment the record does not reveal the year in which woodhead paid the dollar_figure but apparently the dollar_figure was reported on mr martin's form_w-2 in the year paid petitioners purchased a house in kalamazoo that required refurbishing refurbishing was completed in thereafter petitioners moved into the refurbished house on schedule a of their return petitioners claimed dollar_figure in moving_expenses the moving_expenses were for costs incurred in in moving petitioners' furniture and belongings from storage and their apartment to petitioners' newly refurbished house respondent disallowed this deduction claiming the expenses_incurred were not reasonably proximate in time to the commencement of mr martin's employment with woodhead and the storage expenses were not in-transit storage expenses unreimbursed employee business_expenses on schedule a of their return petitioners claimed dollar_figure in unreimbursed employee business_expenses of this amount dollar_figure was for membership fees and expenses in gull lake country club the country club paid for by woodhead and reported on mr martin's form_w-2 mr martin joined the country club because woodhead paid the country club fees and continued in date and resigned in date when it was apparent that his position as president of aero-motive would be terminated approximately dollar_figure of the country club expenses represents an initiation fee the balance is for client entertainment respondent disallowed the deduction for country club fees and expenses claiming the membership fees are a capital_expenditure and they are not ordinary and necessary business_expenses on petitioners' amended tax_return the amount claimed as unreimbursed employee business_expenses other than country club fees and expenses was reduced from dollar_figure dollar_figure - dollar_figure to dollar_figure at trial and in their posttrial brief petitioners state they are willing to concede percent of the dollar_figure so that now they claim dollar_figure for unreimbursed employee business_expenses respondent disallowed the deduction for unreimbursed employee business_expenses claiming petitioners failed to substantiate these expenses and petitioners did not prove mr martin's employer would have denied reimbursement for these expenses had mr martin sought it investment_expenses on schedule a of their return petitioners deducted dollar_figure as investment_expenses on petitioners' amended tax continued expenses and reported the payment as income to mr martin on his w-2 the claimed deduction for the country club fees and expenses should have been characterized as other expenses rather than unreimbursed employee business_expenses return the amount claimed as investment_expenses was reduced to dollar_figure at trial and in their posttrial brief petitioners state they are willing to concede percent of the dollar_figure so that now they claim dollar_figure for investment_expenses the investment_expenses were incurred with respect to mr martin's investigating petitioners' possible purchase of stock in publicly held companies respondent disallowed this deduction primarily on the basis of petitioners' failure to substantiate and on the alternative basis that even if the expenses are substantiated they were incurred in connection with searching for or acquiring new investments and should be added to the basis of the stock acquired job-search expenses on schedule a of their return petitioners claimed dollar_figure in job-search expenses these expenses were incurred prior to and following the termination of mr martin's position as president of aero-motive at trial and in their posttrial brief petitioners state they are willing to concede percent of the dollar_figure so that now they claim dollar_figure for job-search expenses respondent disallowed this deduction on the basis of petitioners' failure to substantiate and petitioners' failure to show the business_purpose of the expenditures tax-work expenses on schedule a of their return petitioners claimed dollar_figure in tax-work audit expenses the expenses are for travel to their attorney's office and related activities relative to prior years' taxes on petitioners' amended tax_return the amount claimed for tax-work expenses was reduced to dollar_figure at trial and in their posttrial brief petitioners state they are willing to concede percent of the dollar_figure so now they claim dollar_figure for tax-work expenses respondent disallowed this deduction on the basis of failure to substantiate schedule c expenses after mr martin was relieved of his duties as president of aero-motive he started a consulting business known as m l associates during and and for or years prior thereto mrs martin operated a business known as mam leasing-r e that leased personal computers which had been acquired in starting in petitioners decided to change the business direction of mam leasing-r e to that of real_estate development the schedules c filed with petitioners' original returns for and aggregated the income and expenses of m l associates and mam leasing-r e on petitioners' amended tax returns for and the income and expenses of m l associates and mam leasing- r e were separately reported on separate schedules c the income and expenses reported on schedules c of petitioners' original and amended returns are as follows gross_income expenses original return dollar_figure -0- dollar_figure dollar_figure amended_return big_number -0- big_number big_number the increase in the amount of income for dollar_figure between that reported on the amended_return and that reported on the original return is the gain short-term from the sale of woodhead stock which had originally been reported on schedule d of petitioners' tax_return at trial and in their posttrial brief petitioners state they are willing to concede percent of the expenses claimed on their amended returns so that now they claim expenses of dollar_figure for and dollar_figure for the majority of these expenses represents home_office expenses including the purchase of furniture and automobile expenses respondent disallowed this deduction on the ground that the expenditures were not ordinary and necessary expenditures further as to those deductions claimed in connection with the use of petitioners' residence as a home_office the deductions were disallowed in part on the basis that some of the claimed expenses were personal and on the basis that petitioners failed to prove their home_office was used exclusively for business purposes miscellaneous_itemized_deductions on schedule a of their return petitioners claimed dollar_figure in miscellaneous itemized expenses apparently the majority of the expenses with regard to this deduction consist of travel and meal expenses in connection with mr martin seeking new employment on petitioners' amended tax_return the amount of the deduction was increased to dollar_figure no explanation was given for the dollar_figure difference respondent disallowed the deduction for lack of substantiation opinion deductions are a matter of legislative grace 292_us_435 taxpayers bear the burden of establishing that they are entitled to the claimed deductions rule a 290_us_111 this includes the burden of substantiating the amount and purpose of the item claimed sec_6001 65_tc_87 affd per curiam 540_f2d_821 5th cir sec_1_6001-1 income_tax regs if claimed deductions are not adequately substantiated we may estimate them provided we are convinced that the taxpayer has incurred such expenses and we have a basis upon which to make an estimate 39_f2d_540 2d cir 85_tc_731 moving_expenses sec_217 permits a deduction for moving_expenses paid_or_incurred during the taxable_year in connection with the commencement of work by the taxpayer as an employee at a new principal_place_of_work to qualify as being in connection with the commencement of work the move must be reasonably proximate both in time and place to the commencement of work at the new workplace in general moving_expenses incurred within year of the commencement of work are considered to be reasonably proximate in time to such commencement moving_expenses incurred after the 1-year period may be considered reasonably proximate in time if there are circumstances which prevented the taxpayer from incurring the expenses of moving within the 1-year period sec_1 a income_tax regs costs of storage are not deductible unless incurred in transit which is defined as within any consecutive 30-day period after the goods are moved from the taxpayer's former residence and before delivery at the new residence sec_1_217-2 income_tax regs petitioners moved from cleveland to kalamazoo in early when mr martin began a new job petitioners claim a dollar_figure deduction for moving_expenses that were incurred in we do not believe that these expenses were reasonably proximate in time to the commencement of mr martin's new employment in kalamazoo petitioners claim that there were circumstances beyond their control which dictated the amount of time for the move the local real_estate market was very tight and no houses were available and business related job activities required all of mr martin's time we have considered these arguments and reject them there was no showing that a suitable house in the kalamazoo area could not have been acquired within a 1-year period and although mr martin's job activities might have required a substantial portion of his time there was no showing that mrs martin could not have looked for suitable housing further the expenses of moving the goods from storage to petitioners' newly refurbished house were not incurred in transit but rather are storage related expenses therefore respondent's determination with respect to the disallowance of the deduction for moving_expenses is sustained employee business_expenses we now turn our attention to petitioners' deduction for employee business_expenses pursuant to sec_162 a taxpayer may deduct all ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business in general an expense is ordinary if it is considered normal usual or customary in the context of the particular business out of which it arose 308_us_488 the term ordinary is also used to distinguish currently deductible items from capital expenditures 383_us_687 an expense is necessary if it is appropriate and helpful to the operation of the taxpayer's trade_or_business 83_tc_356 affd 777_f2d_662 11th cir 82_tc_538 only the portion of an expense that is reasonable in amount is deductible under sec_162 380_f2d_786 9th cir petitioners deducted dollar_figure for membership fees and expenses in gull lake country club mr martin was an active member of the country club from july to date mr martin testified that he joined the country club only because he was strongly encouraged to do so in connection with his employment he further testified that he and his wife never belonged to a country club prior to the time he joined gull lake country club and have not belonged to one since he used the country club solely to entertain business customers and never on social occasions his wife and family never used the facilities of the club mr martin further testified frankly mrs martin did not want to join a country club we're not country club type people and she was very much against it always has been against it still is against it but after i received some pressure i said hey it's going to be one way or the other so i'll join and we'll try it and i finally joined it we found mr martin's testimony in this regard to be credible respondent argues that a one-time club membership is not currently deductible but is a capital_expenditure 30_tc_84 affd 276_f2d_58 5th cir as a general proposition we agree that a one- time club membership fee is a capital_expenditure because the benefits of the payment will last beyond a 1-year period however here mr martin both joined and terminated his membership in the country club in because we find that mr martin's expenses and fees in the country club were business_expenses and because mr martin both joined and terminated his country club membership in the same year we hold that petitioners are entitled to a deduction of dollar_figure on schedule a of their tax_return petitioners also claim for dollar_figure as a deduction for unreimbursed employee business_expenses these expenses are for taking employees for refreshments after work to summarize the events from the day and plan the next day ordinary and necessary business_expenses generally may not be deducted under sec_162 if reimbursement is available from a taxpayer's employer 79_tc_1 mr martin testified that most of the expenses he incurred for taking employees for refreshments after work were submitted to and reimbursed by his employer but that he was required to pocket the claimed expenses because of budget constraints petitioners presented no other evidence in this regard we are not convinced that had mr martin sought reimbursement for the claimed pocketed expenses in his request would have been denied accordingly except for the country club fees and expenses we sustain respondent's disallowance of petitioners' claimed deductions for unreimbursed employee business_expenses for investment_expenses the next matter for our attention is whether petitioners are entitled to deduct dollar_figure in investment_expenses for the expenses were incurred in mr martin's investigating publicly held companies with a view towards the possible purchase of their stock respondent disallowed a deduction for these costs on the ground that they are nondeductible capital expenditures to be added to the basis of the stock acquired 78_tc_910 petitioners failed to show error in respondent's determination thus we sustain respondent's disallowance of the deduction for investment_expenses job-search expenses petitioners claim entitlement to deduct in dollar_figure in job- search expenses although respondent argued that petitioners failed to show the business purposes of these expenditures mr martin testified that when he realized that his position with aero- motive was in jeopardy he began to look for other work we believe him but we do not find that the entire amount of job- search expenses that petitioners claim is deductible a review of petitioners' receipts shows a number of items that are not ordinary and necessary expenses as required by sec_162 for instance petitioners submitted receipts for the purchase of people magazine and the enquirer and for gifts to friends visited by petitioners there is a dollar_figure check payable to video land with no notation as to its purpose petitioners also submitted receipts for the purchase of insecticide charcoal and charcoal starter based on the record presented and using our best estimate we find and thus hold that petitioners are entitled to a deduction for job-search expenses in the amount of dollar_figure for tax-work expenses petitioners now claim entitlement to deduct dollar_figure as tax-work audit expenses for most of these expenses are for travel to petitioners' attorney's office and related activities for earlier years respondent argues that petitioners did not substantiate mileage expenses as required by sec_274 we agree with respondent accordingly we sustain respondent's disallowance of the deduction for tax-work audit expenses schedule c expenses petitioners originally claimed a dollar_figure schedule c business loss for that resulted from their claiming dollar_figure in business_expenses and dollar_figure in income the statutory notice disallowed dollar_figure of the expenses claimed as a sec_179 deduction on their original return petitioners claimed dollar_figure in expenses relating to the business of mr martin on their amended return petitioners claimed dollar_figure in expenses relating to the business of mr martin and dollar_figure in expenses the requirements imposed by sec_274 are in addition to those of sec_162 furthermore in the case of travel_expenses sec_274 overrides the court's ability to approximate a taxpayer's allowable expenses under the cohan doctrine 50_tc_823 affd per curiam 412_f2d_201 2d cir sec_179 in general allows a taxpayer to elect to expense the cost of certain property known as sec_179 property for the taxable_year in which the property is placed_in_service in general sec_179 property is tangible_property used in the active_conduct of a taxpayer's trade_or_business that would be subject_to depreciation but for the election relating to the business of mrs martin thus the total expenses petitioners claimed for on their amended_return for both businesses was dollar_figure respondent contends that petitioners should be allowed no schedule c expenses for the year other than those expenses already allowed by respondent in the statutory notice petitioners originally claimed a dollar_figure schedule c business loss for that resulted from their claiming dollar_figure in business_expenses and no gross_receipts the statutory notice disallowed all of the claimed expenses on their amended return petitioners claimed dollar_figure in expenses relating to the business of mr martin and dollar_figure in expenses relating to the business of mrs martin thus the total expenses petitioners claimed for on their amended_return for both businesses was dollar_figure respondent contends that petitioners are entitled to no schedule c expenses for petitioner and mrs martin each claimed a home_office deduction respondent contends that with respect to mr martin used his office until date both for his consulting business and as an employee thus violating the exclusive-use requirement of sec_280a because his use of a home_office as an employee was not for the convenience of his employer mr martin used his claimed home_office in connection with his work as president of aero-motive until date respondent also argues that many of the expenses petitioners are claiming for business appear to be household expenses and that they did not prove that these expenses are ordinary and necessary business_expenses for example mr martin claimed expenses for plumbing installing a fireplace door snow removal pest spraying and repair and maintenance of a deck mrs martin claimed expenses for sewage and garbage collection and stress training respondent also argues that most of the furniture mr martin purchased for his home_office was more of a personal nature than for business respondent notes that mr martin had no income from his schedule c activity during and sec_262 denies a deduction for any personal living or family_expenses with respect to deductions under sec_162 the taxpayer bears the burden of proving that an expense was incurred for business rather than personal reasons 72_tc_433 specifically the taxpayer must show that the expense was incurred primarily to benefit his her business and there must be a proximate rather than a remote or incidental relationship between the claimed expenses and the taxpayer's business id in the instant case petitioners failed to substantiate that some of the claimed expenses were incurred primarily to benefit their schedule c businesses further we do not find that petitioners used as required by sec_280a that portion of their residence claimed as a home_office either a as the principal_place_of_business for their claimed business activities or b as a place of business to meet or deal with clients moreover petitioners have not satisfied the limitation of sec_280a which provides that the amount of the home_office deduction is limited to the excess of the gross_income generated from the business activity conducted in the home_office less all other deductible expenses attributable to such activity which are not allocable to the use of the home_office itself in other words the deduction may not create or increase a net_loss from the business activity to which it relates grinalds v commissioner tcmemo_1993_66 citing h rept pincite c b vol in the instant case mr martin derived no income from his consulting business in or and mrs martin only derived dollar_figure in from her schedule c activity and no income for petitioners also claim entitlement to a business deduction for_the_use_of their honda accord for business activities petitioners both testified that their honda was used almost exclusively for business however on the application_for the insurance_policy on the automobile petitioners stated the car was used for pleasure and not for business in this regard we do not find petitioners' testimony credible in sum petitioners are not mr martin contends his income from woodhead from the time he was relieved as president of aero-motive in date until date should be characterized as schedule c income we disagree mr martin received a w-2 with respect to his income which petitioners reported as wages on their original and tax returns entitled to a deduction for any of the claimed schedule c expenses for or except to the extent allowed in the statutory_notice_of_deficiency miscellaneous_itemized_deductions for petitioners claimed dollar_figure of miscellaneous_itemized_deductions petitioners provided no documentary_evidence to support their conclusory testimony that they incurred these deductions although sworn testimony may suffice as proof when it is so general and conclusory in character as it was here it will not be sufficient to satisfy petitioners' burden_of_proof see 36_tc_672 affd 309_f2d_431 9th cir in addition since the majority of these expenses are for travel and entertainment they are subject_to the special substantiation provisions of sec_274 and hence normally can not be substantiated by testimony alone consequently we sustain respondent's disallowance of petitioner's claimed deduction in for miscellaneous_itemized_deductions accuracy-related_penalty finally we must decide whether petitioners are liable for the accuracy-related_penalty under sec_6662 for and sec_6662 imposes a penalty equal to percent of the portion of the underpayment that is attributable to negligence or disregard of rules or regulations sec_6662 and b negligence is defined as the failure to exercise the due care that a reasonable prudent person would exercise under similar circumstances 731_f2d_1417 9th cir affg 79_tc_714 85_tc_934 a taxpayer has the burden of proving that respondent's determination is in error rule a 79_tc_846 petitioners claimed numerous schedule a and schedule c expenses on their and returns at trial they substantially reduced the amount of the deduction for most of these expenses for the most part their documentation to substantiate these expenses was lacking indeed petitioners presented no documentary_evidence to support their claim of dollar_figure in miscellaneous_itemized_deductions for considering all the facts we find that petitioners were negligent and disregarded rules and regulations in preparing their and returns thus we sustain respondent's determination that petitioners are liable for the accuracy-related_penalty on the amount of the underpayment for and to reflect the foregoing 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 psi b02 plr-116567-08 date date x y ---------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ----------------------- country ---------- date ---------------------- dear-------------- this responds to a letter dated date submitted on behalf of x requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an election to be treated as a disregarded_entity the information submitted states x is an entity organized on date under the laws of country by a single owner via two wholly owned disregarded entities of y with limited_liability x intended to be treated as a disregarded_entity for federal tax purposes effective date however x did not timely file a form_8832 entity classification election sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 sec_301_7701-2 provides guidance on the classification of a foreign eligible_entity for federal tax purposes under sec_301_7701-3 except as provided in sec_301_7701-3 unless it elects otherwise a foreign eligible_entity is classified as an plr-116567-08 association if all members have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides that an election under sec_301_7701-3 will be effective on the date specified on form_8832 or on the date filed if no such date is specified on the form the effective date specified on form_8832 cannot be more than days prior to the date the form is filed and cannot be more than months after the date on which the form is filed sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make 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 code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 sets forth the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as a disregarded_entity for federal tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code plr-116567-08 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x's authorized representative sincerely curt g wilson deputy associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


office_of_chief_counsel internal_revenue_service memorandum cc ita b05 ----------------- postf-136193-03 number release date uilc date date to gary a benford area_counsel small_business self-employed area from john aramburu senior counsel branch income_tax and accounting ------------------------- subject this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent in response to your date request for legal advice we have reviewed your memorandum regarding whether the taxpayer had income_from_discharge_of_indebtedness and whether this income is excludable under sec_108 of the internal_revenue_code issue whether as a result of an obligation to make a restitution payment the taxpayer realized income that may be considered discharge_of_indebtedness income conclusion the discharge of the restitution obligation is not a discharge_of_indebtedness within the meaning of sec_61 or sec_108 because there is no discharge_of_indebtedness income whether a deduction for the restitution payment would be allowable under sec_162 or another provision of the code and the applicability of sec_108 is moot however because you specifically asked whether the income is subject_to the deduction exception under sec_108 of the code a general analysis of that issue is provided below postf-136193-03 facts ------------------------------------- the corporation is owned and controlled by its sole shareholder -------------------------- the taxpayer who is the president of the corporation the united_states department of energy doe determined that in ------- and ------- the corporation had violated layering regulations that generally impose price controls on resales of crude_oil in ------- doe ordered restitution of the overcharges in the amount of dollar_figure--------------------plus interest the order held the taxpayer jointly and severally liable for the corporation s violation in ------- the federal energy regulatory commission ferc reviewed and affirmed the doe remedial order in ------- the united_states district_court for the ----------------------------------------------------- -----------------------------------------------------------------------------------------reviewed the ferc decision and entered a final judgment against the corporation and the taxpayer requiring them to disgorge as restitution the sum of dollar_figure--------------------plus interest as provided in the doe remedial order the ferc and the district_court decisions were affirmed in ------- and a writ of certiorari was refused by the supreme court in ------- in ------- doe released its judgment lien against the taxpayer and issued a form c cancellation of debt to the taxpayer in the amount of dollar_figure---------------------- the principal_amount of the judgment plus interest to that date examination determined that this amount was income to the taxpayer pursuant to sec_61 of the code you believe that upon doe s issuance of the form 1099-c and release of the judgment lien the taxpayer realized income that may be considered discharge_of_indebtedness income however you ask whether the income is subject_to the deduction exception under sec_108 of the code law sec_61 of the code provides that gross_income includes all income from whatever source derived including income_from_discharge_of_indebtedness see sec_61 sec_108 of the code provides that no income shall be realized from the discharge_of_indebtedness to the extent that payment of the liability would have given rise to a deduction analysis postf-136193-03 issue whether the taxpayer has discharge_of_indebtedness income the taxpayer alleges that the liability for restitution of the overcharges resulted from transactions that benefited the corporation and that discharge of such an obligation does not result in taxable_income to him generally when a taxpayer receives funds tax free because of the obligation to repay the debtor must report income in the taxable_year in which the obligation to repay is cancelled because the debtor has realized an accession to wealth and should be taxed accordingly see 284_us_1 later codified in sec_61 in kirby lumber the supreme court held that if a corporation repurchases its own bonds for an amount less than the issue_price then the difference between the issue_price and the repurchase price constitutes taxable_income to the corporation the court based its decision on the theory that a reduction in liabilities makes available a corresponding amount of assets and this adjustment to the balance_sheet constitutes gross_income not all discharges of indebtedness must be included in gross_income courts have held that the application of the kirby lumber rules should not result in the realization of income upon the release of the taxpayer s obligation as a guarantor for example in hunt v commissioner tcmemo_1990_248 the tax_court explained the situation of a guarantor is not like that of a debtor who as a result of the original loan obtains a nontaxable increase in assets the guarantor obtains nothing except perhaps a taxable consideration for his promise where a debtor is relieved of his obligation to repay the loan his net_worth is increased over what it would have been if the original transaction never occurred this real increase in wealth may be properly taxable under kirby however where the guarantor is relieved of his contingent_liability no previously untaxed accretion in assets thereby results in an increase of net_worth payment by the principal debtor does not increase the guarantor s net_worth it merely prevents it pro tanto from being decreased the guarantor no more realizes income from the transaction that sic he would if a tornado bearing down on his home and threatening loss changes course and leaves the house intact hunt v commissioner tcmemo_1990_248 citing 50_tc_803 acq c b xxiv citations omitted similar to the present case in whitmer v commissioner t c memo the taxpayer formed a wholly-owned corporation midwest agencies inc midwest midwest sold insurance products on a commission basis and entered into an agreement with itt life_insurance corp itt under the agreement when an insurance agent sold a policy he received from itt a commission that approximated the total commissions that would be earned over the life of the policy including renewals the postf-136193-03 unearned portion of each commission was considered a loan if the policy lapsed or was canceled the portion of the commission remaining unearned on the policy was treated as a liability of midwest when itt midwest and the taxpayer terminated their business relationship itt filed suit against midwest for repayment of advance commissions the taxpayer was named as a defendant because he guaranteed all of midwest s obligations to itt midwest and the taxpayer filed a counterclaim and the parties settled the litigation by signing a mutual release the service determined that the taxpayer realized discharge_of_indebtedness income the tax_court ruled against the service stating midwest obtained a nontaxable increase in assets on account of its debt to itt the taxpayer did not to be sure the taxpayer intended as midwest s sole shareholder to derive some benefit from the arrangement with itt the hard fact remains however that the commissions and the loan proceeds that were the subject of the debt went to midwest and they did not go into taxpayer s pocket itt s forgiveness of its debt to midwest also did not increase taxpayer s net_worth it merely prevented petitioner s net_worth from being decreased id pincite in the present case according to your memorandum the taxpayer had personal control of the operations of the corporation and participated in the transactions in which the overcharges occurred he was the only one with authority to conduct such trades in addition you state that a review of transcripts of the taxpayer s account for the years --- ------- through ------- indicates that the taxpayer did not have sufficient reported income to generate dollar_figure--------------- but that the taxpayer has admitted to taking approximately dollar_figure-- ----------------- offshore at about the same time as the corporation’s overcharges consequently under the central figure liability theory you conclude in accordance with doe s earlier determination that the taxpayer personally benefited from the overcharges however in accordance with the preceding case law if the taxpayer did not personally benefit from the overcharges his role is in substance that of a guarantor on the obligation and the discharge of the obligation does not result in taxable_income to the taxpayer we have not found any case law or guidance directly on point however evaluating the present transaction in its entirety even if the taxpayer actually received the dollar_figure-------------- ----------------- this amount was in all likelihood income to the taxpayer that should have been taxed at that time unlike the typical sec_108 situation in which a taxpayer receives nontaxable loan proceeds and a discharge_of_indebtedness leads to an increase in the debtor’s assets in this case income is not realized upon the discharge of the restitution the need to limit any discharge_of_indebtedness income to the extent to which the taxpayer benefited from the overcharges is illustrated by a hypothetical discharge of both the taxpayer and the corporation unless the income of the joint obligors is limited cancellation of a single amount would result in double the amount of income see significant service_center advice date postf-136193-03 obligation because the original receipt of the dollar_figure----------------already increased the taxpayer’s net_worth consequently the discharge of the restitution payment did not increase the taxpayer’s net_worth but merely prevented the taxpayer’s net_worth from being decreased thus we believe the discharge is not a discharge_of_indebtedness within the meaning of sec_61 or sec_108 issue whether the taxpayer’s restitution payment would be deductible under sec_162 sec_162 allows as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_1_162-21 of the income_tax regulations provides that a fine or similar penalty includes an amount ii paid as a civil penalty imposed by federal state or local law or iii paid in settlement of the taxpayer’s actual or potential liability for a fine or penalty civil or criminal sec_1_162-21 provides in relevant part that compensatory_damages paid to a government do not constitute a fine or penalty sec_1_162-1 provides that business_expenses deductible from gross_income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade_or_business it is well settled that expenses paid_by a taxpayer on behalf of another person without pertaining to the taxpayer’s trade_or_business are not deductible by the taxpayer under sec_162 see eg 290_us_111 26_tc_73 ludwig v commissioner t c memo however expenses made on behalf of another person are deductible under sec_162 when the payment is connected with a trade_or_business of the taxpayer see eg 64_tc_132 in the taxpayer’s case whether any payments pursuant to the remedial order would have been deductible under sec_162 by the taxpayer depends in part upon the taxpayer’s reasons for any payment he might have made there is no indication in the facts as to the taxpayer’s basis for his claim of the sec_162 deduction the following is a general discussion of the legal rules that are applicable in ludwig the taxpayer was the sole shareholder of a corporation that was liquidated in in the department of labor dol sued both the corporation and the taxpayer for unpaid overtime on behalf of the corporation’s former employees the dol alleged that the taxpayer was the alter ego of the corporation and therefore personally liable to pay the overtime the taxpayer settled with the dol and paid an amount designated as overtime wages the judgment provided that the payment was in settlement of the taxpayer’s personal liability for the alleged failure of the corporation to pay the claimed overtime wages the taxpayer and his spouse deducted the amount of the settlement payment on their schedule c profit or loss from business during the corporation was no longer in business and the taxpayer worked as an employee of another company postf-136193-03 the ludwig court held that the settlement paid_by the taxpayer in satisfaction of the judgment was not deductible by the taxpayer under sec_162 the court said that although the taxpayer was the president and sole shareholder of the corporation the business of the corporation may plainly not be treated as the trade_or_business of the taxpayer himself a distinction which has been recognized in a long line of cases it was not material to the analysis under sec_162 that the taxpayer was personally liable for the judgment ludwig is factually distinguishable from gould in gould the taxpayer was allowed a deduction under sec_162 for his payment of expenses_incurred by his wholly owned corporation gph the taxpayer was an employee director and minority shareholder of another corporation in the same field imc when gph began to have financial difficulties and to fail its creditors grew concerned about its inability to make payments imc’s directors became concerned that gph’s financial condition might adversely affect imc because of imc’s association with the taxpayer the court found as a fact that the taxpayer believed that his employment with imc would be terminated unless he settled gph’s affairs satisfactorily the court held that payments made by the taxpayer to satisfy the creditors of gph were deductible by the taxpayer under sec_162 because they were made in expectation of continued receipt of earnings from his employment at imc in allowing the taxpayer the deduction the gould court drew a distinction between payments made by the taxpayer to protect his employment with imc and payments made by the taxpayer to revitalize gph or to protect his investment in imc the court indicated that while the former were deductible in the taxpayer’s trade_or_business as an employee of imc the latter would be non-deductible contributions to the capital of gph or imc the taxpayer’s trade_or_business as a corporate officer and sole shareholder of the corporation was not the corporation’s trade_or_business_expenses that the corporation would be entitled to deduct under sec_162 are not ordinarily deductible under sec_162 by the taxpayer as an individual either in his capacity as corporate officer employee or shareholder of the corporation regardless of his legal_obligation to make the payments ihrig pincite ludwig pincite therefore generally the taxpayer would not be entitled to a deduction under sec_162 for payments pursuant to the remedial order even if the corporation was entitled to a sec_162 deduction for the same payment if however the taxpayer had made payments pursuant to the remedial order for a reason connected with or pertaining to his trade_or_business when the payment was made the payment would be deductible under sec_162 as an ordinary and necessary business_expense of the taxpayer under gould because there is no indication in the facts we have regarding the taxpayer’s motive in the hypothetical event he had made payments pursuant to the remedial order we think it is likely that gould does not apply and that the taxpayer would not be allowed a postf-136193-03 deduction under sec_162 in general taxpayers must prove their entitlement to sec_162 deductions 373_us_193 gould pincite if the taxpayer has facts to indicate that gould or similar cases would have applied then the deduction probably would have been allowed under sec_162 subject_to possible disallowance by sec_162 issue whether sec_162 would have barred a deduction for the restitution payment made by the taxpayer pursuant to the remedial order sec_162 disallows a deduction for civil penalties that are imposed for the purpose of enforcing the law or as punishment for violation of the law however a civil payment may be deductible if it is imposed to encourage compliance with the law or as a remedial measure to compensate another party see eg 88_tc_1384 aff’d f 2d 9th cir where a payment could serve both punitive and compensatory purposes it is necessary to determine which purpose the payment was designed to serve 73_tc_1226 72_tc_1136 48_tc_15 the characterization of a payment for purposes of sec_162 depends on the origin of the liability giving rise to the payment middle atlantic distributors inc t c pincite the origin of a settlement payment would generally be the original claims to which the payment relates adolf meller co v united_states f 2d cl_ct however courts will typically give effect to the express characterization of a settlement payment by the parties to a settlement agreement see eg grossman sons inc t c pincite revrul_80_334 1980_2_cb_61 in the taxpayer’s case ferc stated that the taxpayer’s joint_and_several_liability for restitution was not a penalty as against the taxpayer in addition doe’s method of obtaining restitution for violations of the layering regulations is through remedial orders and you indicated that there is nothing in the remedial order to indicate that the restitution was intended to be a penalty these factors suggest that the restitution for violating the layering provisions may be intended to be remedial rather than punitive and intended to encourage compliance with the law thus unless there is evidence to indicate otherwise we do not think that sec_162 would have barred the deduction this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call --------------------- if you have any further questions


significant index nos dollar_figure and dollar_figure department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division sep se t'gp ral ts plan state x company abc option x date dear this letter is in response to your request dated date as modified by letters dated date date date and date in which you request a letter_ruling concerning the effects under sec_401 and sec_401 arising in connection with a proposed new investment option under the plan in particular you have requested rulings that guaranteed withdrawals under the abc option constitute a life_annuity for purposes of the qualified joint and survivor rules under sec_401 and sec_417 the applicable annuity_starting_date for qjsa purposes is the date when guaranteed withdrawals commence under the abc option the following facts and representations have been submitted under penalty of perjury in support of the ruling_request the company is a limited_partnership whose principal_place_of_business is located in state x the plan is a profit-sharing_plan qualified under code sec_401 and includes a cash_or_deferred_arrangement described in code sec_401 the plan last received a determination_letter by letter dated date the plan intends to offer the abc option as a new investment option to plan participants a participant can choose the abc option for all or part of the funds in the participant’s individual_account in the plan the abc option is a target-date fund designed to seek high returns when retirement is many years off to gradually moderate risk over time and to automatically secure annual lifetime retirement income as retirement age approaches through an insurance guarantee from an operational perspective as retirement age approaches a portion of a participant’s investments under the abc option would automatically be directed into group flexible premium variable deferred_annuity contracts issued by insurance_companies funded by a separate_account of each insurance_company that would be invested in a balanced mix of equities and fixed income instruments the portion of a participant’s funds under the abc option that would be directed towards variable_annuity contracts would be gradually phased in beginning around the time the participant reaches age with a complete phase-in ie all funds under the abc option would be invested in variable_annuity contracts by age unlike traditional target-date funds as participants reach retirement age the mix of equity to fixed income instruments is not adjusted downwards rather since the participant has secured lifetime income as described below the participants’ investment in the equity markets is maintained at a meaningful level in addition to standard investment management and operational fees a participant's investment in the abc option is subject_to additional attained-age insurance fees the additional insurance fee is expected to be fixed at x basis points starting on or after age and after termination of employment a participant can elect the glw election to receive guaranteed lifetime annual withdrawals guaranteed withdrawals determined as the product of a specified percentage guaranteed percentage and a participant's base_amount the guaranteed percentage will be determined as the average of percentages specified by each of the insurance_companies underwriting the abc option a participant's base_amount will be initially determined as the amount of the funds in the participant's account under the abc option coincident with the participant’s attainment of age however at each subsequent birthday the base_amount will be redetermined as the greater of the prior year’s base_amount and the account balance coincident with each such subsequent birthday thus the base_amount may ratchet up but it generally can not decrease a participant who takes no action subsequent to his or her glw election will receive payments for the remainder of his or her lifetime in amounts equal to or greater than the initial guaranteed withdrawal amount this is the case regardless of the amount of funds if any’ in his or her account at the time of the payment alternatively a participant may elect at any time to withdraw all or part of the remaining funds in his or her account in such cases his base_amount will be reduced proportionately consequently decreasing future guaranteed withdrawal amounts a participant also has the option of skipping a guaranteed withdrawal entirely or withdrawing an amount less than the amount of his or her guaranteed withdrawal the effect of either option would generally be to increase his or her base_amount consequently increasing his or her future guaranteed withdrawal amounts subsequent to the glw election a participant may transfer funds that were in his or her account but were not originally under the abc option to the abc option a ' a participant’s account balance is determined as the net of contributions plus investment earnings less expense charges less withdrawals if postretirement investment experience is poor or if a participant experiences extraordinary longevity cumulative withdrawals and expense charges may eventually exceed cumulative investment earnings on the initial account balance ie the account balance at the time of the glw election although guaranteed withdrawals will continue for the lifetime of the participant in such cases the account balance of the participant will become dollar_figure ifa participant withdraws all of the funds in his or her account guaranteed withdrawals will cease in situations in which no or reduced withdrawals are taken during a year the succeeding year’s account balance will generally be greater than the prior year’s account balance because the net of the prior year’s investment earnings less expense charges less withdrawals ie the increase in a participant’s account balance would most likely be a positive amount in other words a participant’s account balance will increase whenever the prior year’s investment earnings exceed the sum of the expense charges and whatever withdrawals are taken whenever the new account balance is greater than the prior year’s base_amount the new account balance will become the new base_amount it is also possible that new funds may be placed under the abc option as a result of additional accruals earned by participants who subsequent to their retirements return to employment participant may also roll over funds from another plan to be invested under the abc option in either case the addition of the new funds immediately increases the participant's base_amount on a dollar for dollar basis’ however in determining the participant’s additional future guaranteed withdrawal amounts a different guaranteed percentage may apply to the transferred or rolled over funds a participant who never chooses to make the glw election may withdraw funds from his or her account on an ad hoc basis in such cases once all funds have been withdrawn from the participant’s account the participant is entitled to no further benefits regardless of when or if a participant chooses to make the glw election in the event of a participant’s death the participant’s remaining account balance if any is paid to the participant's lawfully married spouse law sec_401 of the code provides that in the case of any plan to which that paragraph applies except as provided in sec_417 a_trust forming part of such plan shall not constitute a qualified_trust under that section unless --- i in the case of a vested_participant who does not die before the annuity_starting_date the accrued_benefit payable to such participant is provided in the form of a qualified_joint_and_survivor_annuity and in the case of a vested_participant who dies before the annuity_starting_date and who has a surviving_spouse a qualified_preretirement_survivor_annuity is provided to the surviving_spouse of such participant sec_401 of the code provides that paragraph shall apply to ---- any defined_benefit_plan any defined_contribution_plan which is subject_to the funding standards of sec_412 and iii any participant under any other defined_contribution_plan unless for example if a participant’s account balance was dollar_figure and his base_amount was dollar_figure and the participant rolls over dollar_figure from another plan or transfers dollar_figure from another investment option under the plan his or her base_amount would immediately increase to dollar_figure if there is no lawfully married spouse eligible spouse or the eligible spouse consents to a beneficiary other than the eligible the remaining account balance is paid to the non-spouse beneficiary i ii ii i il such plan provides that the participant’s nonforfeitable accrued_benefit is payable in full on the death of the participant to the participant's surviving_spouse such participant does not elect a payment of benefits in the form of a life_annuity and lil with respect to such participant such plan is not a direct or indirect transferee in a transfer after date of a plan which is described in clause i or ii or to which this clause applied with respect to the participant sec_417 of the code provides that a plan meets the requirements of sec_401 only if under the plan each participant may elect at any time during the applicable_election_period to waive the qualified_joint_and_survivor_annuity form of benefit or the qualified_preretirement_survivor_annuity form of benefit or both sec_417 of the code provides that each plan shall provide that an election under paragraph a i shall not take effect unless ---- a i ii iii the spouse of the participant consents in writing to such election such election designates a beneficiary or a form of benefits which may not be changed without spousal consent or the consent of the spouse expressly permits designations by the participant without any requirement of further consent by the spouse and the spouse’s consent acknowledges the effect of such election and is witnessed by a plan representative or a notary public or b it is established to the satisfaction of a plan representative that the consent required under subparagraph a may not be obtained because there is no spouse because the spouse cannot be located or because such other circumstances as the secretary may by regulations prescribe any consent by a spouse or establishment that the consent of a spouse may not be obtained under the preceding sentence shall be effective only with respect to such spouse sec_417 of the code provides that for purposes of that subsection the term applicable_election_period means ---- a in the case of an election to waive the qualified joint and survivor form of benefit the 180-day period ending on the annuity_starting_date or b in the case of an election to waive the qualified_preretirement_survivor_annuity the period which begins on the first day of the plan_year in which the participant attains age and ends on the date of the participant's death in the case of a participant who is separated from service the applicable_election_period under subparagraph b with respect to benefits accrued before the date of such separation_from_service shall not begin later than such date sec_417 provides that for purposes of that section and sec_401 the term qualified_joint_and_survivor_annuity means an annuity --- for the life of the participant with a survivor annuity for the life of the spouse which is not less than percent of and is not greater than percent of the amount of the annuity which is payable during the joint lives of the participant and spouse and which is the actuarial equivalent of a single annuity for the life of the participant sec_417 of the code provides that in the case of any defined contribution pian or participant described in clause ii or iii of sec_401 the term qualified_preretirement_survivor_annuity means an amount for the life of the surviving_spouse the actuarial equivalent of which is not less than percent of the portion of the account balance of the participant as of the date of the death to which the participant had a nonforfeitable right within the meaning of sec_41 a i sec_417 of the code provides that in general for purposes of that section and sec_401 the term annuity_starting_date means --- in the case of a benefit not payable in the form of an annuity the first day on which all events have occurred which entitle the participant to such benefit the first day of the first period for which an amount is payable as an annuity or ii sec_1_401_a_-11 of the regulations provides that as used in that section i ii the term life annuity’ means an annuity that provides retirement payments and requires the survival of the participant or his or her spouse as one of the conditions for any payment or possible payment under the annuity for example annuities that make payments for years or until death whichever occurs first or whichever occurs last are life_annuities however the term life_annuity does not include an annuity or that portion of an annuity that provides those benefits which under sec_411 would not be taken into account in the determination of the normal_retirement_benefit or early_retirement_benefit for example social_security supplements described in the third sentence of a are not considered to be life_annuities for the purposes of this section whether or not an early_retirement_benefit is provided under the plan q a-4 of sec_1 a provides that if a participant elects at any time irrespective of the election_period defined in sec_417 a life_annuity option under a defined_contribution_plan not subject_to sec_412 the survivor annuity requirements of sec_401 and sec_417 will always thereafter apply to all of the participant’s benefits under such plan unless there is separate_accounting of the account balance subject_to the election a plan may allow a participant to elect an annuity option prior to the applicable_election_period described in sec_417 if a participant elects an annuity option the plan must satisfy the applicable written explanation consent election and withdrawal rules of sec_417 including waiver of the qusa within days of the annuity_starting_date if a participant selecting such an option dies the surviving_spouse must be able to receive the qpsa benefit described in sec_417 which is a life_annuity the actuarial equivalent of which is not less than percent of the nonforfeitable account balance adjusted for loans as described in q a d of that section the remaining account balance may be paid to a designated nonspouse beneficiary q a -10 b of sec_1 a of the regulations provides that for purposes of sec_401 sec_411 and sec_417 the annuity_starting_date is the first day of the first period for which an amount is paid as an annuity or any other form q a-10 b of sec_1 a of the regulations provides in part that in case of a deferred_annuity the annuity_starting_date is the date for which the annuity payments are to commence not the date that the deferred_annuity is elected or the date the deferred_annuity_contract is distributed q a -10 d of sec_1 a of the regulations provides that if benefit payments are suspended after the annuity_starting_date pursuant to a suspension_of_benefits described in sec_41 a b after an employee separates from service the recommencement of benefit payments after the suspension is not treated as a new annuity_starting_date unless the plan provides otherwise in such case the plan_administrator is not required to provide new waivers for the recommended distributions if the form of distribution is the same as the form that was appropriately selected prior to the suspension if benefits are suspended for an employee who continues in service without a separation and who never receives payments the commencement of payments after the period of suspension is treated as the annuity_starting_date unless the plan provides otherwise in the case of an annuity_starting_date that occurs on or after normal_retirement_age such date applies to any additional accruals after the annuity_starting_date unless the plan provides otherwise in the case of an annuity_starting_date that occurs prior to normal_retirement_age such date does not apply to additional accruals after such date analysis the abc option is an investment option under the plan a participant may choose to place all or part of his or her funds in the plan under the abc option upon retirement but no earlier than age a participant may elect to receive lifetime payments in amounts determined as a percentage guaranteed percentage of the asset value of the portion of the participant’s individual_account under the abc option glw election if a participant so elects the initial payment guaranteed withdrawal amount is generally determined as the product of the guaranteed percentage and the asset value of the portion of the participant’s account that is invested under the abc option alternatively a participant may choose to never make a glw election and withdraw funds on an ad hoc basis until all funds have been withdrawn from his or her account if a participant makes a glw election the participant absent any further action will receive guaranteed withdrawals for the remainder of his or her lifetime in amounts equal to or greater than the initial guaranteed withdrawal amount although for purposes of determining a participant's account balance guaranteed withdrawals are treated as withdrawals from the participant's account guaranteed withdrawals are paid regardless of the amount of funds if any remaining in the participant's account sec_1_401_a_-11 of the regulations provides that the term life_annuity means an annuity that provides retirement payments and requires the survival of the participant as one of the conditions for any payment or possible payment under the annuity sec_1_401_a_-11 of the regulations provides that the term ‘life annuity does not include an annuity or that portion of an annuity that provides those benefits which under sec_411 would not be taken into account in the determination of the normal_retirement_benefit or early_retirement_benefit in the instant case a glw election by a participant to commence guaranteed withdrawals is an election by the participant of an annuity that provides retirement payments and requires the survival of the participant as one of the conditions for possible payments under the annuity the benefits provided subsequent to a glw election are benefits which under sec_411 would be taken into account in the determination of a normal_retirement_benefit or early_retirement_benefit accordingly a glw election is an election to receive benefits in the form of a life_annuity sec_401 of the code provides in the case of plans to which that paragraph applies except as provided in sec_417 that qualified trusts under that section must provide qualified joint and survivor annuities qusa in the case of vested participants who do not die before the annuity_starting_date and qualified preretirement survivor annuities qpsa in the case of vested participants who do die before the sec_401 annuity_starting_date and who have a surviving_spouse provides in relevant part that paragraph applies to any participant under a defined_contribution_plan unless the participant does not elect a payment in the form of a life_annuity prior to the time a participant makes a glw election the participant is a participant who has not elected a payment of benefits in the form of a life_annuity accordingly prior to the glw election sec_401 does not apply to the participant however if a participant makes a glw election the participant becomes a participant who has elected a life_annuity and therefore the provisions of sec_401 apply to the participant accordingly the plan at the time of the glw election by a participant except as provided in sec_417 must provide that any accrued_benefits payable to the participant are paid in the form of a qjsa sec_417 of the code provides that for purposes of that section and sec_401 the term annuity_starting_date means the first day of the first period for which an amount is payable as an annuity or in the case of a benefit not payable in the form of an annuity the first day on which all events have occurred which entitle the participant to such benefit in the instant case the date of the glw election is the annuity_starting_date with respect to the funds under the abc option at the time of the glw election if subsequent to a glw election a participant elects to skip one or more guaranteed withdrawals the subsequent restart of guaranteed withdrawals does not constitute an additional or new annuity_starting_date with respect to the funds subject_to the glw election such is also the case with respect to such funds if subsequent to the glw election the participant elects to take additional ad hoc withdrawals or elects to withdraw all of the remaining funds in his or her account however if subsequent to the glw election additional funds are invested under the abc option either through an internal transfer or an external rollover the increase in the guaranteed withdrawal amount resulting from such additional funds is a new annuity_starting_date with respect to such funds thus for example if one year subsequent to the glw election a participant transfers funds from another investment option under the plan to the abc option and two years subsequent to the glw election the participant rolls over funds from another plan to the abc option three separate annuity starting dates will be applicable with respect to amounts payable as guaranteed withdrawals’ conclusions guaranteed withdrawals under the abc option constitute a life_annuity for purposes of the qualified joint and survivor rules under sec_401 and sec_417 the applicable annuity_starting_date s for qjusa purposes is the date of the glw election and the dates if any that an increase in the guaranteed withdrawal amount occurs as a result of an internal transfer or an external rollover this ruling does not address the tax treatment of the abc option under any other code provisions including sections t a c and and assumes that at all relevant times the plan is a qualified_plan this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent a copy of this letter is being furnished to your authorized representative pursuant to a power_of_attorney form on file tie the date of the glw election the date of the internal transfer and the date of the external rollover if you have any questions on this ruling letter please contact sincerely td ig david m ziegler manager employee_plans actuarial group


id office uilc cca_2011052012193637 --------- number release date from -------------------- sent friday date pm to -------------------- cc ------------ subject re awr-137 revised form 872-p rev sec_6223 and the regulations there under only require for purposes of this subchapter the use of the name and address of a partner the partner's tin is not required except when the partner is providing updated partner information to the service thus there is no legal requirement to have the full tin of partners on nbaps and fpaas or other tefra related documents thus the service is free to balance privacy and practical necessity in determining whether to include tin's note however that outside of the tefra examination function sec_6103 limits disclosure of one partner's personal identity information to any other person


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp 2-plr-108560-00 date date legend acquiring target fund target fund state x dear this letter responds to your representative’s date request for rulings under sec_368 of the internal_revenue_code on behalf of the above-captioned taxpayers the information submitted for consideration is summarized below acquiring is organized under the laws of state x and registered under the investment_company act of the act as non-diversified leveraged closed- end management investment_company acquiring has elected to be taxed as a regulated_investment_company ric under of the internal_revenue_code the code acquiring currently has outstanding voting common_stock and two series of voting non-qualified preferred_stock target fund is organized under the laws of state x and registered under the plr-108560-00 investment_company act of the act as non-diversified leveraged closed- end management investment_company target has elected to be taxed as a regulated_investment_company ric under of the internal_revenue_code the code target fund currently has outstanding voting common_stock and one series of voting non-qualified preferred_stock target fund is organized under the laws of state x and registered under the investment_company act of the act as non-diversified leveraged closed- end management investment_company target fund has elected to be taxed as a regulated_investment_company ric under of the internal_revenue_code the code target fund currently has outstanding voting common_stock and one series of voting non-qualified preferred_stock acquiring target fund and target fund the funds share the same investment objective which is to provide shareholders with current income exempt from federal_income_tax each fund seeks to achieve its investment objective by investing primarily in a portfolio of long-term investment grade municipal obligations the interest on which is in the opinion of bond counsel to the issuer exempt from federal_income_tax municipal_bonds under normal circumstances each fund invests at least of its assets in municipal obligations with remaining maturities of one year or more that are covered by insurance guaranteeing the timely payment of principal at maturity and interest when due except during temporary defensive periods each fund will invest at least of its total assets in municipal_bonds acquiring target fund and target fund target fund and target fund are sometimes hereinafter referred to as target funds have entered into an agreement and plan_of_reorganization for what are represented to be valid business reasons pursuant to the agreement the transaction consists of the following steps each target fund will transfer all of its assets and liabilities to acquiring in exchange for an equal value of newly issued acquired common voting_stock and non-qualified preferred voting_stock target funds will distribute to their shareholders all of the acquiring stock received in the transaction each target fund shareholder will receive shares of acquiring on a pro_rata basis target funds will liquidate and dissolve in accordance with the laws of state x and terminate their registration under the act after the transaction acquiring may sell up to of the assets received in the transaction to unrelated parties and will reinvest the proceeds consistent with its investment objectives and policies plr-108560-00 the following representations have been made in connection with the proposed transaction a the fair_market_value of the acquiring stock received by each target fund shareholder will be approximately equal to the fair_market_value of the target fund stock surrendered in the exchange b there is no plan or intention by target fund shareholders who own percent or more of a target fund’s stock and to the best of the knowledge of the management of each target fund there is no plan or intention on the part of any other shareholders of a target fund to sell exchange or otherwise dispose_of a number of shares of acquiring stock received in the reorganization that would reduce such target fund shareholders’ ownership of acquiring stock to a number of shares having a value as of the date of the reorganization of less than percent of the value of all of the formerly outstanding_stock of the relevant target fund as of the same date for purposes of this representation shares of target fund stock exchanged for cash or other_property surrendered by dissenters or exchanged for cash in lieu of fractional shares of acquiring stock will be treated as outstanding_stock of such target fund on the date of the reorganization moreover shares of target fund stock and shares of acquiring stock held by target fund shareholders and otherwise sold redeemed or disposed of prior to or subsequent to the reorganization will be considered in making this representation each target fund represents that it is publicly traded and therefore may appropriately make this representation with respect to it sec_5 percent shareholders rather than one percent shareholders per revproc_86_42 c acquiring will acquire at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets held by each target fund immediately prior to the reorganization for purposes of this representation amounts paid_by a target fund to dissenters amounts used by a target fund to pay its reorganization expenses amounts paid_by a target fund to shareholders who receive cash or other_property and all redemptions and distributions except for regular normal dividends made by a target fund immediately preceding the transfer will be included as assets of a target fund held immediately prior to the transaction d acquiring has no plan or intention to reacquire any of its stock issued in the transaction e acquiring has no plan or intention to sell or otherwise dispose_of any of the assets of target funds acquired in the transaction except for dispositions made in the ordinary course of business f target funds will distribute to their shareholders the stock of acquiring received pursuant to the plan_of_reorganization plr-108560-00 g the liabilities of target funds assumed by acquiring and any liabilities to which the transferred assets of target funds are subject were incurred by target funds in the ordinary course of their businesses h following the reorganization acquiring will continue the historic_business of each target fund or use a significant portion of each target fund’s historic_business_assets in the continuing business i target funds acquiring and the shareholders of each target fund will pay their respective expenses if any incurred in connection with the reorganization j there is no intercorporate indebtedness existing between any of the target funds and acquiring that was issued acquired or will be settled at a discount k target funds and acquiring qualify as regulated_investment_companies as defined in sec_368 of the code l the fair_market_value of the assets of each target fund transferred to acquiring will equal or exceed the sum of the liabilities assumed by acquiring plus the amount of liabilities if any to which the transferred assets are subject m acquiring does not own directly or indirectly nor has it owned during the past five years directly or indirectly any stock of either target fund n cash is being distributed to shareholders of target funds in lieu of fractional shares of acquiring solely to save acquiring the expense and inconvenience of issuing and transferring fractional shares and such cash does not represent separately bargained for consideration in the reorganization the total cash consideration that will be paid in each transaction between acquiring and a target fund to the respective target fund shareholders instead of issuing fractional shares of acquiring stock will not exceed one percent of the total consideration that will be issued in the transaction to the target fund shareholders in exchange for their shares of target fund stock the fractional share interests of each shareholder of target fund will be aggregated and no target shareholder will receive cash in an amount equal to or greater than the value of one full share of acquiring stock o target funds are not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 p target funds and acquiring have elected to be taxed as rics under sec_851 and for all of their taxable periods including the last short taxable_period ending on the date of reorganization for each target fund have qualified for the special tax treatment afforded rics under the code after the reorganization acquiring intends to continue to so qualify plr-108560-00 q there is no plan or intention for acquiring the issuing_corporation as defined in sec_1_368-1 or any person related as defined in sec_1_368-1 to acquiring to acquire during the five year period beginning on the date of the proposed transaction with consideration other than acquiring stock acquiring stock furnished in exchange for a proprietary interest in a target fund in the proposed transaction either directly or through any transaction agreement or arrangement with any other person except for cash distributed to the target fund’s common shareholders in lieu of fractional shares of acquiring common_stock r during the five year period ending on the date of the proposed transaction i neither acquiring nor any person related as defined in sec_1_368-1 to acquiring will have acquired a target fund’s stock cid with consideration other than acquiring stock ii no target fund nor any person related as defined in sec_1 e determined without regard to sec_1_368-1 to a target fund will have acquired such target fund’s stock with consideration other than acquiring stock or the target fund’s stock and iii no distributions will have been made with respect to a target fund’s stock other than ordinary normal regular dividend distributions made pursuant to target’s historic dividend paying practice either directly or through any transaction agreement or arrangement with any other person except for a cash paid to dissenters and b distributions described in sec_852 and sec_4982 of the code as required for each target fund’s tax treatment as a ric s the aggregate value of the acquisitions redemptions and distributions discussed in paragraphs q and r above will not exceed percent of the value without giving effect to the acquisitions redemptions and distributions of the proprietary interest in any target fund on the effective date of the proposed transaction t the acquiring preferred_stock to be received by target fund preferred shareholders in exchange for their target fund preferred_stock will be identical to the target fund preferred_stock exchanged u the acquiring preferred_stock to be received by target fund preferred shareholders in exchange for their target fund preferred_stock will be identical to the target fund preferred_stock exchanged based solely upon the information and representations set forth above we hold as follows the acquisition by acquiring of substantially_all of the assets of each target fund solely for acquiring voting_stock and the assumption by acquiring of the liabilities of each target fund as described above will qualify in each instance as a reorganization within the meaning of sec_368 of the code substantially_all means at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets of plr-108560-00 each target fund acquiring and each target fund will be a_party_to_a_reorganization within the meaning of sec_368 no gain_or_loss will be recognized by each target fund upon the transfer of substantially_all their assets to acquiring solely in exchange for acquiring voting common_stock and the assumption by acquiring of the liabilities of each target fund sec_357 and sec_361 no gain_or_loss will be recognized by each target fund upon the distribution of such acquiring stock to target fund shareholders sec_361 acquiring will not recognize any gain_or_loss on the receipt of the assets of the target funds in each instance in exchange for voting shares of acquiring sec_1032 the basis of target fund assets in the hands of acquiring will be the same as the basis of those assets in the hands of the respective target fund immediately prior to the reorganization sec_362 acquiring’s holding_period for target fund assets acquired will include the period during which such assets were held by the respective target fund sec_1223 no gain_or_loss will be recognized by the shareholders of target funds upon the receipt of common and non-qualified stock of acquiring including fractional share interests to which they may be entitled solely in exchange for their target fund shares as described above sec_354 the basis of the acquiring shares including fractional share interests to which they may be entitled received by target fund shareholders will be the same as the basis of the target fund shares surrendered in exchange therefor sec_358 the holding_period of the acquiring shares including fractional share interests to which they may be entitled received by target fund shareholders in exchange for their target fund shares will include the period during which the exchanged target fund shares were held provided that the target fund shares are held as a capital_asset in the hands of the target fund shareholders on the date of the exchange sec_1223 the payment of cash to target fund shareholders in lieu of fractional shares of acquiring will be treated as though the fractional shares were distributed as part of the reorganization and then redeemed by acquiring the cash payment will be treated as a distribution in full payment for the fractional shares deemed redeemed under sec_302 with the result that such target fund shareholders will plr-108560-00 have short-term or long-term_capital_gain or loss to the extent that the cash distribution differs from the basis allocable to their fractional shares pursuant to sec_381 of the code and sec_1_381_a_-1 of the income_tax regulations the tax_year of each target fund will end on the date of the transfer acquiring will succeed to and take into account the items of target described in sec_381 of the code subject_to the provisions and limitations specified in sec_381 sec_382 sec_383 and sec_384 of the code and the regulations thereunder no opinion is expressed about the federal_income_tax treatment of the proposed transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion was requested and none is expressed about whether acquiring or each target fund qualify as rics that are taxable under subchapter_m part i of the code this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant sincerely associate chief_counsel corporate by lewis k brickates assistant to chief branch


t c memo united_states tax_court daniel e godfrey petitioner v commissioner of internal revenue respondent docket no filed date daniel e godfrey pro_se louise r forbes for respondent memorandum opinion powell special_trial_judge this case was heard pursuant to sec_7443a and rule sec_180 sec_181 and sec_182 respondent determined a deficiency in petitioner's federal_income_tax in the amount of dollar_figure petitioner resided in winthrop massachusetts at the time the petition was filed unless otherwise indicated section references are to the internal_revenue_code in effect for the year in issue rule references are to the tax_court rules_of_practice and procedure the sole issue is whether petitioner is entitled to exclude from gross_income dollar_figure paid to petitioner and dartmouth college by the globe newspaper co the publisher of the boston globe the globe the facts are undisputed and may be summarized as follows when petitioner was in secondary school he delivered newspapers for the globe during that time the globe had a paper route to college program in which petitioner participated under the program if petitioner delivered the globe for years the globe would pay dollar_figure toward petitioner's first-year tuition at an accredited college or university petitioner delivered the globe for the years and upon his graduation from secondary school in petitioner was accepted by and enrolled at dartmouth college on date the globe issued a check to petitioner and dartmouth college in the amount of dollar_figure that was applied toward petitioner's first year tuition petitioner did not include the dollar_figure in gross_income on his federal_income_tax return upon examination respondent determined that the dollar_figure was includable in gross_income and issued a notice_of_deficiency sec_61 defines gross_income to include all income from whatever source derived in view of the all inclusive language of sec_61 exclusions from income are matters of legislative grace and are construed narrowly 515_us_323 966_f2d_668 fed cir a taxpayer seeking an exclusion from income must be able to point to an applicable statute and show that he comes within its terms petitioner originally contended that sec_117 excluded the globe payment from income sec_117 excludes from income any amount received as a qualified_scholarship as petitioner now recognizes however sec_117 does not apply to any amount which represents payment for services by the student sec_117 there is no question that petitioner and the globe understood that the dollar_figure was contingent on petitioner's rendering services therefore as petitioner recognizes sec_117 is inapplicable here petitioner also contends that the payment was an award and exempt from gross_income under sec_74 to understand this argument we turn first to sec_74 which provides that as a general_rule gross_income includes amounts received as prizes_and_awards sec_74 however provides an exception to the general_rule in certain circumstances where the award is transferred to a charitable institution while we have no doubt that dartmouth college is a qualified institution we seriously question whether congress intended for this provision to include transfers in payment of tuition furthermore sec_74 applies to amounts received primarily in recognition of religious charitable scientific educational artistic literary or civic_achievement while we have no doubts particularly in light of new england winter mornings that the globe's payment was in recognition of herculean efforts we cannot classify those efforts within any of the enumerated achievements to which sec_74 is directed see 47_tc_428 we further note that under sec_74 the recipient must have been selected without any_action on his part to enter the contest or proceeding we are not pursuaded that petitioner played no role in initiating the process that led to the globe's payment 31_tc_1046 in sum we must also reject petitioner's sec_74 argument therefore respondent's determination is sustained decision will be entered for respondent


internal_revenue_service department of the treasury number release date index number trust washington dc person to contact telephone number refer reply to cc psi - plr-106366-03 date date foundation d1 year year year a b dear this is in reply to a letter dated date and subsequent correspondence submitted on behalf of the trust by its authorized representative requesting that the service grant the trust an extension of time pursuant to sec_301 of the procedure and administration regulations to make an election under sec_642 of the internal_revenue_code for its year taxable_year the information submitted states that the grantor of the trust died on d1 the trust as amended provides that after certain specific bequests all trust corpus and accumulated income should be distributed to the foundation and the trust will terminate but not until the foundation has received its qualification as a tax-exempt charity from the service the trustees of the trust hired an attorney to prepare documents including the grantor’s estate_tax_return and the income_tax returns of the trust plr-106366-03 -2- on the income_tax return for the year taxable_year the trust incorrectly claimed an income distribution_deduction under sec_661 for dollar_figurea the amount set_aside for the foundation pending the foundation’s qualification as a tax-exempt charity in preparing the trust’s year income_tax returns the new income_tax preparers of the trust and foundation discovered that the year income_tax return was incorrect the income_tax preparers prepared and filed an amended year income_tax return including a timely sec_642 election claiming a charitable deduction of dollar_figureb representing deductible amounts of year income paid to charity in year these amounts were not claimed as a charitable deduction on the year return the date to file an effective election under sec_642 for the year taxable_year allowing a deduction for amounts paid to charity in year had already passed therefore the trust requested an extension to file a sec_642 election for year under sec_301 sec_642 provides that in the case of an estate_or_trust there shall be allowed as a deduction in computing its taxable_income any amount of the gross_income without limitation which pursuant to the terms of the governing instrument is during the taxable_year paid for a purpose specified in sec_170 if a charitable_contribution is paid after the close of such taxable_year and on or before the last day of the taxable_year following the close of such taxable_year then the trustee or administrator may elect to treat such contribution as paid during such taxable_year the election shall be made at such time and in such manner as the secretary prescribes by regulation sec_1_642_c_-1 of the income_tax regulations provides that the election under sec_642 shall be made not later than the time including extensions thereof prescribed by law for filing the federal_income_tax return for the succeeding taxable_year sec_1_642_c_-1 provides that the election shall be made by filing with the income_tax return or amended_return for the taxable_year in which the contribution is treated as paid a statement which i states the name and address of the fiduciary ii identifies the estate_or_trust for which the fiduciary is acting iii indicates that the fiduciary is making an election under sec_642 in respect of contributions treated as paid during such taxable_year iv gives the name and address of each organization to which any such contribution is paid and v states the amount of each contribution and date of actual payment or if applicable the total amount of contributions paid to each organization during the succeeding taxable_year to be treated as paid in the preceding_taxable_year under sec_301_9100-1 the commissioner may 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 code except e g h and i 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 plr-106366-03 -3- faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an 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 elections that do not meet the requirements of sec_301_9100-2 based on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result the trust is granted an extension of time for days from the date of this letter to file an election under sec_642 for the trust’s year taxable_year the election must be made on the amended_return for the trust’s year taxable_year the amended_return must be filed within the sixty day period with the service_center where the trust files its returns a copy of the amended_return must be filed with the service office currently examining the trust’s returns a copy of this letter should be attached to the amended returns copies are included for that purpose except as specifically set forth above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code including whether the trust was entitled to sec_642 deductions this ruling is directed only to the taxpayer on whose behalf it was requested sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely heather c maloy associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes