internal_revenue_service number release date index number --------------------------- --------------------------- ---------------------------------------------------- ----------------------- in re ------------------------- ---------------------- --------------------------------- department of the treasury washington dc person to contact ---------------- id no ------------- telephone number --------------------- refer reply to cc psi b09 - plr-162119-02 date may legend taxpayer date donor donor son daughter trust trust ------------------------------------------------------------------------------------ ------------------------- ---------------------- --------------------------------- -------------------------------- ---------------------- ---------------- ------------------------------------------------------------------------------------ ----------------------- ------------------------------------------------------------------------------------ ----------------------- ------------------- --------------------- -------- -------- -------------------------------------------- ------------------- --------- ------------------------- --- -------------------------- ----------------------------------------- ------------------------- -------------------- date trustee b c bank family trusts d partnership e partnership partnership corporation f date successor trustee ---------------------- date date family date ------- ---------------- ----------------- -------------- plr-162119-02 date court ---------------- ------------------------------------------------------------------------------------ -------------------- ---------------------- ---------------- -------------------- this is in response to your letter dated date and prior the information submitted and representations made are summarized as follows date family grandchild dear ------------ correspondence submitted on behalf of taxpayer requesting a ruling regarding the generation-skipping_transfer gst tax consequences of a settlement agreement modifying the terms of trusts that are exempt from the application of the gst tax imposed under sec_2601 of the internal_revenue_code on date a date prior to date donor and donor each established four virtually identical irrevocable inter_vivos trusts original trusts one for the benefit of each of their four then living grandchildren each of the trusts provides either son or daughter with a right to a percentage of the yearly net_income of the trust each of the trusts also contain an equalization provision in order to ensure that any grandchild born after date would be provided for in a manner similar to that of donor and donor 2’s four then living grandchildren pursuant to the equalization provision upon the birth of any grandchild after date each of the trusts established by donor and donor shall contribute a portion of its income and corpus to a new trust to be held under the same conditions for the benefit of the subsequently born grandchild trust and trust are two of the trusts established pursuant to the equalization provisions for grandchildren born after date taxpayer was born on date trust was established by donor and trust was established by donor trust and trust were established for the primary benefit of taxpayer and taxpayer’s issue it is represented that no additions have been made to trust or trust subsequent to the initial funding shall be the original trustees trust provides generally that the trustees shall pay to son and daughter each b percent of the yearly trust income trust provides generally that the trustees shall pay to son and daughter each c percent of the yearly trust income the balance of the net_income of trust and trust is to be paid to taxpayer for her maintenance support education business needs and other trustee-approved requirements after taxpayer reaches age sixteen for so long as both son and daughter are living and serving as original trustees the original trustees son and daughter shall not be required to account to either beneficiaries or representatives of beneficiaries at any time regarding the handling of trust properties or the withholding or distributing of trust income or corpus the preamble of trust and trust provides that daughter son and trustee article fourth of trust and trust provides generally that the trust shall article third of trust and trust provides generally that the original trustees plr-162119-02 and successor trustees shall pay the net_income to taxpayer during her life for the purposes and in the amounts set forth above upon the death of taxpayer if the trusts are still operative and in effect the trustees and successor trustees shall pay the net_income first to the issue of taxpayer should taxpayer leave no issue the trustees and successor trustees shall pay the net_income in equal shares to donor and donor 2’s other grandchildren who may have survived taxpayer or the issue of donor and donor 2’s other grandchildren who may have predeceased taxpayer provided however the shares of any deceased grandchildren shall be divided per capita among all the issue of said deceased grandchildren upon the death of all of donor and donor 2’s grandchildren if such deaths take place during the operation of this trust the income to be paid to taxpayer shall be paid should taxpayer leave no issue per capita to the living issue of donor and donor 2’s other grandchildren continue to be operative so long as any of the trustees herein named are living the trusts shall terminate only after all of the deaths of the trustees the particular time of termination after said deaths shall be on a date twenty-one years after the death of the last trustee upon termination of the trusts the successor trustee shall pay over deliver and convey the trust estate with its accumulations and all undistributed_net_income to taxpayer absolutely if taxpayer is then living in the event that taxpayer shall have died prior to the disposition of the trust the successor trustees shall distribute the trust estate to any living issue of taxpayer should taxpayer leave no issue the successor trustees shall distribute the trust estate in equal shares to donor and donor 2’s other grandchildren who may have survived taxpayer or the issue of donor and donor 2’s grandchildren who have predeceased taxpayer provided however the shares of any deceased grandchildren shall be divided per capita among all the living issue of said deceased grandchildren upon the death therefore of all donor and donor 2’s grandchildren if such deaths take place prior to the termination of this trust the trust corpus herein provided to be paid to taxpayer should she leave no issue shall be paid per capita to the living issue of donor and donor 2’s other grandchildren more than three successor trustees at least one of which is a national bank with a_trust department the successor trustees shall be unanimously appointed by the original trustees son and daughter by means of a written instrument legally effecting such appointment after the death of either daughter or son if no such appointment has been made it shall be the obligation of the survivor of them within ten days after the death of the other to appoint successor trustees any appointment of successor trustees may be revoked at any time by both daughter and son if the two of them are living or either of them if one is deceased and new successor trustees appointed in the place of the ones removed should the original trustees for any reason fail to appoint specific successor trustees the bank shall serve as successor trustee the appointment of successor trustees shall become effective on the deaths of both article fifth of trust and trust provides generally that there shall not be after the execution of the original trusts on date four additional grandchildren plr-162119-02 original trustees daughter and son should trustee survive both daughter and son the successor trustee shall serve together with trustee in administering this trust the appointment of successor trustees shall not become effective so long as either of the original trustees son and daughter are living son or daughter shall have the right to administer this trust alone were born pursuant to the equalization provisions for after-born grandchildren contained in the original trusts four additional trusts one for each after-born grandchild were established by donor and four additional trusts were established by donor thus a total of eight trusts were established by donor and eight trusts were established by donor collectively the parties refer to these sixteen trusts as the family trusts each of the family trusts invests directly or indirectly in publicly held stock and securities real_estate interests in closely-held entities and other miscellaneous assets each of the family trusts owns a d percent limited_partnership_interest in partnership partnership owns a e percent general_partnership interest in partnership partnership is a class b limited_partner in partnership corporation owns a f percent general_partnership interest in partnership and a f percent general_partnership interest in partnership corporation is wholly owned by son appointed successor trustee successor trustee resigned in date since date son has served as the sole trustee family retained the services of an attorney because they were unsatisfied with son’s administration of various trusts offers and counteroffers of settlement were continually made however settlement negotiations broke down around the end of date things that son breached his fiduciary obligations relating to the investment administration management and use of the family trusts’ funds that various related_party transactions were improper and that trust accounts were incorrect before the time for filing an answer to these complaints expired a death in the family led the respective parties to attempt to resolve their disputes again after lengthy negotiations a basis for settlement was reached and finally reduced to writing on date the settlement agreement as a result of the settlement agreement the following modifications will be made to trust and trust article first will be modified in part to provide that reference to the term net_income shall not be deemed to include accumulated but undistributed_income of the trust in date daughter and members of her family collectively referred to as on date daughter and trustee resigned as trustees successor trustee was on date family filed three complaints in the court alleging among other article second paragraph b of trust and trust will be modified to provide article second paragraph a of trust will be modified to provide generally that article second paragraph a of trust will be modified to provide generally that plr-162119-02 the trustees shall pay to daughter at such times and in such amounts as daughter in her own discretion might require b percent of the yearly net_income of the trust upon the death of daughter and until the trust terminates the trustees shall pay b percent of the yearly net_income of the trust to daughter’s then living lineal_descendants per stirpes the trustees shall pay to son at such times and in such amounts as son in his own discretion might require b percent of the yearly net_income of the trust upon the death of son and until the trust terminates the trustees shall pay b percent of the yearly net_income of the trust to son’s then living lineal_descendants per stirpes the trustees shall pay to daughter at such times and in such amounts as daughter in her own discretion might require c percent of the yearly net_income of the trust upon the death of daughter and until the trust terminates the trustees shall pay c percent of the yearly net_income of the trust to daughter’s then living lineal_descendants per stirpes the trustees shall pay to son at such times and in such amounts as son in his own discretion might require c percent of the yearly net_income of the trust upon the death of son and until the trust terminates the trustees shall pay c percent of the yearly net_income of the trust to son’s then living lineal_descendants per stirpes that the trustees shall pay the balance of the net_income to the beneficiary or beneficiaries hereinafter designated for so long as either daughter or son shall be living in such amounts and at such times after the beneficiary has reached the age of sixteen years as the trustees shall deem necessary and proper for the maintenance support education business needs and other trustee-approved requirements of the beneficiary or beneficiaries all net_income not distributed shall be accumulated and added to corpus in addition the provision in article second paragraph b that provides that the original trustees son and daughter shall not be required to account to beneficiaries at any time regarding the handling of trust properties or the withholding or distributing of trust income or corpus will be deleted that in order to ensure that any grandchildren born after the execution of this trust agreement an after-born grandchild shall be provided for in a manner equal to that of taxpayer and donor and donor 2’s other grandchildren who are living as of date donor and donor specifically direct as follows upon the birth of any after-born grandchild there shall be allocated to such after-born grandchild as a separate trust a portion of the assets of this trust determined by multiplying the fair_market_value of the assets of this trust by a fraction the numerator being one and the denominator being the total number of donor and donor 2’s grandchildren whether then living or deceased each trust so set_aside for an after-born grandchild shall be held administered and disposed of for such grandchild as otherwise provided in this trust subject_to the following such trust shall be subject_to further division upon the birth of additional after-born grandchildren each after-born grandchild for whom an article third of trust and trust will be modified in part to provide generally plr-162119-02 additional trust is established pursuant to this paragraph shall be considered the beneficiary of such trust and after his or her death his or her issue shall be beneficiaries as provided herein separate trusts similarly established for a beneficiary may be combined into one trust by the trustees in such event if daughter or son has any rights to receive a percentage of the income from a separate trust such rights shall continue as to a combined trust provided such percentage shall be recomputed for a combined trust based upon the percentage of the assets of the combined trust represented by assets from each separate trust at the time of combination multiplied by the percentage of income to which son or daughter was entitled from such separate trust and such products shall be added together to produce the recomputed percentage of income to which son or daughter is entitled from a combined trust whether or not the separate trusts for an after-born grandchild are combined the date of termination of each trust or portion of a combined trust shall be determined by the provisions of the trusts from which such trusts or portions were created article fourth of trust and trust will be modified in part to provide generally that the trust shall continue to be operative so long as any of the original trustees are living upon termination of the trust the successor trustee shall pay over deliver and convey the trust estate as then constituted to taxpayer absolutely if taxpayer is then living the event of the death resignation or incapacity of son to serve as a trustee his successor shall be that person or persons whom son designates a through a separate written instrument delivered during his life to the other serving trustee or b in his last will and testament which is admitted to probate any written instrument under article fifth clause a shall be witnessed by two individuals and notarized the latest dated written instrument or last will and testament shall control if a successor trustee is not serving or is not nominated herein then a successor trustee the family trustee shall be nominated appointed and confirmed by a majority of the then living lineal_descendants of son family who are sui juris notwithstanding anything to the contrary or otherwise after the death of son the family beneficiaries who are sui juris may by majority vote remove the family trustee for any reason and appoint a new family trustee and if the then acting family trustee becomes incapacitated or incompetent shall replace such trustee grandchild and his successors the family trustee is the successor trustee to daughter in the event of the death resignation or incapacity of the family trustee then a successor trustee shall be nominated appointed and confirmed by a majority of daughter if she is then living and her then living lineal_descendants who are sui juris family notwithstanding anything to the contrary or otherwise the members_of_family who are sui juris may by majority vote remove the family trustee for any reason and appoint a new family trustee and if the then acting family trustee becomes incapacitated or incompetent shall replace such trustee there shall at all times be article fifth of trust and trust will be modified to provide generally that in the settlement agreement has been approved by the court conditioned upon a plr-162119-02 a one trustee who is son or who is selected by either son or family and b one trustee who is grandchild or is selected by family no trustee shall vote or participate in any manner on any discretionary distribution of income or principal to himself or herself or to a beneficiary to whom such trustee is related to or subordinate to within the meaning of sec_672 or to a person whom such trustee or beneficiary is legally obligated to support the trustee who is so restricted in his or her participation in any trustee action under this section shall by written document delivered to the other then acting trustee designate a third party who is not related to or subordinate to within the meaning of sec_672 such restricted trustee or the beneficiary to act as a special trustee solely for the purpose of exercising such discretion and the special trustee shall exercise that discretion provided however that such special trustee shall be subject_to the same terms and limitations applicable to any other named trustee favorable ruling by the service on the effect the settlement agreement has on the family trusts’ exemption from the gst tax taxpayer has requested rulings that the following aspects of the settlement agreement will not adversely affect the gst exempt status of trust and trust the modifications and changes to trust and trust concerning the appointment and removal of a trustee and the method of appointing successor trustees the resolution of the issue of the proper construction and application of the equalization provisions of trust and trust the construction of trust and trust as to the right to income from the trusts after the death of daughter or son by continuing daughter’s and son’s rights to income upon their respective deaths for their respective lineal_descendants until the termination of the trusts and otherwise continuing the right to discretionary distributions of income to the remainder beneficiaries the resolution of the issue of the proper construction of trust and trust with respect to accumulated but undistributed_net_income the elimination of language regarding trustee accountings and the resolution of various economic issues between the parties including but not limited to a equalization of the trust corpus between the family trusts so that the assets of each trust are identical as of the effective date of the settlement agreement b equalization of the right to income of the family trusts so that as of the effective date of the settlement and thereafter the family trusts remain equalized c the transfer of stock of corporation equally to each family_trust d the purchase and or redemption of the interests of the partnership in partnership and e the reimbursement of family 1’s legal fees and costs incurred in the dispute distribution a taxable_termination and a direct_skip sec_2601 imposes a tax on every generation-skipping_transfer sec_2611 defines the term generation-skipping_transfer as a taxable sec_26_2601-1 provides that any trust in existence on sec_26_2601-1 provides rules for determining when a modification plr-162119-02 under b a of the tax_reform_act_of_1986 and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the generation-skipping_transfer_tax provisions do not apply to any generation-skipping_transfer under a_trust as defined in sec_2652 that was irrevocable on date however this exemption does not apply if additions actual or constructive are made to the trust after date date will be considered an irrevocable_trust except as provided in sec_26_2601-1 or c which relates to property includible in a grantor’s gross_estate under sec_2038 and sec_2042 in the present case the trust is considered to have been irrevocable on date because neither sec_2038 nor sec_2042 applies judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax under sec_26_2601-1 or hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status the rules contained in sec_26_2601-1 are applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 fide issue regarding the administration of the trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject_to the provisions of chapter if the settlement is the product of arm’s length negotiations and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement a settlement that results in a compromise between the positions of the litigating parties and reflects the parties’ assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes in the present case trust and trust were created and became irrevocable on date and there have been no additions made to the trusts after date accordingly trust and trust are exempt from the gst tax under sec_26_2601-1 agreement is a settlement of a bona_fide issue the product of arm’s length negotiations and is within the range of reasonable outcomes under the governing instrument and applicable state law therefore provided that the court approves the proposed agreement the modifications will not violate b a of the tax_reform_act_of_1986 and will not affect the exempt status of trust and trust sec_26_2601-1 provides that a court-approved settlement of a bona based on the facts presented and the representations made the settlement the rulings contained in this letter are based upon information and plr-162119-02 representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party if there is a change in material fact or law local or federal before the transactions considered in this ruling take effect the ruling will have no force or effect while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition no opinion is expressed or implied with respect to the income_tax consequences of any transaction the code provides that it may not be used or cited as precedent being sent to taxpayer this ruling is directed only to the taxpayer requesting it sec_6110 of pursuant to the power_of_attorney on file with this office a copy of this letter is except as expressly provided herein no opinion is expressed or implied sincerely melissa c liquerman branch chief branch office of associate chief_counsel passthroughs special industries enclosure copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------ ------------- ------------- ---------------------------------- ---------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number -------------------- refer reply to cc corp plr-129092-07 date date --------------- ----------------------------------- legend distributing -------------------------------------------------------------------- ----------------------------------------------------------- controlled -------------------------------------------------------------------- ----------------------------------------------------------- sub -------------------------------------------------------------------- ----------------------------------------------------------- state x shareholder a shareholder b shareholder c busine sec_1 -------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------- ------------------------ ----------------------- ------------------- -------------- ------------------------------------------- -------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- ------------------------------------------------------------ busine sec_2 plr-129092-07 irrevocable_trust -------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- ------------ ------------ ------------------ ------------------------------------------------------ section y z date dear--------------------- this letter responds to your letter dated date requesting rulings as to the federal_income_tax consequences of a proposed transaction additional information was submitted on date and date the information submitted is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process moreover no information provided by the taxpayer has been reviewed and no determination has been made regarding whether the proposed transaction i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 of the internal_revenue_code the code and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a fifty percent or greater interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 summary of facts distributing is an accrual basis state x corporation and the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return distributing has a single class of voting common_stock outstanding which is equally owned by three shareholders shareholder a shareholder b and shareholder c the shareholders each of sub and controlled is a state x corporation and has a single class of voting common_stock outstanding all of which is owned by distributing plr-129092-07 sub conducts busine sec_1 and controlled conducts busine sec_2 shareholder a and shareholder b are involved in busine sec_1 and shareholder c is involved in busine sec_2 the shareholders are related to one another financial information has been received indicating that each of busine sec_1 and busine sec_2 has had gross_receipts and operating_expenses representative of an active trade_or_business for each of the past five years sub and controlled are distinct and separate businesses the shareholders disagree with respect to how to operate the businesses it is the belief of management that the two businesses could be operated more efficiently if the ownership and management were separated in order to provide key employees with an equity ownership of their respective business and allow each business to have a separate corporate focus distributing plans to exchange all of the issued and outstanding controlled common_stock owned by distributing for all of the distributing common_stock owned by shareholder c the exchange shareholder a was the grantor of the irrevocable_trust which was partially funded with all of shareholder a’s distributing common_stock section y provided that when shareholder a attained the age of z the trustees would distribute to shareholder a outright and absolutely the balance of principal and accumulated income of the irrevocable_trust and that it would then terminate the irrevocable_trust terminated and distributed its assets to shareholder a on date because the trustees felt that it was not practical to continue its administration representations the following representations have been made with respect to the exchange a the fair_market_value of the controlled common_stock to be received by shareholder c will be approximately equal to the fair_market_value of the distributing common_stock surrendered by shareholder c in the exchange b no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of the corporation c the five years of financial information provided on behalf of busine sec_1 conducted by distributing’s separate_affiliated_group through sub is representative of the present business operations conducted distributing’s separate_affiliated_group and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted plr-129092-07 d the five years of financial information submitted on behalf of busine sec_2 is representative of busine sec_2’s present operations and with regard to busine sec_2 there have been no substantial operational changes since the date of the last financial statements submitted e following the transaction distributing through sub and controlled will each continue the active_conduct of their respective businesses independently and each with its separate employees f the distribution of the stock of controlled is carried out for the following corporate business purposes to attain operating efficiencies for busine sec_1 and busine sec_2 to eliminate disagreement between the shareholders with respect to how the two businesses should be operated and to allow the persons who are currently operating the respective businesses to have equity ownership of their respective businesses without having to share ownership with non-participating owners the distribution of the stock of controlled is motivated in whole or substantial part by one or more of these corporate business purposes g the exchange is not being used principally as a device for the distribution of earnings_and_profits of distributing controlled or both h distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of the transaction i no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution of the stock of controlled other than payables and receivables that arise in the ordinary course of business j immediately before the exchange items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_32_irb_6 and as currently in effect sec_1_1502-13 as published by t d furthermore distributing’s excess_loss_account if any with respect to controlled common_stock or the excess_loss_account that distributing may have in the stock of another member that is required to be taken into account by sec_1_1502-19 will be included in income immediately before the exchange see sec_1_1502-19 k payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length plr-129092-07 l neither distributing nor controlled is an investment_company as defined in sec_368 and iv m the exchange is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a fifty percent or greater interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation under sec_673 a grantor will be treated as the owner of any portion of a_trust in which he has a reversionary_interest in either the corpus or the income therefrom if as of the inception of that portion of the trust the value of such interest exceeds five percent of the value of such portion revrul_85_13 1985_1_cb_184 holds that if a grantor is treated as the owner of the entire trust the grantor is treated as the owner of the trust’s assets for federal_income_tax purposes rulings based solely on information submitted and the representations set forth above we rule as follows prior to date shareholder a was treated as the owner of the corpus of the irrevocable_trust because shareholder a retained a reversionary_interest described in sec_673 over that portion of the irrevocable_trust in accordance with revrul_85_13 shareholder a was the owner of all of the irrevocable_trust assets for federal_income_tax purposes no gain_or_loss will be recognized by distributing upon the distribution of controlled common_stock to shareholder c in the exchange sec_355 no gain_or_loss will be recognized by shareholder c and no amount will be included in income upon the receipt of controlled common_stock pursuant to the exchange sec_355 and shareholder c's basis in the controlled common_stock will equal the basis in the shares of distributing common_stock surrendered in the exchange sec_358 the holding_period of the controlled common_stock received by shareholder c will include the holding_period of the distributing common_stock surrendered in the exchange provided that the distributing common plr-129092-07 stock is held as a capital_asset on the date of the exchange sec_1223 earnings_and_profits will be allocated between distributing and controlled in accordance with sec_312 sec_1_312-10 and sec_1_1502-33 caveats no opinion is expressed about the tax treatment of the exchange under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the exchange that are not specifically covered by the above rulings in particular no opinion is expressed regarding whether the exchange i satisfies the business_purpose requirement of sec_1_355-2 ii is used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a fifty percent or greater interest in the distributing_corporation or the controlled_corporation under sec_355 procedural statements this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively instead of attaching a copy of this letter to a return taxpayers filing a return electronically may attach a statement to the return that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file in this office a copy of this ruling letter will be forwarded to your authorized representative sincerely ___________________ lisa a fuller senior counsel branch office of associate chief_counsel corporate


internal_revenue_service number release date index numbers ----------------------- --------------------------------- ----------------- ------------------------------------ - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-120407-06 date date ----------- ------------------ ---------------------- ----------------------------------- legend x --------------------------------------------------- state d1 d2 dear ---------------- this is in response to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as an association_taxable_as_a_corporation for federal tax purposes facts according to the information submitted x was formed on d1 under the laws of state and began conducting business on d2 x intended to be treated as an association_taxable_as_a_corporation for federal tax purposes effective d2 however x inadvertently failed to timely file the proper election law and analysis 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 sec_301_7701-3 provides plr-120407-06 that unless the entity elects otherwise a domestic eligible_entity with a single owner is disregarded as an entity separate from its owner sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 with the service_center designated on the form sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed 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 internal_revenue_code except subtitles e g h and i section b defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that 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 rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interest of the government section a conclusion based solely on the facts 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 make an election to be treated as an association_taxable_as_a_corporation for federal tax purposes effective d2 x should make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-120407-06 pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely william p o'shea associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c summary opinion united_states tax_court michael t crow petitioner v commissioner of internal revenue respondent docket nos 1611-04s 6123-04s filed date michael t crow pro_se thomas m newman for respondent couvillion special_trial_judge these consolidated cases were heard pursuant to sec_7463 in effect at the time the petition was filed the decisions to be entered are not reviewable by any other court and this opinion should not be cited as authority 1unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the years at issue all rule references are to the tax_court rules_of_practice and procedure in separate notices of deficiency respondent determined the following deficiencies and additions to tax for petitioner’ sec_2001 and sec_2002 tax years year deficiency sec_6651 sec_6654 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure at trial respondent filed written motions for imposition of the penalty under sec_6673 the issues for decision are whether petitioner is liable for federal income taxes for the years in question on compensation he received from his employer for services he performed as an employee for state_income_tax refunds and for the year on distributions received from a qualified_pension plan whether petitioner is liable for the additions to tax under sec_6651 and sec_6654 for the years in question and whether petitioner is liable for the sec_6673 penalty for the years before the court at trial respondent conceded an income adjustment for the tax_year for a state_income_tax refund of dollar_figure respondent agreed that petitioner did not claim an itemized_deduction for state income taxes on hi sec_2001 federal_income_tax return therefore the refund of dollar_figure to him during the year did not constitute income some of the facts were stipulated and those facts with the annexed exhibits are so found and are incorporated herein by reference at the time the petitions were filed petitioner was a legal resident of manteca california during the years in question petitioner was employed as a mechanic by a trucking company martin-brower he received wages of dollar_figure and dollar_figure respectively for the years at issue there was no testimony at trial by petitioner of the dollar_figure distribution he received during the year from first trust corp administrator of a qualified_pension plan that adjustment therefore is deemed conceded on his federal_income_tax return for each of the years at issue petitioner claimed single filing_status a personal_exemption for himself and the standard_deduction all other lines on the returns are listed as -0- except for the federal income taxes withheld all of which were listed and claimed as overpayments which were to be refunded to him the withholdings shown on the returns are dollar_figure and dollar_figure respectively for and the return is stamped received by the irs on date and the return is stamped date both returns also bear a stamp frivolous_return program internal_revenue_service fresno ca petitioner attached to each return a two-page signed typewritten statement containing classic tax_protester statements such as that no section of the internal_revenue_code establishes an income_tax_liability that his return was not being filed voluntarily but was being filed in order to avoid prosecution for failure_to_file a return that in the ninth circuit of the federal appellate court system a tax_return form_1040 with all zeros on the return constitutes a valid_return and that he had zero income because there is no reference in the internal_revenue_code for the taxation of wages salaries or compensation_for_personal_services along with several other arguments of this nature petitioner also attached to his returns the forms w-2 wage and tax statement that had been issued by his employer petitioner filed identical petitions in response to each notice_of_deficiency alleging income_tax is based on voluntary compliance and self- assessment income is not defined in the irc income is defined by the supreme court as gains and profits derived from corporate activities i never received a statutory notice demand for payment i am not statutorily liable for income_tax i was never granted an administrative hearing as per due process no irs agent ever produced a delegation of authority to change my or assess any deficiency the court rejects entirely petitioner’s allegations and the same arguments he made at trial sec_61 defines gross_income to include all income from whatever source derived including but not limited to compensation_for services rendered whether such services are for a corporation an individual or in a self-employed activity petitioner’s protester arguments have been heard on numerous occasions by this court as well as other courts and have been consistently rejected the court sees no need to further respond to petitioner’s arguments with somber reasoning and copious citations of precedent as to do so might suggest that his argument possesses some degree of colorable merit see 737_f2d_1417 5th cir in short petitioner is a taxpayer subject_to the income_tax laws and he is liable for income_tax on the compensation and other income paid to him during the years in question none of which was questioned or denied his arguments are rejected although not addressed by petitioner at trial his gross_income for includes the distribution to him of proceeds of a qualified_pension plan sec_72 petitioner did not deny that he received the distribution and he presented no argument relating thereto as noted earlier the court considers that income adjustment as conceded with respect to the second issue sec_6651 provides for an addition_to_tax in the event a taxpayer fails to file a timely return determined with regard to any extension of time for filing unless it is shown that such failure is due to reasonable_cause and not due to willful neglect petitioner’ sec_2001 return was received by respondent on date hi sec_2002 return was received by respondent on date united_states citizens must file income_tax returns on or before the 15th day of the fourth month following the end of their taxable years sec_1_6072-1 income_tax regs that date for a calendar_year taxpayer is april 15th petitioner’s returns therefore for the year sec_2001 and sec_2002 were required to be filed on or before respectively date and date they were not received by respondent until date and date respectively respondent therefore is sustained on this issue respondent determined that petitioner was liable for the addition_to_tax under sec_6654 for failure to pay estimated_tax this addition_to_tax is applicable where there is an underpayment of estimated_tax subject_to exceptions or waivers that are not applicable here sec_6654 in general estimated income_tax payments are used to provide for payment of income taxes not collected through withholding sec_6654 provides for four quarterly installments income taxes withheld from salaries or wages apply toward the amount of each required quarterly installment however to the extent withholdings do not satisfy the required quarterly installments the taxpayer i sec_2the court notes that even though the tax returns of petitioner contained primarily zeroes respondent treated the returns as returns and did not impose a failure_to_file addition_to_tax against petitioner sec_7203 required to make supplemental quarterly payments of estimated_taxes sec_6654 under sec_6654 the amount of the four quarterly installments including taxes withheld generally must equal percent of the tax for the year or percent of the tax for the preceding_taxable_year whichever is less where there is an underpayment of estimated_tax there is no exonerating provision such as reasonable_cause or lack of willful neglect 33_tc_1071 as noted earlier taxes were withheld from petitioner’s earnings for each of the years in question therefore petitioner’s liability for the sec_6654 addition_to_tax will depend on whether after these prepayments are credited and a further credit is allowed in the rule computation because of respondent’s concession that the dollar_figure state_income_tax refund received by petitioner during did not constitute gross_income as determined in the notice_of_deficiency the balances due are within or without the 90-percent rule_of sec_6654 to that extent respondent is sustained on this issue respondent filed a motion for imposition of the penalty under sec_6673 sec_6673 authorizes this court to require a taxpayer to pay a penalty to the united_states in an amount not to exceed dollar_figure whenever it appears that proceedings have been instituted or maintained by such taxpayer primarily for delay or that the taxpayer's position in a proceeding is frivolous or groundless a petition in the tax_court is frivolous if it is contrary to established law and unsupported by a reasoned colorable argument for change in the law 791_f2d_68 7th cir prior to the trial petitioner was advised by letter from the irs that his positions were frivolous and could lead to sanctions against him if he persisted with such arguments at trial respondent filed motions for imposition of the sec_6673 penalty throughout his testimony petitioner dwelt solely on his protester arguments those arguments are considered frivolous and respondent’s motion will be granted the court will require petitioner to pay a penalty of dollar_figure in each docket number reviewed and adopted as the report of the small_tax_case division for respondent in docket no 1611-04s an order and decision will be entered an order and decision will be entered under rule in docket no 6123-04s


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp plr-123508-00 date date controlled b target holdco b1 date b date c this letter responds to your date request that we further supplement our letter_ruling dated date plr-121425-98 the original letter_ruling as supplemented by our letter rulings dated date plr- and date plr-107939-00 together the prior letter rulings capitalized terms not defined in this letter retain the meanings assigned them in the original letter_ruling the prior letter rulings address certain federal_income_tax consequences of the distributions by distributing of the stock of controlled a and controlled b and related transactions the distributions were consummated on date b facts publicly traded target is a state x corporation that has outstanding and will have outstanding at the time of the transactions described below i common_stock ii compensatory stock_options convertible into target common_stock and iii debentures convertible into target common_stock i ii and iii together target securities and the holders of target securities target equity holders target also has an employee_stock_purchase_plan in effect plr-123508-00 as a result of certain developments since the distributions including the appreciation of controlled b stock by more than percent controlled b proposes to acquire target to this end controlled b and target entered into an agreement and plan of merger on date c a date that is more than six months after the distributions under which target will merge with and into controlled b in a transaction that controlled b believes will qualify as a reorganization described in sec_368 of the internal_revenue_code and potentially sec_368 the merger in the merger the stockholders of target will receive a combination of cash and controlled b common_stock all or a part of the target debentures will be converted into target common_stock before the merger any unconverted target debentures will be assumed by controlled b and will become convertible into the same combination of cash and controlled b common_stock that is being issued to stockholders of target in the merger the debenture assumption in connection with the merger compensatory options to acquire target stock at the election of each holder will be converted into either options to acquire controlled b common_stock or a combination of cash and controlled b common_stock target's employee_stock_purchase_plan will be terminated before the merger and amounts that are allocated to the accounts of participants at the election of each participant will be used to purchase target common_stock at a discount or returned to the participant based on the amount of controlled b common_stock target common_stock and target debentures outstanding on date c and assuming that all target debentures are converted into target common_stock before the merger the controlled b common_stock to be issued to target shareholders in the merger will represent more than percent of the total number of shares of controlled b common_stock outstanding immediately following the merger the actual percentage of controlled b common_stock to be issued in the merger may vary depending on among other things the number of shares of controlled b common_stock and target common_stock outstanding at that time before the merger holdco b1 will merge with and into controlled b in a transaction that controlled b believes will qualify as a liquidation described in sec_332 and sec_337 the liquidation representations controlled b makes the following representations a controlled b and target or any potential acquirer of controlled b or any of their respective controlling shareholders did not discuss the merger or a similar acquisition before the distributions or within six months thereafter b there was an identifiable unexpected change in market or business plr-123508-00 conditions occurring after the distributions that resulted in the merger that was unexpected at the time of the distributions distributing makes the following representations c distributing and target or any potential acquirer of controlled b or any of their respective controlling shareholders did not discuss the merger or a similar acquisition before the distributions or within six months thereafter d the distributions were motivated in whole or substantial part by a corporate business_purpose within the meaning of sec_1_355-2 other than a business_purpose to facilitate the merger or a similar acquisition of controlled b e the distributions would have occurred at approximately the same time and in similar form regardless of the merger or a similar acquisition distributing reaffirms the following representation that appears in the original letter_ruling fff the distributions are carried out for the following corporate business purposes to enable each controlled_corporation to i attract motivate and retain key management and other employees by adopting separate esops and providing compensation packages that include other equity incentives tied directly and exclusively to the stock of the controlled_corporation and ii solve operational problems inherent in the current corporate structure and enhance the controlled corporation's performance and earnings by permitting its management to focus attention on smaller strategically aligned markets and adopt strategies and pursue objectives that are appropriate to the unique characteristics and needs of local communities within those markets the distributions are motivated in whole or substantial part by one or more of these corporate business purposes distributing reaffirms the following representation that appears in the original letter_ruling modified as set forth below ppp provided the service rules as the taxpayer requests neither distribution is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock of the distributing_corporation or either controlled_corporation entitled to vote or stock possessing percent or more of the total value of all classes of stock of the distributing_corporation or either controlled_corporation within the meaning of sec_355 rulings plr-123508-00 based solely on the information submitted in the original and supplemental ruling requests and the representations set forth above we rule as follows regardless of whether target is a predecessor to controlled b under sec_355 none of i any acquisition of target securities before the merger ii the debenture assumption iii any acquisition of controlled b common_stock pursuant to the conversion of debentures following the merger iv the acquisition of controlled b common_stock by target equity holders in connection with the merger v the acquisition of options to acquire controlled b common_stock by holders of options to acquire target stock in connection with the merger or vi the exercise of options to acquire controlled b common_stock that are received by former holders of options to acquire target stock in connection with the merger will constitute an acquisition that is part of a plan or series of related transactions within the meaning of sec_355 that includes the distributions the consummation of the proposed transactions described above and the additional information and representations contained in the supplemental ruling_request will not adversely affect the prior letter rulings and the prior letter rulings retain full force and effect caveats we express no opinion about the tax treatment of the transactions described above under any provisions of the code or regulations or the tax treatment of any condition existing at the time of or effect resulting from the transactions that is not specifically covered by the above rulings in particular no opinion is expressed about the tax effect of the merger and the liquidation that is not specifically covered by the above rulings procedural matters this supplemental ruling is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent each taxpayer affected by the prior letter rulings should attach copies of those rulings and this supplemental ruling to the taxpayer's federal_income_tax return for the taxable_year in which the transactions covered by these rulings are completed plr-123508-00 under a power_of_attorney on file in this office a copy of this supplemental letter will be forwarded to each of your authorized representatives sincerely associate chief_counsel corporate by _____________________ wayne t murray senior technician reviewer branch


t c memo united_states tax_court west covina motors inc petitioner v commissioner of internal revenue respondent docket no filed date steven ray mather for petitioner alan cooper for respondent memorandum findings_of_fact and opinion kroupa judge respondent determined a dollar_figure deficiency in petitioner’s federal_income_tax for and a dollar_figure deficiency for respondent also determined a dollar_figure accuracy-related_penalty under section for and a dollar_figure penalty for after concessions we are left to decide five issues we first decide whether petitioner may deduct legal expenses it incurred in the bankruptcy of its landlord hassen imports partnership hip for and the years at issue we find that petitioner may not deduct these expenses the second issue is whether petitioner may deduct legal expenses related to the purchase of clippinger chevrolet clippinger for the years at issue we find that it may not the third issue is whether petitioner may deduct dollar_figure in miscellaneous legal expenses for we find that petitioner is not entitled to the deduction the fourth issue is whether petitioner is entitled to claim cost_of_goods_sold attributable to the write-down of inventory for the years at issue we find that petitioner is not entitled to such costs the final issue is whether petitioner is liable for accuracy-related_penalties under sec_6662 for the years at issue we find that petitioner is liable for the penalties all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated the parties resolved issues relating to the deductibility of management fees imputed_interest employee_benefits expenses transit expenses and prepaid expenses resulting in an dollar_figure net increase in taxable_income for and a dollar_figure increase for other issues are computational in addition we find no merit to petitioner’s racial profiling argument findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the accompanying exhibits are incorporated by this reference petitioner is a california corporation with its principal_place_of_business in west covina california zaid alhassen mr alhassen owned percent of the stock in petitioner which operated a dodge dealership legal fees incurred in the hip bankruptcy mr alhassen and his two brothers owned percent of hassen holding co the parent and owner of hassen imports inc hassen imports inc was a 1-percent general_partner of hip petitioner’s landlord which owned and leased to petitioner the site of the dodge dealership west covina property hip filed for chapter bankruptcy in date to prevent foreclosure of the west covina property the mortgagor bank expressed its intent to toss out petitioner from the property during the bankruptcy proceeding the leases between petitioner and hip provide however that a foreclosing mortgagor is deemed to have assumed and agreed to carry out the covenants and obligations of the leases mr alhassen signed these leases as the representative for both petitioner and hip petitioner participated in hip’s bankruptcy reorganization and was able to expand its business to two additional parcels of land that hip acquired as a result of the reorganization petitioner directly paid dollar_figure of bankruptcy-related fees in and dollar_figure in petitioner reimbursed hip for dollar_figure of bankruptcy- related fees in and dollar_figure in petitioner claimed these fees as deductions on its returns for the respective years legal fees incurred in the clippinger acquisition in an unrelated transaction mr alhassen entered into an agreement to purchase purchase agreement the assets of clippinger an established new car dealership in covina california mr alhassen assigned the purchase rights to petitioner who consummated the purchase agreement with clippinger in date petitioner acquired clippinger’s inventory of new and used automobiles automobile parts and accessories new automobile deposits fixed assets including shop equipment and machinery and intangible assets including goodwill and trademark rights escrow documents list the clippinger purchase_price as dollar_figure the purchase agreement assigned specific dollar values to the assets as follows dollar_figure to fixed assets dollar_figure to miscellaneous assets and dollar_figure to goodwill and other intangible assets clippinger also required petitioner to assume clippinger’s legal fees for structuring a seller-financing arrangement when petitioner was unable to proceed with the transaction on a cash_basis petitioner paid dollar_figure in fees to clippinger’s counsel in for preparing multiple loan documents and lease agreements and petitioner incurred dollar_figure of legal fees in and dollar_figure in for its own representation in the clippinger acquisition petitioner claimed all these fees including those paid to clippinger’s counsel on its returns for the respective years the parties also dispute whether dollar_figure of miscellaneous legal expenses may be deducted for inventory write-down respondent also challenges petitioner’s method of writing down inventory petitioner assigned a stock number to each new and used automobile in its inventory petitioner referenced the stock number in records comparing the cost and the market_value of each automobile for purposes of determining the proper write- down if any petitioner did not include however complete information concerning the year make and model for several automobiles in these records nor did these records indicate the condition mileage or equipment options of any of the automobiles petitioner’s accountants estimated market_value based on the kelly blue_book average wholesale prices without reference to the actual condition mileage or equipment options of any of the automobiles respondent originally disallowed dollar_figure in miscellaneous legal fees but conceded that petitioner had substantiated and was entitled to claim dollar_figure the parties stipulated that it is industry custom to use the lower_of_cost_or_market method of inventory_valuation under which items are valued at the lower_of_cost_or_market value this method usually results in an adjustment to inventory by means of a write-down of inventory to market_value petitioner’s write-down calculations show that the inventory write-down should have been dollar_figure for and dollar_figure for petitioner recorded the inventory write-down adjustment for the years at issue however as a trial balance_sheet item titled uv res for writedown petitioner offset dollar_figure against a reserve for each of the years at issue rather than using the write-down amounts from its records petitioner’s ending inventory for consisted of automobiles of which had been listed in petitioner’s ending inventory for petitioner did not adjust the cost of these automobiles at the beginning of by the write-down taken at the end of resulting in a dollar_figure overstatement of inventory write-down in petitioner timely filed its federal_income_tax returns for the years at issue respondent examined petitioner’s returns and issued a deficiency_notice disallowing various deductions and cost_of_goods_sold the amounts still in dispute include legal fees incurred in the hip bankruptcy in the clippinger acquisition and for other legal expenses as well as the cost_of_goods_sold attributable to inventory write-down i character of legal fees opinion we are asked to decide whether petitioner is entitled to deduct various legal expenses as ordinary and necessary business_expenses under sec_162 or must capitalize them under sec_263 it is well established that attorney’s fees that are paid as ordinary and necessary expenses may be deductible see 8_tc_130 no deduction is allowed however for attorney’s fees that are considered capital expenditures sec_263 397_us_572 flint v commissioner tcmemo_1991_405 the parties agree that the legal expenses at issue here must be analyzed under the origin of the claim doctrine see 86_tc_190 courts apply the origin_of_the_claim_test to determine whether expenses are deductible under sec_162 or subject_to capitalization under sec_263 woodward v commissioner supra 372_us_39 the substance of the underlying claim or the nature of the transaction out of which the expenditure in controversy arose governs whether the item is a deductible expense or a capital_expenditure regardless of the payor’s motives or the consequences resulting from the failure to defeat the claim see woodward v commissioner supra pincite 539_f2d_929 3d cir 473_f2d_1217 7th cir 427_f2d_429 7th cir this test requires examination of all the facts and events underlying the claim and each case turns on its special facts 59_tc_708 ii legal fees incurred in the hip bankruptcy against this background we address whether the legal fees petitioner incurred must be capitalized or are currently deductible first we address the legal fees petitioner paid to defend hip in the bankruptcy reorganization respondent determined that the bankruptcy-related legal fees were ordinary and necessary expenses of petitioner but nevertheless were not deductible because they were rooted in the defense of title petitioner argues that these expenses were paid to stave off its extinction and are therefore deductible we agree with respondent legal expenses_incurred to defend claims that would injure or destroy a business are ordinary and necessary expenses 320_us_467 the expenses_incurred in defending legal_title however are not deductible and must be capitalized duntley v commissioner tcmemo_1987_579 sec_1_263_a_-2 income_tax regs we have held that legal expenses_incurred in defending or postponing foreclosure actions must be capitalized because they are actions in defense of title flint v commissioner supra boyajian v commissioner tcmemo_1970_78 we see no difference where a tenant as here takes the highly unusual action of paying expenses to defend its landlord’s title a taxpayer may not deduct the expenses of another as a general_rule see 308_us_488 we have recognized a narrow exception where the original obligor is unable to make payment and the taxpayer satisfies the obligation to protect its own business interests see 115_tc_172 and cases cited thereat 48_tc_679 the adverse consequences for the payor taxpayer’s business must be direct and proximate however as demonstrated by the impact on the payor’s business of an obligor’s inability to meet its obligations hood v commissioner supra pincite here there is no suggestion that hip was unable to pay the bankruptcy-related legal fees in fact hip had paid some of the fees and petitioner reimbursed hip accordingly we conclude that petitioner may not deduct these expenses because the benefits to petitioner are not as direct and proximate as required for the narrow exception set out in lohrke iii legal fees incurred in the clippinger acquisition we now turn to the legal fees petitioner incurred to acquire clippinger respondent argues that the dollar_figure of legal expenses in and the dollar_figure of legal expenses in are capital expenditures because petitioner incurred them while acquiring a capital_asset petitioner counters that these fees are deductible because they relate to inventory which turns over every to days and does not provide significant benefit beyond a taxable_year petitioner further argues that these fees were either directly linked to physical inventory and inventory financing or were related to the clippinger purchase in which to percent of the purchase_price was attributable to inventory we agree with respondent that the expenses_incurred in the clippinger acquisition are not deductible because they constitute capital expenditures it is well settled that legal expenses_incurred in the acquisition or disposition of a capital_asset are capital expenditures woodward v commissioner u s pincite moreover we find petitioner’s argument that most of the clippinger purchase_price represented automobile inventory conflicts with the evidence in the record escrow documents list the clippinger purchase_price at dollar_figure and removing the amounts allocated in the purchase agreement to non-inventory item sec_5 leaves less than dollar_figure ie less than percent of the purchase_price allocated to clippinger’s inventory and other assets we find mr alhassen’s uncorroborated testimony the amount representing non-inventory items includes dollar_figure for legal fees paid to clippinger’s counsel dollar_figure for fixed assets dollar_figure for miscellaneous assets and dollar_figure for goodwill and intangible assets concerning the portion of the purchase_price allocated to inventory insufficient to overcome the information found in the escrow documents and purchase agreement we are not required to nor do we in this instance accept the self-serving testimony of interested parties without probative corroboration see 87_tc_74 yang v commissioner tcmemo_2000_263 in addition petitioner’s records contradict its position that inventory turned over every to days a sec_35 of the automobiles included in the year-end inventory were also listed in the year-end inventory we conclude that the acquisition-related legal fees are not deductible as ordinary and necessary business_expenses iv miscellaneous legal fees respondent also disallowed dollar_figure of miscellaneous legal fees for petitioner has not provided the court with any information regarding these miscellaneous legal fees accordingly we find that petitioner is not entitled to deduct these fees petitioner also failed to provide invoices or records for the acquisition-related legal services indicating that these services related specifically to physical inventory or inventory financing nor did we find the accountant’s testimony credible as to this issue v cost_of_goods_sold related to the write-down of inventory we now turn to petitioner’s method_of_accounting for inventory write-down respondent disallowed dollar_figure of cost of sales expenses related to inventory write-down for the years at issue respondent argues that petitioner both failed to substantiate the write-downs and violated the regulations under sec_471 by using a reserve amount petitioner argues that its accounting complied with industry standards and the write- downs should be allowed we disagree with petitioner a taxpayer is required to use a method_of_accounting for inventory that clearly reflects the taxpayer’s income sec_471 best auto sales inc v commissioner tcmemo_2002_297 affd 90_fedappx_388 11th cir the taxpayer has a heavy burden of proving that the commissioner’s determination is plainly arbitrary and constitutes an abuse_of_discretion if the commissioner determines that the taxpayer’s method_of_accounting for inventory under sec_471 is improper 439_us_522 a taxpayer using the lower_of_cost_or_market method of valuing inventory may write-down a decline in the value of merchandise from its cost to a lower market_value in the year in which the decline occurs even though the goods have not been 7petitioner also argued that the inventory write-down had no taxable effect we find this argument to be without merit sold sec_471 sec_1_471-2 income_tax regs this is referred to as an inventory write-down if the market_value of the inventory at the end of the year is lower than its cost the taxpayer writes down the basis of the inventory to the lower market_value thereby reducing gross_income thor power tool co v commissioner supra pincite sec_1_471-4 income_tax regs deducting a reserve for price changes from the inventory or writing down inventory based on mere estimates however is not allowable sec_1_471-2 income_tax regs further we will not disturb the commissioner’s determination disallowing a taxpayers’s write-downs without objective evidence substantiating an item-by-item comparison of cost-to-market value see thor power tool co v commissioner supra pincite import specialties inc v commissioner tcmemo_1982_41 petitioner’s accountant determined market_value for write- down purposes as the wholesale kelly blue_book value with the assumption that the automobiles were in average condition petitioner’s accountant testified that it is necessary to know the make model and year of the automobile as well as the automobile’s condition mileage and equipment options to determine the kelly blue_book value yet petitioner’s write-down we acknowledge than an official guide for used automobiles may be used to determine the market_value for write-down purposes 60_tc_884 records do not include complete information petitioner’s records lack the make model and year of several automobiles and do not include the mileage condition or options of any automobiles petitioner argues that this method is the industry standard and any differences between the method used and a more detailed analysis would have been immaterial we are not persuaded given the incomplete write-down records and absence of any corroborating evidence to support the estimated kelly blue_book values in addition petitioner did not then use its write-down calculations of dollar_figure in and dollar_figure in to determine its cost_of_goods_sold rather petitioner violated the regulations when it substituted a reserve amount of dollar_figure as the write-down for both years see sec_1 f income_tax regs we find that petitioner did not adequately substantiate the inventory write-downs and relied on a reserve in violation of the sec_471 regulations we also find that petitioner failed to prove that the commissioner’s determination was arbitrary and an abuse_of_discretion accordingly we sustain respondent’s determination as to this issue vi sec_6662 penalties we next address whether petitioner is liable for the accuracy-related_penalties under sec_6662 respondent has the burden of production under sec_7491 and must come forward with sufficient evidence that it is appropriate to impose a penalty see 116_tc_438 respondent determined that petitioner was liable for substantial understatements of income_tax under sec_6662 for the years at issue a taxpayer is liable for an accuracy-related_penalty of percent of any part of an underpayment attributable to among other things a substantial_understatement_of_income_tax see sec_6662 and b sec_1_6662-2 income_tax regs there is a substantial_understatement_of_income_tax if the understatement amount exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 sec_1_6662-4 income_tax regs petitioner reported income_tax of zero for the years at issue and reported negative taxable_income of dollar_figure for taxable_year and zero taxable_income for respondent has met his burden of production because the adjustments related respondent determined in the alternative that petitioner was liable for accuracy-related_penalties for negligence or disregard of rules or regulations under sec_6662 for the years at issue because respondent has proven that petitioner substantially understated its income_tax for the years at issue we need not consider whether petitioner was negligent or disregarded rules or regulations to the conceded issues alone are sufficient to meet the threshold amounts under sec_6662dollar_figure petitioner urges us to waive the sec_6662 penalties for three reasons first petitioner claims there was substantial_authority for the positions taken on its tax returns next petitioner argues it provided adequate_disclosure of the relevant facts affecting its tax treatment of the items on the returns finally petitioner claims to have reasonable_cause for its positions on the returns while the commissioner bears the burden of production under sec_7491 the taxpayer bears the burden_of_proof with regard to issues of reasonable_cause substantial_authority or similar provisionsdollar_figure higbee v commissioner supra pincite we address these arguments in turn a substantial_authority for positions taken substantial_authority for the tax treatment of an item exists only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary positions see 939_f2d_874 9th cir affg in part and revg in part see supra note petitioner presented no evidence concerning the issues of reasonable_cause substantial_authority or disclosure and reasonable basis in relation to its positions for the conceded issues and did not carry its burden as to these issues see supra note tcmemo_1989_390 sec_1_6662-4 income_tax regs the weight of an authority depends on its source persuasiveness and relevance sec_1_6662-4 income_tax regs the weight of authority consistently favored respondent we found no merit to petitioner’s arguments concerning the deductibility of the attorney’s fees in addition petitioner’s position regarding the inventory write-down explicitly contradicts the relevant income_tax regulations sec_1_471-2 income_tax regs accordingly we find that the substantial_authority exception does not apply b disclosure of a position and reasonable basis for treatment we now address whether petitioner adequately disclosed its position no accuracy-related_penalty may be imposed for a substantial_understatement_of_income_tax when the taxpayer adequately discloses the relevant facts affecting the tax treatment of an item and there existed a reasonable basi sec_12 for the treatment of that item sec_6662 sec_1 e income_tax regs a taxpayer may make adequate_disclosure a return position generally has a reasonable basis if it is reasonably based on one or more of the following authorities among others the internal_revenue_code and other statutory provisions proposed temporary and final regulations construing the statutes court cases and congressional intent as reflected in committee reports sec_1_6662-4 income_tax regs the reasonable basis standard is not satisfied by a return position that is merely arguable or is merely a colorable claim sec_1_6662-3 income_tax regs if the taxpayer provides sufficient information on the return to enable the commissioner to identify the potential controversy schirmer v commissioner 89_tc_277 merely claiming the loss without further explanation however is insufficient to alert the commissioner to the controversial nature of a loss claimed on the tax_return mcconnell v commissioner tcmemo_2008_167 citing robnett v commissioner t c memo petitioner did not provide sufficient facts to supply respondent with actual or constructive knowledge of the tax treatment of the disputed items see robnett v commissioner supra the returns do not mention petitioner’s inventory write- down method or that petitioner deducted legal fees related to hip’s bankruptcy and the clippinger purchase we find that petitioner did not adequately disclose its position and the adequate_disclosure exception does not apply c reasonable_cause we now address whether petitioner had reasonable_cause the accuracy-related_penalty under sec_6662 does not apply to any portion of an underpayment if it is shown that there was reasonable_cause for and that the taxpayer acted in good_faith with respect to that portion sec_6664 sec_1 a income_tax regs the determination of whether the taxpayer acted with reasonable_cause and in good_faith depends on the pertinent facts and circumstances including the taxpayer’s efforts to assess his or her proper tax_liability the knowledge and experience of the taxpayer and the taxpayer’s reliance on the advice of a professional sec_1_6664-4 income_tax regs petitioner argues that it is not liable for the accuracy- related penalties because it relied upon the advice of its accountant concerning the tax treatment of the disputed items reliance on the advice of a competent adviser can be a defense to the accuracy-related_penalty 469_us_241 118_f3d_184 4th cir affg tcmemo_1996_167 sec_1_6664-4 income_tax regs reliance must be reasonable in good_faith and based upon full disclosure however 91_tc_396 affd without published opinion 940_f2d_1534 9th cir 88_tc_654 petitioner has not shown that it supplied its accountant with all the correct and necessary information needed to establish its position that its error in underreporting was the result of the preparer’s mistake or that it discussed the tax treatment of the legal fee deductions with its accountant before filing the returns after considering all of the facts and circumstances we find that petitioner has not established that it had reasonable_cause and acted in good_faith with respect to the substantial understatements of income_tax accordingly we sustain respondent’s determination regarding the accuracy-related_penalties for the years at issue vii conclusion in reaching our holdings we have considered all arguments made and to the extent not mentioned we consider them irrelevant moot or without merit to reflect the foregoing and the concessions of the parties 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 b01 plr-152009-05 date date --------------------- ------------------------- -------------------------------------------- legend legend x -------------------------------------------------- country d dear -------------- correspondence written on behalf of x requesting an extension of time under ' and ' of the procedure and administration regulations to elect to be treated as a partnership for federal tax purposes this letter responds to the letter dated date and related facts the information submitted states that x was incorporated under the laws of country on d x intended to file a form_8832 entity classification election to be treated as a partnership for federal tax purposes effective d however the election was not timely filed law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under ' b or an eligible_entity can elect its classification for federal tax purposes elections are necessary only when an plr-152009-05 eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 provides that except for certain existing entities described in sec_301_7701-3 unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single member that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under ' b by filing form_8832 with the appropriate service_center under ' c iii this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed 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 sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the federal_register commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-1 through provide the standards the conclusion based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of and and therefore it is granted an extension of time of sixty days from the date of this letter to file a form_8832 to elect to be treated as a partnership for federal tax purposes effective d a copy of this letter should be attached to the election a copy is enclosed for that purpose plr-152009-05 except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being mailed to your authorized representative sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for ' purposes cc


internal_revenue_service number release date index number ----------------- ----------------------------------------- ------------------------------------------ ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no ------------- ----------------- telephone number ---------------------- refer reply to cc psi b03 plr-102751-18 date date legend x date state date trust a b date ------------------------------ ------------------------ ------------------------ -------------- ------------------------ ------------------------------ ------------------------------ ------------------------ ------------------------------ -------------------------- ------------------------------ -------------------------- ------------------- dear --------------- this letter responds to a letter dated date and supplemental information submitted on behalf of x by x's authorized representative requesting relief under sec_1362 of the internal_revenue_code the code plr-102751-18 facts according to the information submitted and representations made x was incorporated on date under the laws of state and elected to be an s_corporation effective date prior to date trust a shareholder of x was a grantor_trust that was treated under subpart e of part of subchapter_j of chapter as owned by a on date trust ceased to be a grantor_trust x represents that as of date trust satisfied the qualified_subchapter_s_trust qsst requirements under sec_1361 however b trust’s income_beneficiary failed to make an election under sec_1361 to treat trust as a qsst effective date therefore x’s s_corporation_election terminated on date x represents that the circumstances resulting in the termination of its s_corporation_election were inadvertent and were not motivated by tax_avoidance or retroactive tax planning x represents that it and its shareholders have filed tax returns consistent with the treatment of x as an s_corporation and trust as a qsst x and its shareholders agree to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder of an s_corporation sec_1361 defines a qsst as a_trust a the terms of which require that i during the life of the current income_beneficiary there shall be only one income_beneficiary of the trust ii any corpus distributed during the life of the current income plr-102751-18 beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary's death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to such beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to one individual who is a citizen or resident_of_the_united_states sec_1361 provides that in the case of a qsst with respect to which a beneficiary makes an election under sec_1361 -- a such trust shall be treated as a_trust described in sec_1361 b for purposes of sec_678 the beneficiary of such trust shall be treated as the owner of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 is made and c for purposes of applying sec_465 and sec_469 to the beneficiary of the trust the disposition of the s_corporation stock by the trust shall be treated as a disposition by such beneficiary sec_1361 provides that a beneficiary of a qsst or his legal_representative may elect to have sec_1361 apply an election under sec_1362 shall be made separately with respect to each corporation the stock of which is held by the trust sec_1362 provides that an election under sec_1362 will be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides in relevant part that if an election under sec_1362 by any corporation was terminated under paragraph or of sec_1362 the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken so that the corporation is once more a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make any adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to the period then notwithstanding the circumstances resulting in the termination the corporation will be treated as continuing to be an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and the representations made we conclude that x's s_corporation_election was terminated on date when trust became an plr-102751-18 ineligible shareholder we also conclude that the termination was inadvertent within the meaning of sec_1362 accordingly pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from date and thereafter provided that x’s s_corporation_election was valid and was not otherwise terminated under sec_1362 this ruling is contingent on b filing a qsst election for trust effective date with the appropriate service_center within days from the date of this letter a copy of this letter should be attached to the qsst election except as specifically ruled upon above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express or imply no opinion regarding x's eligibility to be an s_corporation or trust’s eligibility to be a qsst this ruling is directed only to the taxpayer that requested it according to sec_6110 this ruling may not be used or cited as precedent the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination pursuant to the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely mary beth carchia senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes