t c memo united_states tax_court laura k davis et al petitioners v commissioner of internal revenue respondent docket nos 144-05l 145-05l filed date 146-05l 147-05l 149-05l these cases brought pursuant to sec_6330 i r c are before the court to determine whether ps must pay penalties pursuant to sec_6673 i r c for instituting procedures primarily for delay etc and whether counsel must pay r’s excess counsel fees pursuant to sec_6673 i r c for unreasonably and vexatiously multiplying the proceedings held p husband penalized pursuant to sec_6673 i r c for instituting and maintaining proceedings primarily for delay making frivolous arguments and taking groundless positions and cases of the following petitioners are consolidated herewith jld asset management co a k a jld asset management_trust jeffrey davis trustee docket no 145-05l jeffrey w davis docket no 146-05l jeffrey w davis docket no 147-05l and laura k davis docket no 149-05l unreasonably failing to pursue available administrative remedies held further ps’ lead counsel liable for r’s attorney’s fees since he signed pleadings and other papers knowing ps’ claims to be meritless and thus abused the judicial process and unreasonably and vexatiously multiplied the proceedings robert alan jones maria angelisa l lacorte and mario p fenu for petitioners alan j tomsic and paul c feinberg for respondent memorandum opinion halpern judge each of the cases in this consolidated proceeding is before the court to determine whether the petitioner therein must pay a penalty pursuant to sec_6673 and whether two of petitioners’ counsel common to all of the cases robert alan jones mr jones and maria angelisa l lacorte ms lacorte must pay certain of respondent’s costs pursuant to sec_6673 for the reasons that follow we impose on petitioner jeffrey w davis mr davis penalties totaling dollar_figure and on mr jones costs totaling dollar_figure unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as amended and all rule references are to the tax_court rules_of_practice and procedure generally we shall use the term counsel to refer to mr jones and ms lacorte background introduction each of these cases began with a petition for review of a determination by respondent’s appeals_office appeals that respondent might proceed with certain activities to collect unpaid tax or taxes owed by petitioner the docket numbers petitioners and years in issue are as follows docket no petitioner year s 144-05l 145-05l 146-05l 147-05l 149-05l laura k davis jld asset management co a k a jld asset management_trust jeffrey davis trustee jeffrey w davis jeffrey w davis laura k davis each petitioner resided in beavercreek ohio at the time he or she without distinction he filed the petition at the call of these cases from the calendar for the trial session of the court at las vegas nevada commencing on date the las vegas trial session the court received from the parties to each case a proposed decision document sustaining appeals’ determination that respondent might proceed with the collection activities in question in that case we filed each proposed decision document as a stipulation of settlement to facilitate the court’s dealing with the penalty and costs issues before us today we ordered each petitioner to show cause in writing why in each case in which he is involved a penalty should not be imposed on him pursuant to sec_6673 and we ordered mr jones and ms lacorte to show cause why in each case excess costs should not be imposed on them pursuant to sec_6673 we also ordered respondent to inform the court of his fees and costs incurred in these cases and of his positions with respect to the penalties and costs at issue we explained to the parties and to counsel that our orders to show cause were motivated by our concern that petitioners had raised and their counsel had abetted them in raising meritless arguments that had served merely to delay the collection_of_taxes owing in addition to ordering petitioners and their counsel to respond in writing to our orders to show cause we accorded each the opportunity to appear and be heard finally in the face of the stipulations of settlement we vacated the orders we had entered granting in whole or in part respondent’s motions for summary_judgment and tax_liabilities on date respondent issued to mr davis and petitioner laura k davis ms davis a notice_of_deficiency with respect to their joint and federal income taxes mr davis timely filed a petition in this court for a redetermination of the deficiencies ms davis did not file a petition on date we entered an order and decision in mr davis’s case sustaining the deficiencies in full and imposing a penalty of dollar_figure upon him under sec_6673 for instituting the case for purposes of delay and for making frivolous arguments mr davis did not appeal the order and decision respondent timely assessed the and deficiencies and other_amounts on date ms davis for in support of our order and decision we relied on the following deemed admissions paragraph numbers and ellipses omitted petitioner jeffrey w davis created a series of sham trusts designed to assist him in evading the payment of his federal income and employment_taxes petitioner jeffrey w davis created the jld asset management_trust to avoid paying his federal taxes the jld asset management_trust is a sham trust the davis charitable_trust is a sham trust the petitioner jeffrey w davis instituted this case to delay the assessment of his individual income taxes for the taxable years and the petitioner jeffrey w davis instituted this case to use the tax_court as a forum to present frivolous constitutional and procedural arguments against the united states’ federal_income_tax system the petitioner jeffrey w davis fired his attorney scott w gross after mr gross refused to file frivolous motions in connection with this case the petitioner jeffrey w davis intentionally recklessly and negligently disregarded the federal tax laws in the preparation of his and federal_income_tax returns date ms davis for and date mr davis for and tax_liabilities on date respondent issued to petitioner jld asset management_trust jeffrey w davis trustee the trust and the trustee respectively a notice_of_deficiency with respect to the trust’s federal_income_tax and issued to mr and ms davis a notice_of_deficiency with respect to their federal_income_tax neither the trustee mr davis nor ms davis filed a petition for redetermination of the deficiency and respondent timely assessed the deficiencies and other_amounts on date mr and ms davis and date the trust notices on date respondent sent to each petitioner with respect to each year of that petitioner in issue a final notice - notice_of_intent_to_levy and notice of your right to a hearing final notice on date respondent sent to each petitioner with respect to each year of that petitioner in issue a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 nftl each nftl notified the recipient that respondent had filed a lien with respect to the recipient’s unpaid federal_income_tax liability or liabilities for the year or years in issue responses and hearing on date in response to the final notices and the nftls each petitioner filed with appeals an internal_revenue_service irs form request for a collection_due_process_hearing on those forms petitioners commonly allege that there exist whipsaws with related entities or persons ms davis alleges that she is an innocent spouse mr jones signed the forms as each petitioner’s authorized representative on date in response to the forms an appeals employee settlement officer michael a freitag the settlement officer sent mr jones a letter scheduling a hearing for date with respect to all of the hearing requests among other things the letter states that if mr jones wishes to propose collections alternatives such as an installment_agreement or an offer-in-compromise he must complete and submit current financial statements along with verification prior to the hearing date the hearing was rescheduled for date but mr jones failed to appear on date the settlement officer held a telephone conference with mr jones determinations on date appeals issued to each petitioner a notice_of_determination concerning collection action s under sec_6320 and or notice the notices sustain the filing of the lien and the proposed levy action each notice is accompanied by an attachment wherein the settlement officer sets forth the analysis leading to his conclusion that the collection actions should be sustained the analysis in each attachment is similar and the following are among the facts generally similar in each attachment on which the settlement officer relied petitioner could not challenge the underlying tax_liability because he had received a notice_of_deficiency petitioner had neither requested release or withdrawal of the nftl nor shown that he was entitled to release or withdrawal of the nftl no collection alternatives such as an offer-in-compromise or an installment_agreement were finalized with petitioner because he either did not respond with any alternatives or still believes that he does not owe the liability and that this is a whipsaw case where relevant petitioner had not provided information necessary for innocent spouse relief for ms davis appeals had verified the assessments of tax the requirements of all applicable laws and administrative procedures had been met the proposed collection action balanced the need for efficient collection with petitioner’s concern that any collection action be no more intrusive than necessary petitions on date each petitioner timely petitioned for review of the notice received by that petitioner each petitioner assigned error in substantially the same terms except as noted each sought to challenge the tax_liability underlying the collection actions at issue submitted that there were impermissible whipsaws with related entities or persons submitted that the settlement officer did not make a determination from petitioner’s tax returns claimed the settlement officer did not allow him to raise collection alternatives including an offer-in-compromise claimed the settlement officer did not allow sufficient time for him to retrieve irs documentation to test whether the period of limitations on assessment had expired alleged that the assessments were time barred and violated the statute_of_limitations and in docket nos 144-05l and 149-05l claimed innocent spouse protection for ms davis mr jones executed each petition on behalf of the named petitioner respondent answered the petitions denying or otherwise countering those claims the petitions are substantially_similar to petitions filed by mr jones on behalf of taxpayers in at least eight other cases six of them calendared for trial at the las vegas trial session three of those cases are the subject of our report in gillespie v commissioner released today as tcmemo_2007_202 ms lacorte’s appearance on date ms lacorte filed an entry of appearance in each case amended petitions on date approximately months before commencement of the las vegas trial session each petitioner moved for leave to amend petition those motions are signed by mr jones and ms lacorte the accompanying amended petitions were lodged with the court on the same date and on date we ordered respondent to respond to the motions for leave to amend on january and we filed respondent’s objections to the motions on date we granted all of the motions and we filed the amended petitions mr jones executed each amended petition on behalf of the named petitioner in each amended petition petitioner avers numerous instances of abuse_of_discretion by the settlement officer viz respondent objected to the motions on among other grounds that the proposed amendments were frivolous or groundless provided no basis for relief and were being raised solely for the purpose of delay we granted the motions in light of the facts before us and the standard set forth in rule a that leave to amend shall be freely given however we directed the attention of petitioners’ counsel to the provisions of rule b concerning the effect of signing a pleading see discussion of rule b infra and stated at the trial of this case the court expects petitioners’ counsel to show that the claims in the amended petition are well grounded in fact and otherwise supported as set forth in rule b the court warns petitioners and their counsel that if justified the court will not hesitate to impose sanctions and costs as provided for in sec_6673 he did not give petitioner adequate time to make his case including raising collection alternatives such as an offer-in- compromise petitioner’s counsel was not provided documentation showing that the irs had met the requirements of all applicable laws and administrative procedures the settlement officer failed to provide petitioner a copy of his individual_master_file the assessment of tax was backdated and collection was time barred the settlement officer was biased against petitioner because of petitioner’s use of the trust system there are impermissible ‘whipsaws’ with related entities or individuals and in docket nos 144-05l and 149-05l ms davis is entitled to ‘innocent spouse protection’ in each case respondent denied those averments the amended petitions are substantially_similar to petitions filed by mr jones on behalf of taxpayers in at least six other cases calendared for trial at the las vegas trial session three of those cases are the subject of our report in gillespie v commissioner supra motions for summary_judgment and motion for penalty on date in docket nos 146-05l and 149-05l and on date in the remaining cases respondent moved for summary_judgment he relied on similar grounds in support of each motion since petitioner had received a notice_of_deficiency with respect to the underlying liability or liabilities without distinction liability he could not challenge the liability thus at his collection_due_process_hearing petitioner could raise only collection alternatives although nothing prevented him from doing so he did not raise any collection alternative nor did ms davis present any basis for innocent spouse relief finally no other error assigned by petitioner raised any justiciable issue or showed any abuse_of_discretion by the settlement officer respondent also moved in docket no 146-05l concerning mr davis’s and taxable years that we impose a penalty on him under sec_6673 in the amount of dollar_figure as petitioner has instituted this proceeding primarily for the purpose of delay and petitioner’s position is frivolous or groundless petitioners’ objections on date each petitioner filed an objection to respondent’s motion for summary_judgment no petitioner disputed that he failed to present collection alternatives each argued that the settlement officer had not given him adequate time to make his case each claimed that he required additional information to prepare collection alternatives and to resolve other issues relating to the years at issue in docket nos 05l 145-05l and 147-05l petitioners specifically argued that the settlement officer failed to allow additional time to retrieve relevant documents from the irs each petitioner argued that the settlement officer was biased against him on account of his use of the trust system and that there were impermissible whipsaws with related entities or individuals ms davis in docket nos 144-05l and 149-05l claimed that she is an innocent spouse petitioners in each case except for docket no 145-05l also continued to argue that the assessments of tax on which the collection actions were based were time barred mr davis in docket no 146-05l contested the sec_6673 penalty mr jones and ms lacorte signed each of the objections orders disposing of motions for summary_judgment and motion for penalty on date we issued orders granting in full respondent’s motion for summary_judgment in docket no 145-05l and granting in part his motions for summary_judgment in the other four cases in substantial part the orders were similar in each we concluded that petitioner was prohibited from challenging the underlying liability we found that petitioner had approximately months to submit information to the settlement officer regarding collection alternatives but failed to do so we determined that where petitioner had claimed that he needed additional documents he had not described to the settlement officer or to the court those documents or their relevance we concluded that the settlement officer need not have waited any longer than he did to make his determination we rejected petitioner’s claim that the settlement officer was required to provide documentation verifying that all applicable laws and procedures were followed or to produce petitioner’s individual or business master files we cited the following authority specifically holding that an appeals officer is not required to produce that type of information 118_tc_162 117_tc_183 carrillo v commissioner tcmemo_2005_290 we found petitioner’s claim of bias to be frivolous and unsubstantiated we found that beyond ms davis’s bare assertion that she was entitled to innocent spouse relief she had done nothing eg setting forth facts showing a genuine issue for trial to substantiate a claim to that relief in the orders governing the four cases in which we granted respondent’s motion for summary_judgment only in part we denied the motion only with respect to petitioner’s affirmative defense of the statute_of_limitations each of those petitioners based that defense on his claim that respondent had backdated his assessment or assessments of tax and as a result collection of the tax was time barred in turn each based his claim of backdating on his argument concerning the cycle post date of the assessment since that argument was unclear but we were concerned that it might involve a material we determined that petitioner in docket no 145-05l conceded that defense because the issue was not addressed in his opposition to the motion for summary_judgment issue of fact we declined to adjudicate summarily petitioners’ affirmative defense claims by the order we issued in docket no 146-05l we also denied respondent’s motion for a penalty under sec_6673 we explained that because we were only granting partial summary_judgment in that case we would await further developments before determining whether a penalty is appropriate we added that we would also consider imposing excess costs on counsel pursuant to sec_6673 should we conclude that counsel had taken actions to multiply the proceeding unreasonably and vexatiously we likewise warned petitioners and counsel in the orders issued in the other cases that we were considering the imposition of penalties and costs in all of the orders we stated our impressions that petitioner aided by counsel may have instituted and maintained the proceeding before this court primarily to delay the collection of his income_tax_liability in support of that goal raised frivolous arguments and relied on groundless claims and unreasonably failed to pursue his opportunity for a sec_6330 hearing we cataloged our concerns with respect to each petitioner generally as follows he had not challenged respondent’s statements in support of the motion for summary_judgment that petitioner received a notice_of_deficiency and failed to petition the tax_court he had failed to present the settlement officer any collection alternatives or the financial information necessary to consider collection alternatives and in the amended petition he had made claims that had little or no substance all but one of which we had rejected we also noted the similarity of the amended petitions to petitions filed by counsel in other cases calendared for trial at the las vegas trial session and the shortness of the period between filing those amended petitions and the start of the trial session we expressed our skepticism with respect to the cycle post date argument made in support of the statute_of_limitations defense stating our suspicion based on the rejection of the same or a similar argument in dahmer v united_states aftr 2d ustc par big_number w d mo magistrate judge’s order that the argument was frivolous in docket no 145-05l the case in which we granted respondent’s motion for summary_judgment in full we ordered petitioner and counsel to appear and be prepared to show cause during the las vegas trial session why a penalty and excess costs should not be imposed on them respectively in the other cases we left the penalty and cost issues for later resolution the las vegas trial session as above stated at the call of these cases from the calendar for the las vegas trial session we received from the parties to each case a decision document which we filed as a stipulation of settlement sustaining appeals’ determination that respondent may proceed with the collection activities in question in the face of the stipulations of settlement we vacated our orders granting in whole or in part respondent’s motions for summary_judgment we accorded each petitioner and counsel the opportunity to appear and be heard with respect to our orders to show cause why we should not impose on petitioner a penalty pursuant to sec_6673 and impose on counsel excess costs pursuant to sec_6673 mr davis appeared and was heard on date the salient points of his testimony are as follows he did not recall being advised that because he received notices of deficiency he could not challenge his underlying tax_liability in a sec_6330 hearing he did not carefully review the amended petitions mr jones suggested filing the amended petitions he did not recall reviewing the oppositions to respondent’s motions for summary_judgment and he basically relied on the legal advice of mr jones and ms lacorte in contesting respondent’s collection actions and in filing his petitions in these cases ms davis did not to appear and therefore was not heard victoria osborn ms osborn was called by petitioners and in pertinent part testified as follows she lives in colorado and has a bachelor of science from the university of colorado with concentrations in accounting and finance her profession is public accountant forensic accountant and certified fraud examiner she is not however a certified_public_accountant nor is she licensed by the state of colorado to practice accounting she has never been employed by the irs and is not an enrolled_agent or otherwise authorized to represent taxpayers before the irs pursuant to treasury_department circular no practice before the internal_revenue_service c f_r part rev among other things she testified to the following she had told mr jones that the assessments of tax in these cases with respect to the taxable years in issue of both mr and ms davis were time barred the date of assessment of tax is the date an officer of the irs signs a summary record of assessment the data necessary to compile a summary record of assessment however is only available for that purpose after it has been posted to the irs’s master_file system on the basis of her examinations of transcripts of petitioners’ individual master files for the years at issue which revealed postings of assessments on dates subsequent to the assessment dates shown on those transcripts she had reached the conclusion that the assessment dates were not accurate and the true assessment dates were the dates of the postings both mr jones and ms lacorte were accorded the opportunity to be heard with respect to our orders to show cause why excess costs should not be imposed on them pursuant to sec_6673 but each preferred to respond to our orders in writing i introduction discussion sec_6673 provides for the imposition of sanctions and the award of costs in tax_court proceedings in pertinent part the provision provides sec_6673 sanctions and costs awarded by courts a tax_court proceedings -- procedures instituted primarily for delay etc --whenever it appears to the tax_court that-- a proceedings before it have been instituted or maintained by the taxpayer primarily for delay b the taxpayer’s position in such proceeding is frivolous or groundless or c the taxpayer unreasonably failed to pursue available administrative remedies the tax_court in its decision may require the taxpayer to pay to the united_states a penalty not in excess of dollar_figure counsel’s liability for excessive costs --whenever it appears to the tax_court that any attorney or other person admitted to practice before the tax_court has multiplied the proceedings in any case unreasonably and vexatiously the tax_court may require-- a that such attorney or other person pay personally the excess costs expenses and attorney’s fees reasonably incurred because of such conduct ii sec_6673 liability of petitioners a positions of the parties respondent’s position is that we should impose a penalty against mr davis in docket nos 146-05l concerning mr davis’s and taxable years and 147-05l concerning his taxable_year for advancing frivolous arguments and making groundless claims and for instituting proceedings primarily for delay respondent points out that mr davis’s and taxable years were previously before the court in a deficiency case in which we sustained the deficiencies in full and imposed a penalty of dollar_figure upon him under sec_6673 for instituting the case for purposes of delay and for making frivolous arguments respondent argues that despite the imposition of one sec_6673 penalty against him mr davis has continued to institute proceedings in this court for delay and to advance frivolous and groundless arguments therein respondent adds however that at the las vegas trial session mr davis testified to certain facts that if true might mitigate the penalty the court saw fit to impose on him eg his reliance on counsel nevertheless respondent believes that given his history of advancing frivolous or groundless arguments the court should impose some penalty upon him each petitioner filed a response to the court’s order to show cause each argues that the standard for imposition of a penalty under sec_6673 is bad faith and bad faith does not encompass nonfrivolous arguments each catalogs both identical errors in and defenses to the settlement officer’s determination that respondent may proceed with his collection actions viz the affirmative defense of statute_of_limitations the imposition of double_taxation or whipsaw an innocent spouse claim the presentation of collection alternatives including an offer-in-compromise the settlement officer’s failure to provide requested documents and the settlement officer’s failure to accord him adequate time to perfect his defense each argues that sanctions are not applicable to good_faith efforts by taxpayers and their counsel to reach agreement with the irs finally each appears to argue that notwithstanding the receipt of a statutory_notice_of_deficiency a taxpayer is entitled to raise the underlying tax_liability in a sec_6330 hearing b discussion respondent has not asked us to impose a sec_6673 penalty on ms davis in docket nos 144-05l and 149-05l or on the trustee in docket no 145-05l and we shall not we shall however impose penalties on mr davis in docket nos 146-05l and 147-05l we shall do so because we believe that mr davis instituted and has maintained the proceedings in those cases primarily for delay we further believe that in support of that goal he raised frivolous arguments and relied on groundless positions we have on more than one occasion during these consolidated proceedings stated our concern that petitioners had raised meritless arguments that served merely to delay the collection of tax we accorded mr davis both a hearing and the opportunity to respond in writing to our concerns neither by his testimony ms osborn’s testimony nor his written responses to our orders to show cause has mr davis shown us the merit of any averment claim or argument advanced by him in our order sec_5 unsupported by any citation of authority mr davis claims that the standard for imposition of a penalty under sec_6673 is bad faith in 119_tc_285 n we observed there is some question whether it is necessary for a court to find that a taxpayer acted in bad faith in order to impose a penalty on him under sec_6673 for putting forth a frivolous or groundless position compare 846_f2d_36 8th cir a taxpayer’s asserted good_faith is not relevant to the assessment of frivolous_return sec_6702 penalties with 752_f2d_1301 8th cir showing of willfulness or lack of good_faith is required for sec_6673 damages we have not however required a showing of bad faith before imposing a sec_6673 penalty see eg bean v commissioner tcmemo_2006_88 holmes v commissioner tcmemo_2006_80 wetzel v commissioner tcmemo_2005_211 and do not believe that to be a requirement of the statute moreover we believe that the court_of_appeals for the sixth circuit where barring a stipulation to the contrary any appeal continued granting in part and denying in part respondent’s motions for summary_judgment in docket nos 146-05l and 147-05l we addressed each item in the catalog of errors and defenses presented in mr davis’s written responses and except with respect to the affirmative defense of the statute_of_limitations with respect to which we withheld judgment we found that he failed to raise any issue that demonstrates error or abuse_of_discretion on the part of the settlement officer we incorporate herein by this reference those findings and the analyses supporting them summarized supra in our background discussion with respect to his affirmative defense of the statute_of_limitations mr davis presents only the testimony of ms osborn she testified to nothing more remarkable than that after an assessment of tax is made record of that assessment is posted to the irs’ computerized record system ms osborn’s theory that assessment predating posting indicates something fraudulent was rejected by the magistrate judge in dahmer v united_states aftr 2d pincite9 ustc par big_number at big_number in a ruling that accepted the government’s position that the dahmers’ evidence that the date assessment was entered into the irs administrative continued by petitioner would lie see sec_7482 would agree see 796_f2d_164 6th cir good_faith not a defense to imposition of sec_6702 penalty for frivolous income_tax return computer records in date provided no evidence of fraud because an assessment occurs on the date an authorized official signs a summary record of assessment containing the taxpayer’s assessment rather than the date the assessment is posted to the irs computerized record system indeed mr davis neglects even to discuss ms osborn or her cycle post date theory in his written responses to our orders to show cause which suggests to us that he no longer attaches any value to her testimony or theory see 117_tc_117 n concluding that taxpayers abandoned arguments and contentions asserted prior to the filing of their brief where they failed to advance those arguments and contentions on brief we see no merit in his affirmative defense mr davis’s inability to show the merit of any averment claim or argument advanced by him leads us to the conclusion that he initiated and has maintained these proceedings primarily for delay and we so find indeed he was sanctioned for just such conduct and fined dollar_figure in the proceeding that he initiated to contest respondent’s determination of his underlying tax_liabilities for and a taxpayer’s good_faith reliance on the advice of counsel is not a defense to the imposition of a penalty under sec_6673 see 846_f2d_36 8th cir nor need we excuse a taxpayer’s failure to review pleadings and other documents filed on his behalf the purpose of sec_6673 is to compel taxpayers to think and to conform their conduct to settled principles before they file returns and litigate 119_tc_285 not only do we determine that mr davis is deserving of a penalty for conduct that violates sec_6673 and b but we believe that he is deserving of a penalty pursuant to sec_6673 for unreasonably failing to pursue available administrative remedies as summarized in our background discussion under the heading determinations mr davis neither requested release nor withdrawal of the nftl nor did he show that he was entitled to release or withdrawal of it nor did he respond to the settlement officer’s request for collection alternatives assuming that he had a case to make to the settlement officer mr davis did not act reasonably in presenting less than his full case to him during the administrative process c conclusion taking into account respondent’s position we shall discharge our orders to show cause in docket nos 144-05l and 149-05l involving ms davis and 145-05l involving the trustee as to why a penalty should not be imposed on the petitioner pursuant to sec_6673 and we shall make absolute our orders to show cause in docket nos 146-05l and 147-05l involving mr davis and impose on him in each docket number a penalty pursuant to sec_6673 in the amount of dollar_figure iii sec_6673 liability of counsel for excessive costs a positions of the parties respondent’s position is that we should impose excess costs on mr jones and ms lacorte pursuant to sec_6673 respondent argues that on behalf of their clients counsel made only frivolous arguments and advanced only groundless claims and they did so knowingly or at least recklessly respondent claims that at no point in these proceedings have they shown the merit of any argument or claim made by them on behalf of petitioners in particular respondent focuses on mr jones’s perseverance in challenging petitioners’ underlying tax_liabilities notwithstanding the clear language of sec_6330 prohibiting such challenges to taxpayers who have received notices of deficiency and the well-defined caselaw interpreting that section respondent finds especially egregious mr jones’s challenge of mr davis’s underlying tax_liabilities for and in docket no 146-05l since those liabilities had been finally determined by this court in a deficiency proceeding respondent notes that the motions to amend petitions were filed less than months before the start of the las vegas trial session and the amended petitions contain only additional claims that were all determined to be meritless by the court respondent implies that counsel filed the motions only to vex respondent respondent argues that the lack of citation to relevant legal authorities in the oppositions to the motions for summary_judgment signed by both mr jones and ms lacorte indicates their lack of legal research or their willful disregard of adverse authority respondent concludes mr jones’ entire conduct in this case constitutes bad faith in that he knowingly or recklessly filed petitions motions for leave to amend petitions amended petitions and oppositions to respondent’s summary_judgment motions that raised nothing but frivolous groundless or statutorily precluded arguments ms lacorte’s involvement was limited to participation in the filing of motions for leave to amend petition and oppositions to respondent’s summary_judgment motions respondent claims that he incurred excessive costs of dollar_figure in litigating all of these cases and asks payment in that amount alternatively if we do not impose excess costs on mr jones and ms lacorte under sec_6673 respondent asks that we sanction both individuals under rule b which sets standards in connection with counsel’s signature on a pleading and provides that counsel may be sanctioned for failure to meet those standards mr jones and ms lacorte advance as their own defense the arguments made on behalf of each petitioner they also claim errors in respondent’s calculation of his costs mr jones states that at all times relevant to these cases ms lacorte was his employee subject_to his direction and advice and is in no way responsible for the decisions made in connection with the initiation or prosecution of these cases ms lacorte agrees with that description of her relationship to mr jones b discussion introduction we accept that mr jones is principally responsible for the decisions of counsel made in these cases and ms lacorte his employee at all times worked under his direction and control we shall hold only mr jones financially responsible for the excessive costs we determine requirements for an award of excess costs sec_6673 plainly imposes three prerequisites to an award of excess costs first the attorney or other practitioner without distinction attorney must engage in unreasonable and vexatious conduct second that unreasonable and vexatious conduct must be conduct that multiplies the proceedings finally the dollar amount of the sanction must bear a financial nexus to the excess proceedings ie the sanction may not exceed the costs expenses and attorney’s fees reasonably incurred because of such conduct see amlong 457_f3d_1180 11th cir with reference to the analogous language of u s c sec unreasonable and vexatious conduct the purpose of sec_6673 is to penalize an attorney for his misconduct in unreasonably and vexatiously multiplying the proceedings congress has not however specified the degree of culpability that an attorney must exhibit before we may conclude that his conduct in multiplying the proceedings is unreasonable and vexatious see eg takaba v commissioner t c pincite the language of sec_6673 is substantially identical to that of u s c sec the two provisions serving the same purpose in different forums and we have relied on caselaw under the latter to ascertain the degree of culpability necessary to make an award under the former takaba v commissioner supra pincite while most of the united_states courts of appeals have required a showing of bad faith before awarding costs under u s c sec a few have required only a showing of recklessness a lesser degree of culpability id pincite among those few are both the court_of_appeals for the district of columbia circuit see 792_f2d_1137 d c cir and the court_of_appeals for the sixth circuit see 465_f3d_642 6th cir the venue for appeal of any award of costs imposed on mr jones may be the court_of_appeals for the district of columbia circuit see sec_7482 second sentence takaba v commissioner supra if not it may be the court_of_appeals for the sixth circuit see sec_7482 the court_of_appeals for the sixth circuit has recently expressed the standard for awarding costs under u s c sec as follows a n attorney is sanctionable when he intentionally abuses the judicial process or knowingly disregards the risk that his actions will needlessly multiply proceedings red carpet studios div of source advantage ltd v sater supra pincite in support of that standard the court_of_appeals cites 964_f2d_1214 d c cir a case of the court_of_appeals for the district of columbia circuit id because we are uncertain of appellate venue and because we find that mr jones’s conduct would be culpable under the standard expressed by the court_of_appeals for the sixth circuit and presumably shared by the court_of_appeals for the district of columbia circuit we shall for purposes of this case and without deciding the standard in this court adopt that standard see takaba v commissioner supra pincite we believe that mr jones intentionally abused the judicial process by bringing and continuing these cases on behalf of petitioners knowing their claims to be without merit in support of our determination to impose a sec_6673 penalty on mr davis we found that he initiated and maintained these proceedings primarily for delay and in support of that goal raised frivolous arguments and relied on groundless positions although we decline to impose a sec_6673 penalty on the other petitioners given the almost cookie-cutter similarity of the claims made by each of them we could and do make the same finding and reach the same conclusion with respect to each of them none of the petitioners presents any meritorious claims moreover we have no doubt that mr jones has known all along that petitioners’ claims lack merit we have no doubt because of mr jones’s candor in responding to the orders to show cause in those responses mr jones admits that while on average the cases he brings have merit some do not the orders to show cannot be properly answered in the context of analysis of individual issues raised on appeal from cdp sec_6330 hearings this is true because there are some l sec_6330 case docket numbers which standing alone do not have appealable issue s however in conjunction with other related l case docket numbers and sometimes statutory_notice_of_deficiency docket numbers they have sufficient appealable issues and hazards_of_litigation which justify settlement of all docket numbers before the court as agreed upon by petitioners their counsel and the irs office_of_chief_counsel acting on behalf of respondent the five amended petitions before us today raise substantially the same issues if mr jones believed that those issues were appealable issues by which term we assume that he means meritorious issues then there would be no reason for him to make his probabilistic argument ie while some of my cases have no merit some do so that on average all of my cases have merit and each is entitled to a portion of some wholesale settlement that mr jones does indeed take a wholesale approach to representing clients before this court is supported by his request that we take notice that during the three trial sessions of the tax_court in las vegas nevada between date and date mr jones and his clients settled cases agreeing to make payments of dollar_figure with respect to dollar_figure of claimed liabilities the difficulty with mr jones’s wholesale approach and the reason we believe that he intentionally abused the judicial process is that in taking that approach mr jones violated the well-known duty_of an attorney before this court to insure that there is merit to every case that he brings before the court that duty is imposed on mr jones both by our rules and by the aba model rules of professional conduct model rules which by rule a govern his practice before this court that mr jones takes a wholesale approach in representing clients before the court is also evidenced by the fact that he made the same probabilistic argument in gillespie v commissioner tcmemo_2007_202 as discussed in the text supra the court_of_appeals for the sixth circuit requires only a showing of recklessness not a showing of subjective bad faith before assessing monetary sanctions under u s c sec 465_f3d_642 6th cir if mr jones were to claim a lack of familiarity with our rules_of_practice and the aba model rules of professional conduct we would conclude that he acted recklessly in representing petitioners before the court in ignorance of continued in pertinent part rule b provides b effect of signature the signature of counsel constitutes a certificate by the signer that the signer has read the pleading that to the best of the signer's knowledge information and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good_faith argument for the extension modification or reversal of existing law and that it is not interposed for any improper purpose such as to harass or to cause unnecessary delay or needless increase in the cost of litigation if a pleading is signed in violation of this rule the court upon motion or upon its own initiative may impose upon the person who signed it an appropriate sanction which may include an order to pay to the other party or parties the amount of the reasonable expenses_incurred because of the filing of the pleading including reasonable counsel’s fees the effect of a signature on a motion is the same as the effect of a signature on a pleading rule a in pertinent part model rule sec_3_1 states a lawyer shall not bring or defend a proceeding or assert or controvert an issue therein unless there is a basis in law and fact for doing so that is not frivolous which includes a good_faith argument for an extension modification or reversal of existing law mr jones has signed pleadings and other papers to bring and defend these proceedings knowing petitioners’ claims to be meritless he has done so in violation of our rules and the continued applicable rules the pleadings and papers we have in mind are the petitions motions for leave to amend petition amended petitions and objections to the motions for summary_judgment model rules and thus has intentionally abused the judicial process if by that conduct he has multiplied the proceedings he is deserving of sanctions for unreasonably and vexatiously multiplying the proceedings within the meaning of sec_6673 see red carpet studios div of source advantage ltd v sater supra multiplication of the proceedings these proceedings should never have been brought all of respondent’s costs are thus in a sense excessive there is however some disagreement among the courts of appeals in interpreting u s c sec as to whether it is only possible to multiply or prolong the proceedings after a case has been initiated presumably because an attorney cannot begin to multiply the proceedings until some proceeding has come into existence for the attorney to multiply compare 78_f3d_431 9th cir u s c sec applies only to unnecessary filings and tactics once a lawsuit has begun with 769_f2d_441 7th cir under u s c sec trial judge had the authority to award the fees incurred right from the beginning we have not addressed the analogous issue under sec_6673 and we are not compelled to do so today since with respect to respondent’s costs incurred in responding to the first pleadings ie answering the petitions there is adequate basis under rule b for imposing upon mr jones respondent’s reasonable expenses including reasonable counsel’s fees incurred in answering those pleadings the text of rule b is set forth supra by signing a pleading the signer certifies among other things that after a reasonable inquiry he has concluded that to the best of his knowledge the pleading is well grounded in fact and law the signer must inquire into both the facts and the law at the time the pleading is filed 91_tc_339 mr jones does not argue that he made a reasonable inquiry that led to his erroneous conclusion that petitioners’ claims had merit indeed we have concluded that he signed the petitions knowing that they lacked merit mr jones signed the petitions in violation of rule b and is deserving of a sanction on account thereof excess costs attorney's_fees awarded under sec_6673 are to be computed by multiplying the number of excess hours reasonably expended on the litigation by a reasonable hourly rate takaba v commissioner t c pincite the product is known as the lodestar amount id to assist us in computing the lodestar amount respondent has provided us with the declarations of attorneys alan j tomsic and paul c feinberg messrs tomsic and feinberg respectively and the tomsic and feinberg declarations respectively attached to the tomsic declaration are copies of reports generated from respondent’s internal time keeping records showing the number of hours expended on these cases by mr tomsic although the feinberg declaration includes the number of hours he expended on these cases he does not provide reports similar to those provided by mr tomsic declaring that he does not keep detailed records by individual case number for time he spends in a supervisory capacity mr tomsic explicitly and mr feinberg by inference calculate their time expended working on these cases from their first contacts with the cases ie for mr tomsic from review of the case files leading to his drafting answers respondent asks to be reimbursed for hours of mr tomsic’s time at dollar_figure an hour and for hours of mr feinberg’s time at dollar_figure an hour respondent provides the following chart showing the allocations of hours and dollars among docket numbers 144-05l 145-05l 146-05l 147-05l 149-05l total hours-alan j tomsic lodestar amount at dollar_figure hour tomsic dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure hours-paul c feinberg lodestar amount at dollar_figure hour feinberg lodestar amount total dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure mr tomsic is the attorney with day-to-day responsibility for these cases he is an attorney employed in the irs office_of_chief_counsel in las vegas nevada he has been a member of one or more state bars since he is admitted to practice before the united_states tax_court his declaration contains the following chart showing the hours he spent on these cases 144-05l 145-05l 146-05l 147-05l 149-05l total review case files and answer petition request information and perform research objections to motions for leave to amend motions for summary_judgment answer amended petitions review info and prepare settlement documents prepare for and attend las vegas trial session total -- -- mr feinberg is an associate area_counsel in the irs office_of_chief_counsel in las vegas nevada he has been in that position since date and has been employed by the chief_counsel since date he has been a member of one or more state bars since he is admitted to practice before the united_states tax_court his responsibilities include among other things supervising the litigation of cases before the court in connection with these cases he supervised the activities of mr tomsic and as supervisor he familiarized himself with the cases discussed handling of the cases and issues presented reviewed all documents that were prepared for filing with the court and attended all proceedings concerning the cases at the las vegas trial session he estimates that he spent a total of hours on these cases respondent claims that it is reasonable to utilize hourly charges of dollar_figure and dollar_figure for messrs tomsic’s and feinberg’s time respectively in computing the lodestar amounts for these cases respondent argues that those are the same rates that were allowed by the court for the commissioner’s trial and supervisory attorneys in in takaba v commissioner t c pincite mr jones does not question the reasonableness of the hourly rates claimed for either mr tomsic or mr feinberg mr jones has principally two objections to the award of excess costs first he objects to respondent’s claim that all of the hours expended by his attorneys are excessive and deserving of compensation second he claims that respondent fails to describe and substantiate the nature of the services rendered by his attorneys we see no merit to either of mr jones’s objections as we have made plain these cases are without merit and never should have been brought by their declarations messrs tomsic and feinberg describe adequately their activities with respect to these cases mr tomsic’s declaration is accompanied by computer records that we assume were made contemporaneously with the work performed and that support his claim moreover we are familiar with the procedural and factual history of these cases and we believe that hours was reasonably necessary for mr tomsic to do the work he describes we find that dollar_figure is a reasonable hourly charge for mr tomsic’s time and he reasonably expended hours on this litigation the lodestar amount for mr tomsic is thus dollar_figure we accept at face mr feinberg’s descriptions of his duty and activities and find reasonable his claim that he spent hours in those activities we find that dollar_figure is a reasonable hourly charge for mr feinberg’s time and he reasonably expended hours on this litigation the lodestar amount for mr feinberg is thus dollar_figure the total lodestar amount for the time of messrs tomsic and feinberg is dollar_figure respondent has not itemized costs for travel expense photocopying or supplies used in preparing the cases respondent limits his request for costs to the total lodestar amount we shall require mr jones to pay costs in that amount c conclusion we find that dollar_figure is a reasonable amount for respondent's excess attorney's_fees incurred by reason of mr jones’s unreasonable and vexatious multiplication of these proceedings therefore we shall make the orders to show cause absolute and order mr jones personally to pay dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure in docket nos 144-05l 145-05l 146-05l 147-05l and 149-05l respectively pursuant to sec_6673 iv conclusion to reflect the foregoing an appropriate order will be issued and an order and decision will be entered in each docket alternatively with respect to respondent’s attorney’s fees allocated to reviewing case files and answering petition we make the award pursuant to rule b as discussed supra


internal_revenue_service department of the treasury number release date index numbers re washington dc person to contact telephone number refer reply to cc psi b09-plr-132334-01 date date legend decedent date trust date date date date date date date date date caregiver trust trust trust trust trust plr-132334-01 trust trust step-grandchild step-grandchild step-grandchild charity stepdaughter dollar_figurea dollar_figureb dollar_figurec dollar_figured corporation dear this is in response to your letter dated date requesting a ruling under sec_2601 of the internal_revenue_code the facts and representations submitted are summarized as follows decedent executed a revocable_trust agreement trust on date and amended it on date date date date date and date corporation is the trustee of the trust paragraph of the trust as amended provides for the payment of debts and taxes upon decedent’s death paragraph of the trust provides that after providing for the payments contemplated in paragraph the trustee shall divide the remaining trust property including property to which the trustee is entitled under decedent’s will into four separate trusts one of which shall consist of one-half of such trust property and shall be designated the charitable_trust each of the other three shall consist of one- sixth of trust’s property and be designated respectively by the names of decedent’s three step-grandchildren step-grandchild step-grandchild and step-grandchild the trustee is directed to immediately distribute the principal of the charitable_trust to charity paragraph of the trust directs that caregiver a non-skip_person to decedent be paid dollar_figurea per year in monthly installments these payments are to be made out of income and to the extent income is insufficient out of principal of the respective trusts named for decedent’s step-grandchildren plr-132334-01 paragraph subsection a of the trust provides that from the trusts of the step-grandchildren the trustee shall pay to the beneficiary for whom a_trust is named and his or her descendants such part or all of the income and principal of the trust at such times as the trustee believes desirable for the best interests and welfare of the beneficiary and his or her descendants in that order and as a group considering the desirability of supplementing their respective incomes or assets and all other circumstances and factors the trustee believes pertinent all undistributed_income is to be accumulated and from time to time added to principal paragraph subsection b of the trust provides that if a beneficiary for whom a_trust is named dies before the complete distribution of principal from the trust the principal and undistributed_income of the trust shall be distributed to or for the benefit of his spouse and descendants or such religious charitable scientific or educational_purposes in such proportions and subject_to such trusts powers and conditions that beneficiary may provide and appoint by will specifically referring to this power to appoint paragraph subsection c of the trust provides that any part of a_trust not effectively disposed of by any other provision shall be divided and allocated on the death of the last to die of the beneficiary for whom the trust is named and decedent per stirpes among the living descendants of the beneficiary or if none then per stirpes among the then living descendants of the nearest lineal ancestor of the beneficiary who was also a descendant of stepdaughter and of whom one or more descendants then are living or if none then per stirpes among stepdaughter’s then living descendants paragraph subsection d of the trust provides that when a descendant of a step-grandchild for whom a_trust is named reaches thirty years of age the trustee shall distribute the remaining principal of the trust to him or her paragraph subsection e of the trust provides that on the day preceding the end of twenty-one years after the death of the last to die of decedent’s husband’s descendants living on date and decedent the trustee shall distribute any property then held in a_trust to the beneficiary for whom the trust is named decedent died on date the trustee divided each step-grandchild’s trust into three trusts trust a which consisted of dollar_figureb trust b which consisted of dollar_figurec and an annuity_trust which consisted of dollar_figured the division and allocation were provisional because the trustee was not certain that the generation-skipping_transfer gst tax applied to decedent for step-grandchild trust a has been designated as trust and trust b has been designated as trust for step-grandchild trust a has been designated as trust and trust b has been designated as trust for step- grandchild trust a has been designated as trust and trust b has been designated as trust the annuity trusts have been consolidated into trust and will continue to pay an annuity to caregiver for her life any amount in trust at caregiver’s death will be divided and allocated among the trusts named for decedent’s step-grandchildren plr-132334-01 the executor of decedent’s estate timely filed a federal estate_tax_return form_706 on date in accordance with the requirements of sec_26_2601-1 of the generation-skipping_transfer_tax regulations the executor attached to schedule r of form_706 a sworn statement stating decedent was under a mental_disability to change the disposition of her property from date until her death and certifications of decedent’s physicians stating that decedent was incompetent to handle her own affairs during the period of time that each physician treated decedent the certifications cover the entire period of time from date until decedent’s death the internal_revenue_service service issued an estate_tax closing letter for decedent’s estate on date the trustee proposes to merge trust a and trust b for each step-grandchild into a single trust for the step-grandchild the trustee has requested a ruling under chapter of the internal_revenue_code that under b c of the tax_reform_act_of_1986 act each of the trusts created under trust is exempt from the generation-skipping_transfer gst tax and each trust a and b which are named for a step-grandchild of decedent may be merged into a separate trust that will be exempt from gst tax sec_2601 of the code imposes a tax on every generation-skipping_transfer made after date under b c of the tax_reform_act_of_1986 the tax does not apply to any generation-skipping transfer-- i under a_trust to the extent such trust consists of property included in the gross_estate of a decedent other than property transferred by the decedent during his life after the date of the enactment of the act or reinvestments thereof or ii that is a direct_skip that occurs by reason of the death of any decedent but only if such decedent was on the date of the enactment of the act under a mental_disability to change the disposition of his property and did not regain his competence to dispose_of such property before the date of death sec_26_2601-1 of the generation-skipping_transfer_tax regulations provides in part that if an individual was under a mental_disability to change the disposition of his or her property continuously from date until the date of his or her death the provisions of chapter do not apply to any generation-skipping transfer-- a under a_trust as defined in sec_2652 to the extent such trust consists of property or the proceeds of property the value of which was included in the gross_estate of the individual other than property transferred by or on behalf of the individual during the individual’s life after date or b which is a direct_skip other than a direct_skip from a_trust that occurs by reason of the death of the individual sec_26_2601-1 provides that the term mental_disability means mental incompetence to execute an instrument governing the disposition of the individual’s property whether or not there was an adjudication of incompetence and regardless of whether there has been an appointment of a guardian fiduciary or other plr-132334-01 person charged with either the care of the individual or the care of the individual’s property sec_26_2601-1 provides that if there has not been a court adjudication that the decedent was mentally incompetent on or before date the executor must file with form_706 either- a certification from a qualified physician stating that the decedent was- i mentally incompetent at all times on and after date and ii did not regain competence to modify or revoke the terms of the trust or will prior to his or her death or sufficient other evidence demonstrating that the decedent was mentally incompetent at all times on and after date as well as a statement explaining why no certification is available from a physician and any judgment or decree relating to the decedent’s incompetency that was made after date sec_26_2601-1 provides that the items in sec_26_2601-1 and will be considered relevant but not determinative in establishing the decedent’s state of competency sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust exempt from the gst tax under sec_26_2601-1 sec_26_2601-1 and sec_26_2601-1 will not cause the trust to lose its exempt status under sec_26_2601-1 a modification will not cause a_trust that was irrevocable on date to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a generation-skipping_transfer or the creation of a new generation-skipping_transfer according to the facts as represented the principal of trust trust trust trust trust trust and trust consists of property that was included in decedent’s gross_estate and decedent’s form_706 included a certification regarding decedent’s mental_disability from each physician who treated decedent from date until her death because the required statements were filed with the form_706 on date and the service issued an estate_tax closing letter on date the service has accepted that decedent was under a mental_disability to change the disposition of her property continuously from date until her death plr-132334-01 because decedent was under a mental_disability to change the disposition of her property continuously from date until her death the provisions of b c of the tax_reform_act_of_1986 apply to each of the trusts and thus the provisions of chapter of the internal_revenue_code will not apply to any generation-skipping_transfer made from the trusts in addition the trustee proposes to merge each step-grandchild’s separate trusts for step-grandchild trust will merge with trust for step-grandchild trust will merge with trust for step-grandchild trust will merge with trust in this case the merger of the trusts will not result in either an increase in the amount of a generation-skipping_transfer or the creation of a new generation-skipping_transfer thus the mergers will not result in a shift in beneficial_interest to a lower generation beneficiary or extend the time for vesting of any beneficial interests in the trusts for purposes of sec_26_2601-1 accordingly we conclude that the merged trusts will continue to be exempt from the gst tax except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent james f hogan sincerely senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 1-plr-128527-02 date june legend x a b_trust trust trust trust state a b c d1 d2 d3 d4 d5 year plr-128527-02 dear this responds to your letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts according to the information submitted and representations therein x was incorporated under the law of state on d1 an election to treat x as a subchapter_s_corporation effective d2 was filed on d3 a and b who were husband and wife owned a of the outstanding shares of x as community_property the remaining b of the outstanding shares of x were owned among the children of a and b a and b transferred their share of x to trust on or shortly after d4 a died on d5 upon a’s death trust was divided into trust trust and trust under the terms of trust after the division trust and trust held b and c of the outstanding shares of x respectively trust held no outstanding shares of x soon after the division trust was terminated and the shares of x held by trust were transferred to b in year the trustee of trust and b realized that an election to qualify trust as a qualified_subchapter_s_trust qsst had not been made causing the termination of x’s s election on d5 x represents that at all relevant times x and its shareholders treated x as an s_corporation and filed their tax returns accordingly x and its shareholders agree to make any adjustments required by the secretary consistent with the treatment of x as an s_corporation law and analysis sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation which does not a have more than shareholders b have as a shareholder a person other than an estate and other than a_trust described in subsection c who is not an individual c have a nonresident_alien as a shareholder and d have more than class of stock sec_1361 provides that for purposes of sec_1361 trusts that may be shareholders include a_trust all of which is treated as owned by an individual who is a citizen or resident_of_the_united_states sec_1361 provides in part that in the case of a qualified_subchapter_s_trust with respect to which a beneficiary makes an election under sec_1361 - such plr-128527-02 trust shall be treated as a_trust described in sec_1361 sec_1361 provides that the term qualified_subchapter_s_trust means a_trust - a the terms of which require that - i during the life of current income_beneficiary there shall be only income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary’s death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to such beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to individual who is a citizen or resident_of_the_united_states sec_1362 provides that an election under sec_1362 shall be terminated whenever the corporation ceases to be a small_business_corporation sec_1362 provides that if an election under sec_1362 by any corporation was terminated under sec_1362 the secretary determines that the circumstances resulting in the termination were inadvertent no later than a reasonable period of time after the discovery of the circumstances resulting in the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period of inadvertent termination of the s election agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the termination the corporation is treated as an s_corporation during the period specified by the secretary the committee reports accompanying the subchapter_s_revision_act_of_1982 explain sec_1362 as follows if the internal_revenue_service determines that a corporation’s subchapter_s_election is inadvertently terminated the service can waive the effect of the terminating event for any period if the corporation timely corrects the event and if the corporation and the shareholders agree to be treated as if the election had been in effect for such period the committee intends that the internal_revenue_service be reasonable in granting waivers so that corporations whose subchapter_s eligibility requirements have been inadvertently violated do not suffer the tax consequences of a termination if no tax_avoidance would result from the continued subchapter_s treatment in granting a waiver it is hoped that taxpayers and the government will work out agreements that protect the revenues without undue_hardship to taxpayers it is expected that the waiver may be made retroactive for all years or retroactive for the period in which the corporation again became eligible for subchapter_s treatment depending on the facts plr-128527-02 s rep no 97th cong 2d sess 1982_2_cb_718 h_r rep no 97th cong 2d sess 1982_2_cb_730 conclusion based solely on the facts submitted and the representations made we conclude that x’s election to be treated as an s_corporation terminated on d5 we also conclude that the termination constituted an inadvertent termination within the meaning of sec_1362 under the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d5 and thereafter and the beneficiary of trust will be treated as having filed timely a qsst election on behalf of trust effective d5 provided that x’s s_corporation_election is not otherwise terminated under sec_1362 and provided further that the beneficiary of trust file a qsst election for trust with the appropriate service_center effective d5 within days of the date of this letter a copy of this letter should be attached to the election except as specifically provide herein no opinion is expressed or implied as to the federal tax consequences of the facts described above under any other provision of the code in particular no opinion is expressed as to whether x is an s_corporation for federal tax purposes whether trust and trust were trusts permitted as shareholders of an s_corporation under sec_1361 or whether trust is a qsst under sec_1361 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent under a power_of_attorney on file in this office a copy of this letter will be sent to your authorized representative sincerely david r haglund senior technician reviewer branch office of associate chief_counsel passthroughs and special industries


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc psi b09-plr-132722-02 date date legend trust date taxpayer spouse date child child child child date court drafting attorney date date state plr-132722-02 dear this is in response to your authorized representative’s letter dated date and subsequent correspondence requesting rulings regarding the proper treatment of the trust under sec_2041 sec_2036 sec_2514 and sec_2511 of the internal_revenue_code the facts and representations submitted are summarized as follows on date taxpayer and spouse established the trust a revocable_trust for the benefit of taxpayer spouse and their children spouse died on date article i paragraph d of the trust provides that the property comprising the original corpus of the trust estate is jointly owned property of the trustors taxpayer and spouse and is held by them as tenants_by_the_entirety article i paragraph d part of the trust provides that during the joint lives of the trustors any property transferred to the trust shall retain its original character and in the event of revocation the trustee shall distribute such property to the respective trustors based on the same property rights they had prior to the transfer to the trust article iii of the trust provides that the trustee shall hold manage invest and reinvest the trust estate and shall collect the income and upon demand of the trustors or the survivor of them pay to the trustors or to the survivor of them all net_income of the trust estate and pay to each trustor all separate net_income from his or her respective share of the trust estate the trustee shall further pay principal up to the whole thereof to the trustors or to the survivor of them upon written request upon the written request of the trustor who transferred separate estate property to the trust the trustee shall pay so much of the principal of the separate estate established by such trustor up to the whole thereof as he or she shall request article v of the trust provides that upon the death of the trustor whose death shall occur first the trustee shall divide the trust estate including all property received as a result of the decedent’s death into two parts each part to be administered as a separate trust to be known respectively as the decedent’s trust and the survivor’s trust article v paragraph a of the trust provides that the decedent’s trust shall include an amount equal to the lesser_of the equivalent estate_tax exemption in effect during the year of the death of the decedent or one-half of the trust estate in determining the equivalent estate_tax exemption the trustee is to take into consideration any lifetime gifts made which may decrease the actual amount available to transfer to the decedent’s trust the trustors acknowledge that it is their intent that the amount to be distributed to the decedent’s trust shall not exceed an amount which will provide for zero tax upon the death of the first of the trustors to die article v plr-132722-02 paragraph b of the trust provides that all of the rest and residue of the assets of the trust estate shall be allocated to the survivor’s trust article vi of the trust contains provisions governing the decedent’s trust article vi paragraph a of the trust provides that all of the net_income shall be distributed in convenient installments not less frequently than quarterly to the survivor during his or her lifetime article vi paragraph b of the trust provides that the trustee shall also distribute principal to the survivor which in the sole discretion of the trustee is necessary to provide proper support for the survivor article vi paragraph c of the trust provides that the survivor during his or her lifetime shall have the power to appoint the principal and undistributed_income of the trust estate or any part thereof to himself or herself or to any person or persons however the survivor may exercise said power_of_appointment during any calendar_year only to the extent of dollar_figure or five percent of the aggregate value of the trust estate whichever amount shall be greater any such power_of_appointment shall not be construed to be cumulative and if not exercised in any calendar_year such power shall be terminated as to that year article vi paragraph d of the trust provides that upon the death of the survivor the decedent’s trust shall terminate and shall become a part of the survivor’s trust created under article vii and shall be administered in accordance with the provisions of article vii article vii of the trust contains provisions governing the survivor’s trust article vii paragraph a of the trust provides that all of the net_income shall be distributed in convenient installments not less frequently than quarterly to the survivor during his or her lifetime article vii paragraph b of the trust provides that during his or her lifetime the survivor shall have a general power to appoint the principal and any undistributed_income of the survivor’s trust or any part thereof to himself or to herself or to any person or persons upon the death of the survivor he or she shall have the power to appoint the principal and any undistributed_income of the survivor’s trust or any part thereof to his or her estate or to any person or persons or to the decedent’s trust article vii paragraph c of the trust provides that upon the death of the survivor the survivor’s trust shall terminate and shall be distributed in accordance with article viii article vii paragraph d of the trust provides that the survivor’s trust shall be revocable article viii of the trust provides that unless sooner terminated in the manner provided herein both the decedent’s trust and the survivor’s trust shall cease and terminate on the death of the survivor of the trustors on such termination the trustee is directed to distribute the trust as follows article viii paragraph a part of the trust provides for distributions of personal_property plr-132722-02 article viii paragraph a part of the trust provides that the entire remaining trust estate including principal and accrued or undistributed_income shall be distributed to the trustors’ four children child child child and child in equal shares share and share alike provided however that the share devised to child is to be held in trust by child and child or the survivor of them for the benefit of child article viii paragraph a part subpart a of the trust provides that the share of a living child who has attained the age of twenty-one years shall be distributed to him or her as soon as practicable article viii paragraph a part subpart b of the trust provides that in the event that any of trustors’ children shall not have attained the age of twenty- one years at the time of distribution then the trustee shall retain the distributable share of such child and administer and distribute the trust according to the provisions of that article taxpayer represents that a subsequent review of the trust by taxpayer’s new estate_planning attorney revealed three ambiguities in the trust that may result in a construction contrary to the taxpayer and spouse’s intent the first ambiguity involves article vi paragraph d of the trust and article vii paragraph b of the trust article vi paragraph d of the trust provides that upon the death of the survivor the decedent’s trust shall terminate and shall become a part of the survivor’s trust created under article vii and shall be administered in accordance with the provisions of article vii article vii paragraph b of the trust provides in part that upon the death of the survivor he or she shall have the power to appoint the principal and any undistributed_income of the survivor’s trust or any part thereof to his or her estate or to any person or persons or to the decedent’s trust taxpayer represents that these two provisions taken together may be construed to give taxpayer the survivor a general_power_of_appointment over the assets of the decedent’s trust taxpayer further represents that this result is contrary to taxpayer and spouse’s intent taxpayer states that she and spouse intended to shelter the assets of the decedent’s trust at the death of the first trustor by use of the deceased trustor’s unified_credit and distribute the assets of the decedent’s trust on the death of the surviving trustor in the same manner as the remaining assets of the survivor’s trust the second ambiguity involves several provisions of the trust relating to the nature of jointly owned property contributed to the trust specifically taxpayer contends that it is unclear how article i paragraph d part of the trust is meant to apply on the death of a trustor taxpayer asserts that this provision which purports to preserve the tenancy by the entireties character of the trust property could be construed as an attempt to preserve the surviving trustor’s right_of_survivorship in assets in the decedent’s trust contrary to the provisions of article v the third ambiguity arises from the fact that the trust does not expressly state that the decedent’s trust is to be funded with assets from the decedent’s share of the trust estate while some provisions of the trust mention separate shares of the trust estate to be attributable to each trustor other provisions fail to suggest the existence of plr-132722-02 separate trust shares taxpayer asserts that if the decedent’s trust was funded with assets from the survivor’s share of the trust estate then such assets would be includible in taxpayer’s gross_estate under sec_2036 taxpayer represents that this result would be inconsistent with the trustors’ intent in order to eliminate the ambiguities contained in the trust and to accurately reflect the intent of the trustors on date taxpayer as trustee of the trust filed a petition with the court seeking authorization to reform the trust taxpayer child child child and child the named beneficiaries of the trust indicated their written consent to the reformation sought by the petition drafting attorney the attorney who drafted the trust provided a sworn affidavit that the ambiguous provisions of the trust as described above were the result of a scrivener’s error and are contrary to the intent of taxpayer and spouse on date the court issued an order authorizing the reformation of the trust the court found in part that i there were ambiguities present on the face of the trust instrument ii that because of circumstances not known to or anticipated by the trustors compliance with the terms of the trust would defeat or substantially impair the accomplishment of a material purpose of the trust and iii that the reformation is consistent with the court’s belief of the trustors’ intent on date taxpayer executed the reformation of the trust the reformation provides that it shall be effective retroactively as of date as a result of the reformation the following changes were made to the trust article i paragraph d of the trust was reformed in its entirety article i paragraph d of the trust as reformed provides that the trustors shall each have an equal one-half ½ beneficial_interest in the trust estate all property transferred to the trust estate whether by the trustors or otherwise shall be held in such separate shares as tenants in common property prior to the death of either trustor each trustor’s one-half ½ beneficial_interest in the trust estate may be further characterized as an undivided one-half ½ tenant in common interest in the property comprising the trust estate certain property transferred to the trust estate may be jointly owned by the trustors and held as joint_tenants with the right_of_survivorship or held as tenants_by_the_entirety trustors acknowledge and agree that upon their transfer of such property to the trust estate it shall lose its character as joint_tenancy with the right_of_survivorship property or tenancy_by_the_entirety property and be thereafter held as tenants in common property with each trustor’s individual one-half ½ interest to be held as such trustor’s separate share in accordance with the terms of this trust each trustor acknowledges and understands the nature of each trustor’s separate share of the trust estate as tenancy_in_common property article v paragraph a was reformed in its entirety article v paragraph a as reformed provides that the trustee shall set_aside as the decedent’s trust all assets of the decedent’s separate share of the trust estate that cannot qualify for the federal estate_tax_marital_deduction plus the largest pecuniary amount if any of the remaining plr-132722-02 assets of the decedent’s separate share of the trust estate that can be added to the decedent’s trust without incurring or increasing the state and federal estate_tax liability of the decedent’s estate this amount will be calculated by taking into account the decedent’s applicable_exclusion_amount and all other tax_credits deductions and other preferences allowed to the decedent’s estate in determining that amount the trustee shall consider all other transfers of assets included in the decedent’s gross_estate for federal estate_tax purposes and all the decedent’s adjusted_taxable_gifts the decedent’s trust shall be held administered and distributed in accordance with the provisions of article vi article v paragraph b was reformed in its entirety article v paragraph b as reformed provides that all assets of the decedent’s separate share of the trust estate that are not set_aside as the decedent’s trust plus all assets of the survivor’s separate share of the trust estate shall be set_aside by the trustee as the survivor’s trust the survivor’s trust shall be held administered and distributed in accordance with the provisions of article vii article vi paragraph d of the trust was reformed in its entirety article vi paragraph d as reformed provides that upon the death of the survivor the decedent’s trust shall terminate and shall be distributed in accordance with the provisions in article viii taxpayer has requested the following rulings article vi paragraph d of the trust as reformed does not provide taxpayer with a general_power_of_appointment over the assets of the decedent’s trust and upon the death of taxpayer the assets of the decedent’s trust will not be includible in taxpayer’s gross_estate under sec_2041 with the exception of of the principal of the decedent’s trust due to the existence of the and power the assets of the decedent’s trust will not be includible in taxpayer’s estate under sec_2036 the reformation of the trust does not constitute the release of a general_power_of_appointment by taxpayer resulting in a gift under sec_2514 and the reformation of the trust does not result in taxpayer being deemed to have made a gift of her remainder_interest in the decedent’s trust to her children upon spouse’s death sec_2001 provides that a tax is imposed on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2031 provides generally that the value of the gross_estate of the decedent shall be determined by including to the extent provided for in sec_2031 through the value at the time of his death of all property real or personal tangible or intangible wherever situated plr-132722-02 sec_2033 provides that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death sec_2036 provides generally that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money or money’s worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2041 provides that to the extent of any property with respect to which the decedent has at the time of his death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power_of_appointment by a disposition which is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent’s gross_estate under sec_2035 to inclusive for purposes of sec_2041 the power_of_appointment shall be considered to exist on the date of the decedent’s death even though the exercise of the power is subject_to a precedent giving of notice or even though the exercise of the power takes effect only on the expiration of a stated period after its exercise whether or not on or before the date of the decedent’s death notice has been given or the power has been exercised sec_2041 provides that for purposes of sec_2041 the term general_power_of_appointment means a power which is exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_2041 provides that the lapse of a power_of_appointment created after date during the life of the individual possessing the power shall be considered a release of such power the preceding sentence shall apply with respect to the lapse of powers during any calendar_year only to the extent that the property which could have been appointed by exercise of such lapsed powers exceeded in value at the time of such lapse the greater of the following amounts a dollar_figure or b percent of the aggregate value at the time of such lapse of the assets out of which or the proceeds of which the exercise of the lapsed powers could have been satisfied sec_2501 provides generally that a tax is imposed for each calendar_year on the transfer of property by gift by any individual resident or nonresident sec_2511 provides that the gift_tax shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible plr-132722-02 sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power sec_2514 provides that for purposes of sec_2514 the term general_power_of_appointment means a power which is exercisable in favor of the individual possessing the power his estate his creditors or the creditors of his estate in 387_us_456 the court considered whether a state trial court’s characterization of property rights conclusively binds a federal court or agency in a federal estate_tax controversy the court concluded that the decision of a state trial_court as to an underlying issue of state law should not be controlling when applied to a federal statute rather the highest court of the state is the best authority on the underlying substantive rule_of state law to be applied in the federal matter if there is no decision by that court then the federal authority must apply what it finds to be state law after giving proper regard to the state trial court’s determination and to relevant rulings of other courts of the state in this respect the federal_agency may be said in effect to be sitting as a state court generally if due to a mistake in drafting the instrument does not contain the terms of the trust that the settlor and the trustee intended the settlor or other interested_party may maintain a suit in equity to have the instrument reformed so that it will contain the terms that were actually agreed upon george gleason bogert george taylor bogert the law of trusts and trustees sec_991 rev 2d ed based on the facts submitted and the representations made we conclude that the court order modifying the trust based on scrivener’s error is consistent with applicable state law as it would be applied by the highest court of state accordingly we conclude as follows the taxpayer does not have a general_power_of_appointment over the assets of the decedent’s trust and upon the death of taxpayer the assets of the decedent’s trust will not be includible in taxpayer’s gross_estate under sec_2041 with the exception of percent of the principal of the decedent’s trust due to the existence of the and power the assets of the decedent’s trust will not be includible in taxpayer’s estate under sec_2036 the reformation of the trust does not constitute the release of a general_power_of_appointment by taxpayer resulting in a gift under sec_2514 and the reformation of the trust does not result in taxpayer being deemed to have made a gift of her remainder_interest in the decedent’s trust to her children upon spouse’s death 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 request for rulings it is subject_to verification on examination plr-132722-02 except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the 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 pursuant to the power_of_attorney on file we are sending a copy of this letter to your authorized representative sincerely melissa c liquerman melissa c liquerman branch chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes