internal_revenue_service number release date index number ------------------------------------------- --------------------------------------------------------- ------------------------------------------ -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------------- --------------------------------------------------- telephone number ---------------------- refer reply to cc psi b02 plr-132487-13 date date legend trust debtors --------------------------------------------------------- ------------------------ ----------------------------------------- ------------------------ ------------------------------------------------------------------- ------------------------ ---------------------------- ------------------------ ---------------------------------------------------------- ------------------------ -------------------------------------- ------------------------ ------------------------------------- ------------------------ ----------------- ------------------------ -------------------- ------------------- ---------------------------- date date date plr-132487-13 date date date date date date date date date date date date date date m n o ---------------------------- ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ ---------------------- ------------------------ ------------------ ------------------------ ------------------ ------------------------ ---------------------- ------------------------ -- -- ---- dear ------------------ this is in response to a letter dated date and subsequent correspondence submitted on behalf of trust requesting a ruling regarding the classification of trust as a liquidating_trust under sec_301_7701-4 of the procedure and administration regulations the information submitted states that debtors filed a voluntary petition under chapter of the bankruptcy code in the united_states bankruptcy court on date plr-132487-13 on date debtors submitted to the bankruptcy court the plan_of_reorganization the plan debtors filed a plan supplement to the liquidating chapter plan on date and a plan modification on date on date the plan as modified was confirmed by the bankruptcy court on date trust was established and approved by the bankruptcy court to facilitate the liquidation of the estate the initial term of the trust was for m years ending date on date the bankruptcy court extended the term of the trust by n years ending on date on date the bankruptcy court extended the term of the trust by an additional n years ending on date on date the bankruptcy court extended the term of the trust by an additional n years ending on date on date the bankruptcy court extended the term of the trust by an additional n years ending on date on date the bankruptcy court extended the term of the trust by an additional n years ending on date pursuant to the provisions of the trust agreement trust was created for the purpose of liquidating the assets of trust with no objective to continue or engage in the conduct_of_a_trade_or_business except to the extent reasonably necessary to and consistent with the liquidating purpose of trust trust shall not receive or retain cash in excess of a reasonable amount to meet claims and contingent liabilities including disputed claims or to maintain the value of the assets during liquidation cash not available for distribution and cash pending distribution will be held in demand and time deposits such as short-term certificates of deposit in banks or other savings institutions or other temporary liquid investments such as treasury bills since trust’s establishment in date trust’s trustee has made periodic distributions to beneficiaries of trust’s net_income plus all net_proceeds from the sale of assets except for amounts thought to be reasonably necessary to maintain the value of trust’s assets or to meet claims and contingent liabilities trust provides that the beneficiaries of trust will be treated as the grantors and deemed owners of trust it further provides that the parties will value all assets transferred to trust consistently and use such values for all federal_income_tax purposes trust provides that the trustee of trust shall file tax returns as a grantor_trust pursuant to sec_1_671-4 of the income_tax regulations trust consistent with the requirements set out in revproc_94_45 1994_2_cb_684 provides that the transfer of trust assets to trust will be treated for all federal tax purposes as a deemed transfer by the debtors to the beneficiaries followed by a deemed transfer by the beneficiaries to trust as of the date of the request trust had distributed amounts comprising approximately o of the claims in the trust to its beneficiaries trust represents that from its establishment trust has been formed and operated consistent with the conditions set out in revproc_94_45 trust now represents that certain developments generally beyond the control of the trustee of trust have occurred that make it plr-132487-13 impossible to completely liquidate trust by date trust's term has been extended by the bankruptcy court for another n years ending on date the new extension trust requests a ruling that it will retain its status as a liquidating_trust in compliance with sec_301_7701-4 and rev_proc law and analysis sec_671 of the internal_revenue_code provides that where it is specified in subpart e that the grantor or another person shall be treated as the owner of any portion of a_trust there then shall be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust that are attributable to that portion of the trust to the extent that such items would be taken into account under chapter of the code in computing taxable_income or credits against the tax of an individual sec_1_671-4 provides that except as provided in sec_1_671-4 and items of income deduction and credit attributable to any portion of a_trust which under the provisions of subpart e sec_671 and following part i subchapter_j chapter of the code are treated as owned by the grantor or another person should not be reported by the trust on form_1041 u s income_tax return for estates trusts but should be shown on a separate statement attached to that form sec_677 provides in part that the grantor shall be treated as the owner of any portion of a_trust whether or not the grantor is treated as such owner under sec_674 whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a non-adverse party or both may be distributed to the grantor or the grantor's spouse or held or accumulated for future distribution to the grantor or the grantor's spouse sec_301_7701-4 provides that certain organizations which are commonly known as liquidating trusts are treated as trusts for purposes of the internal_revenue_code an organization will be considered a liquidating_trust if it is organized for the primary purpose of liquidating and distributing the assets transferred to it and if its activities are all reasonably necessary to and consistent with the accomplishment of that purpose a liquidating_trust is treated as a_trust for purposes of the code because it is formed with the objective of liquidating particular assets and not as an organization having as its purpose the carrying on of a profit-making business which normally would be conducted through business organizations classified as corporations or partnerships however if the liquidation is unreasonably prolonged or if the liquidation purpose becomes so obscured by business activities that the declared purpose of liquidation can be said to be lost or abandoned the status of the organization will no longer be that of a liquidating_trust revproc_94_45 provides the conditions under which the service will consider issuing advance rulings classifying certain trusts as liquidating trusts under plr-132487-13 sec_301_7701-4 revproc_94_45 states that the service will issue a ruling classifying an entity created pursuant to a bankruptcy plan under chapter of the bankruptcy code u s c sec_1101 et seq as a liquidating_trust under sec_301_7701-4 if certain specified conditions are met conclusions based on the information submitted and the representations made we conclude that the conditions of revproc_94_45 have been satisfied accordingly based on the representations made and the information submitted we rule that trust will continue to be classified for federal_income_tax purposes as a liquidating_trust under sec_301_7701-4 of the regulations and that the new extension has not adversely affected the classification of trust as a liquidating_trust furthermore we rule that trust will continue to be treated for federal_income_tax purposes as a grantor_trust and the beneficiaries of trust will be treated as the owners of trust under sec_671 and sec_677 we rule that the new extension has not adversely affected the classification of trust as a grantor_trust for federal_income_tax purposes except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter will be sent to trust's authorized representative sincerely bradford poston senior counsel branch office of the associate chief_counsel passthroughs special industries


internal_revenue_service number release date index number ----------------------- ------------- ---------------------------------------------------- --------------------------- ----------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no ----------------- ------------------------------------------------------ telephone number --------------------- refer reply to cc tege eb hw plr-144904-08 date date legend taxpayer ------------------------------------------------------ ------------------------------------------------------ state ------------ county ----------------------- trust --------------------------------------------------------------------------- plan ------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- dear ---------------- this is in reply to your letter dated date and subsequent correspondence in which you request various rulings on behalf of taxpayer with respect to plan and trust facts taxpayer is a school board that oversees the operation of the public schools in county taxpayer is a body politic and corporate existing under the laws of state as a body politic and corporate of state taxpayer is a political_subdivision of state taxpayer adopted plan as a means of providing health and welfare benefits to its retirees their spouses and eligible dependents taxpayer is the sole employer participating in plan taxpayer is authorized to amend_or_terminate plan plr-144904-08 plan provides benefits through insurance and self-insurance arrangements under plan taxpayer pays a portion of the premium for health_insurance_coverage for eligible retirees participants are responsible for the remainder of the premium taxpayer represents that there are no pre-tax salary reduction elections under the plan in addition taxpayer represents that plan does not permit a cash-out of unused amounts or a conversion of sick or vacation days to retiree health benefits participants may not salary-reduce to pay for any benefit taxpayer does not currently provide benefits to individuals who do not qualify as a spouse or as a dependent under sec_152 of the internal_revenue_code the code however if taxpayer extends benefits to a non-spouse or non-dependents taxpayer will take reasonable steps to identify individuals who do not qualify as a spouse or dependent and include in the income of participants the fair_market_value of the coverage for any such individual plan provides that each benefit provided by taxpayer that is a self-insured medical expense reimbursement plan benefit shall comply with the nondiscrimination requirements of sec_105 of the code and the income_tax regulations thereunder taxpayer created trust to provide a vehicle for funding retiree benefits under plan the income of trust consists solely of contributions from taxpayer and investment_income trust assets will be used to pay for plan benefits and for the administration of trust in addition trust will establish and accumulate a reserve fund to pay for health benefits for future retirees private interests do not participate in trust no part of trust may be diverted to purposes other than the exclusive benefit of the participants and their beneficiaries no part of trust’s net_earnings may inure to the benefit of any private person the parties to the trust agreement are taxpayer and the trustee of trust the trustee is the person currently serving as the director of finance of the county public schools taxpayer may terminate trust at any time for any reason upon termination of trust the remaining assets of trust will be transferred to one or more trust funds to be used exclusively for the purpose of providing health and welfare benefits to the participants of plan in the event the assets are not transferred to such a_trust fund the assets may be transferred to taxpayer or to county in no event will the assets be transferred to an entity which is not a state a political_subdivision of a state or an entity the income of which is excluded from gross_income under sec_115 of the code law and analysis plr-144904-08 sec_115 of the code provides that gross_income does not include income derived from any public_utility or the exercise of any essential government function and accruing to a state or any political_subdivision thereof in revrul_77_261 1977_2_cb_45 income from an investment fund established under a written declaration of trust by a state for the temporary investment of cash balances of the state and its participating political subdivisions was excludable from gross_income for federal_income_tax purposes under sec_115 the ruling indicates that the statutory exclusion was intended to extend not to the income of a state or municipality resulting from its own participation in activities but rather to the income of a corporation or other entity engaged in the operation of public_utilities or the performance of some governmental function that accrued to either a state or municipality the ruling points out that it may be assumed that congress did not desire in any way to restrict a state’s participation in enterprises that might be useful in carrying out projects that are desirable from the standpoint of a state government and which are within the ambit of a sovereign to properly conduct in addition pursuant to sec_6012 and the underlying regulations the investment fund being classified as a corporation that is subject_to taxation under subtitle a of the code was required to file a federal_income_tax return each year in revrul_90_74 1990_2_cb_34 the service determined that the income of an organization formed funded and operated by political subdivisions to pool various risks casualty public liability workers’ compensation and employees’ health is excludable from gross_income under sec_115 of the code in revrul_90_74 private interests neither materially participate in the organization nor benefit more than incidentally from the organization trust provides health benefits to retired employees of taxpayer a political_subdivision of state providing health benefits to current and former employees constitutes the performance of an essential government function based upon revrul_90_74 and revrul_77_261 trust performs an essential_governmental_function within the meaning of sec_115 of the code the income of trust accrues to the taxpayer taxpayer is the sole participating employer in plan no private interests participate in or benefit from the operation of trust any distribution of remaining funds in trust to participating retirees upon the dissolution of the trust satisfies an obligation the taxpayer has assumed with respect to providing benefits to its employees the benefit to the participating employees their spouses and dependents is incidental to the public benefit see revrul_90_74 sec_6012 of the code provides in general that every trust having for a taxable_year any taxable_income or having gross_income of dollar_figure or more regardless of the amount of taxable_income shall make returns with respect to income taxes under subtitle a however no annual return is required to be filed by trust if income realized by trust is excluded from gross_income under sec_115 plr-144904-08 sec_7701 and sec_301_7701-4 of the procedure and administration regulations define trusts for purposes of sec_6012 sec_301_7701-4 provides in general that an arrangement will be treated as a_trust under the code if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and therefore are not associates in a joint enterprise for the conduct of business for profit in this case the taxpayer contributes money to the trust to provide health benefits for former employees their spouses and dependents the trustee of trust is given responsibility to protect and conserve the trust’s assets for the beneficiaries who cannot share in the discharge of this responsibility and therefore is not an associate in a joint business for profit sec_61 of the code and sec_1_61-21 of the regulations provide that except as otherwise provided in subtitle a of the code gross_income includes compensation_for services including fees commissions fringe_benefits and similar items sec_106 of the code provides that gross_income of an employee does not include employer-provided coverage under an accident_or_health_plan sec_1_106-1 of the regulations provides that the gross_income of an employee does not include contributions which his employer makes to an accident_or_health_plan for compensation through insurance or otherwise to the employee for personal injuries or sickness incurred by him his spouse or his dependents as defined in sec_152 the employer may contribute to an accident_or_health_plan either by paying the premium or a portion of the premium on a policy of accident_or_health_insurance covering one or more of his employees or by contributing to a separate trust or fund including a fund referred to in sec_105 which provides accident and health benefits directly or through insurance to one or more of his employees however if the insurance_policy trust or fund provides other_benefits in addition to accident or health sec_106 applies only to the portion of the contributions allocable to accident or health benefits coverage provided under an accident_and_health_plan to former employees and their spouses and dependents is excludable from gross_income under sec_106 see revrul_62_199 1962_2_cb_32 revrul_82_196 1982_2_cb_53 sec_105 provides that except as otherwise provided in sec_105 amounts received by an employee through accident_or_health_insurance for personal injuries or sickness shall be included in gross_income to the extent such amounts are attributable to contributions by the employer which were not includible in the gross_income of the employee or are paid_by the employer plr-144904-08 sec_105 provides that except in the case of amounts attributable to and not in excess of deductions allowed under sec_213 relating to medical_expenses for any prior taxable_year gross_income does not include amounts referred to in subsection a if such amounts are paid directly or indirectly to the taxpayer to reimburse the taxpayer for expenses_incurred by him for the medical_care as defined in sec_213 of the taxpayer his spouse and his dependents as defined in sec_152 of the code based on the information submitted and representations made we conclude as follows trust income is derived from the exercise of an essential_governmental_function and will accrue to a state or a political_subdivision thereof for purposes of sec_115 accordingly trust’s income is excludable from gross_income under sec_115 of the code trust is not required to file an annual income_tax return under sec_6012 of the code contributions paid to plan and payments made from plan which are used exclusively to pay for the accident or health coverage of retired employees and their spouses and dependents as defined in sec_152 of the code are excludable from the gross_income of retired employees and retired employees’ spouses and dependents under sec_106 and sec_105 of the code no opinion is expressed concerning the federal tax consequences of plan or trust under any other provision of the code other than those specifically stated herein in particular sec_3 of revproc_2008_3 i r b provides that the service will not issue a ruling concerning whether a self-insured_medical_reimbursement_plan satisfies the requirements of sec_105 for a plan_year accordingly no opinion is expressed concerning whether plan satisfies the nondiscrimination requirements of sec_105 of the code and sec_1_105-11 of the regulations this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely harry beker chief health and welfare branch associate counsel division counsel tax exempt government entities


department of the treasury internal_revenue_service washington d c date number info release date uil conex-151890-08 the honorable george lemieux united_states senate washington oc dear senator lemieux 1am responding to your letter dated date requesting that we publish formal guidance under sec_165 of the intemal revenue code on the availability of a casualty_loss deduction for damage from imported drywall as expiained in your letter the consumer product safety commission has issuad its preliminary study regarding the corrosive effect of certain imported drywall installed in u s homes we are evaluating whether damage such as that described in the report could qualify for a casualty_loss under sec_185 we are also discussing the need for published guidance with the treasury department's office of tax policy we recognize that this issue affects a significant number of taxpayers and appreciate your continued concern am sencing a similar lete your calleagues if you have any questions please contact or me at sincerely george j blaine associate chief_counsel income_tax and accounting department of the treasury internal_revenue_service washington c date conex-151890-09 the honorable bill nelson united_states senate washington dc dear senator nelson am responding to your letter dated date requesting that we publish formal guidance under sec_165 of the intemal revenue code on the availability of a casualty_loss deduction for damage from imported drywall as expiained in your letter the consumer product safety commission has issued its preliminary study regarding the corrosive effect of certain imported drywall installed in u s homes we are evaluating whether damage such as that described in the report could qualify for a casualty_loss under sec_185 we are also discussing the need for published guidance with the treasury department's office of tax policy we recognize that this issue affects a significant number of taxpayers and appreciate your continued concern am sending a similar letter to your colleagues if you have any questions please contact or me at sincerely george j blaine associate chief_counsel income_tax and accounting department of the treasury internal_revenue_service washington d c date conex-151890-09 the honorable glenn c nye ill united_states house of representatives washington dc dear representative nye 1am responding to your letter dated date requesting that we publish formal guidance under sec_165 of the internal_revenue_code on the availability of a casualty_loss deduction for damage from imported drywall ‘as explained in your letter the gonsumer product safety commission has issued its preliminary study regarding the corrosive effect of certain imported drywall installed in u s homes we are evaluating whether damage such as that described in the report could qualify for a casualty_loss under sec_165 we are also discussing the need for published guidance with the treasury department's offica of tax policy we recognize that this issue affects a significant number of taxpayers and appreciate your continued concern am sending a similar letter to your colleagues hf you have any questions please contact or me at sincerely george j blaine associate chief_counsel income_tax and accounting department of the treasury internal revenue bervice washington c date conex-151890-09 the honorable david vitter united_states senate washington dc dear senator vitter 1am responding to your letter dated date requesting that we publish formal guidance under sec_165 of the internal_revenue_code on the availability of a casualty_loss deduction for damage from imported drywall as explained in your letter the consumer product safety commission has issued its preliminary study regarding the corrosive effect of cartain imported drywall installed in u s homes we are evaluating whether damage such as that described in the report could qualify for a casualty_loss under sec_185 we are also discussing the need for published guidance with the treasury department's office of tax policy we recognize that this issue affects a significant number of taxpayers and appreciate your continued concem am sending a similar letter ta your colleagues ifyou have any questions please contact ‘or me at sincerely george j blaine associate chief_counsel income_tax and accounting department of the treasury internal_revenue_service washington d c date conex-151880-09 the honorable mark warner united_states senate washington dc dear senator warner 1am responding to your letter dated date requesting that we publish formal guidance under sec_165 of the intarnal revenue code on the availability of a casualty_loss deduction for damage from imported drywall as explained in your letter the consumer product safety commission has issued its preliminary study regarding the corrosive effect of certain imported drywall installed in u s homes we are evaluating whether damage such as that described in the report could qualify for a casualty_loss under sec_165 we are also discussing the need for published guidance with the treasury department's office of tax policy we recognize that this issue affects a significant number of taxpayers and appreciate your continued concern am sending a similar letter to your colleagues if you have any questions please contact orme at sincerely george j blaine associate chief_counsel income_tax and accounting department of the treasury internal_revenue_service washington c date conex-151890-09 the honorable jim webb united_states senate washington dc dear senator webb 1am responding to your letter datad date requesting that we publish formal guidance under sec_165 of the internal_revenue_code on the availability of a casualty_loss deduction for damage from imported drywall as explained in your letter the consumer product safety commission has issued its preliminary study regarding the corrosive effect of certain imported drywall installed in u s homes we are evaluating whether damage such as that described in the report could qualify for a casualty_loss under sec_165 we are also discussing the need for published guidance with the treasury department's office of tax policy we recognize that this issue affects a significant number of taxpayers and appreciate your continued concern am sanding a similar letter to your clleagues you have any questions please contact ‘orme at sincerely george j blaine associate chief_counsel income_tax and accounting


id office uilc cca_2010062517211154 ---------------------------- number release date from ---------------------- sent friday date pm to ------------------------------------------------------------- cc -------------------------------------------------------------------------------------- subject materials on methods dear ------------------------------------- the attached materials may be helpful in understanding the income_method and related concepts however i need to carefully explain their relevance which is different from what one might first think these materials relate to cost sharing buy-in_payments called pct payments under the temporary cost sharing regulations i am not sending them because our case has a cost_sharing_arrangement rather i am sending them because they address the following question if one party call it d for donor gives a related_party call it r for recipient something valuable which r must further develop at its own expense before any exploitation or at least before full exploitation is possible how can one determine the compensation that r owes to d this question occurs in the cost sharing context under cost sharing two parties call them again d and r agree to share costs of intangible development in proportion to each party's anticipated benefit from exploiting the intangibles to be developed of course the parties also need to specify how they will divide between themselves the interest in the intangibles to be developed a simple and typical approach is to divide the world into d's exploitation territory and r's exploitation territory typically d and r do not share such costs from scratch rather when the cost shared development is about to start d provides preexisting intangible_property under the permanent cost sharing regulations or a platform_contribution under the temporary cost sharing regulations which is available to r and to the cost shared development program r will bear that part of the subsequent intangible_development_costs that are allocable to its interest in the project eg to its territory of eventual exploitation the compensation due from r to d for what d provided is called a buy-in payment or buy-in under the regulations and a pct payment under the regulations determining this compensation has often been difficult and contentious this question similarly occurs outside the cost sharing context for example d could develop a pharmaceutical substance to a particular point and then give r exclusive worldwide rights to the substance as so far developed r will then pay for any further intangible development with no cost sharing by d and will have worldwide exploitation rights this contrasts with the cost sharing context in which further development costs are shared and r_and_d each will exploit the developed intangibles eg each in its own territory however in the cost sharing context if one looks at just r's operations eg the operations in r's territory of exploitation it appears that r bears all further development costs applicable to those operations and r has exclusive rights to exploit the developed intangibles thus these two different contexts cost sharing and this pharmaceutical example are really quite similar this question also occurs in our case where d is the parent and r is the cfc d provides valuable initial services with embedded_intangibles to r that lead to r owning rights to ---------- r must conduct further ---------------------------------------- at its own expense before any exploitation is possible at that stage of further ---------------------------------------- d also provides valuable services to r similarly in the cost sharing context d might make its research team available on an ongoing basis -------------------------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------- the -4 regulations generally address a license of rights to exploit an intangible as is the residual_profit_split method in the -6 regulations do address this question to some extent under that method routine activities are given a return determined by comparables and any residual profit is split according to each party's relative intangible contributions however usually the only practical way to determine relative intangible contributions is to look at each party's past intangible_development_costs as capital expenditures one capitalizes and amortizes each year's expenditures using an assumed useful_life and computes a running total for each party of the capitalized and unamortized expenditures a running total of each party's intangible stock each year's residual profit is split between the parties in proportion to their relative intangible stocks in that year the regulation states that splitting residual profit by this capitalized costs approach diminishes the reliability of the method in fact while a capitalized costs approach can sometimes be fairly reliable eg when both parties build up intangibles together over many years in roughly the same proportion over time that approach tends to be unreliable when one party's investment period entirely precedes another party's investment period this circumstance is present in the cost sharing context as discussed above as far as r's own operations are concerned r funds all further development after r starts cost sharing this circumstance is also present in the pharmaceutical example above r completely takes over intangible development from d finally this circumstance is present in our case after being given the project r funds all ---------------------------------- in fact none of the traditional specified methods tend to work well for this question as explained in section iii of the attached date lmsb coordinated issues paper cip on cost sharing buy-ins the residual_profit_split method in particular is discussed in section iii d one thus needs other methods more than that one needs a new approach to valuation relying less on comparables and more on fundamental financial principles one normally cannot find good comparables for the rights to further develop a company's core valuable_intangibles because such rights normally have a unique profit potential not directly reflected in the marketplace see cip section iii c ------------------------------------------ -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- the irs's early thinking on this question was largely in the cost sharing context some of this thinking occurred in the apa program----------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------practitioners did write about this question attaching in one pdf file three seminal articles wills morgan and ballentine with the benefit of these articles ------------------------------------------------- the attached three issues paper ------ --------------------------------------- this paper was made an exhibit to our apa study guide and as such was published by bna and as i was told by --------------------------- was read fairly widely by practitioners while our thinking on many points has progressed beyond what is reflected in this paper i think that this paper remains a useful introduction to many concepts eg full value platform vs make- sell rights contingent payment form i am together these four attached papers provide a ground-floor intellectual introduction to the question posed the cip of course represents important later thought as i said while this thinking was developed for the cost sharing context it is relevant to our case as well -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------- the irs position is that the economic result should control there is in general no legal loophole to avoid full economic compensation and methods that deny full compensation should be rejected --------- -------------- attached date lmsb coordinated issues paper cip on cost sharing buy-ins tm tpr westlaw pdf file with papers by a wills john wills avaluing technology buy-in_payments for acquisitions journal of global transfer_pricing feb date pp b morgan r william morgan abuy-in payments and market valuations tax management transfer_pricing report bna date pp c ballentine j gregory ballentine atechnology buy-ins do the law and the arm s length standard conflict paper and accompanying slides the future of international transfer_pricing practical and policy opportunities annual federal tax policy symposium of the tax council policy institute feb washington dc three issues weissler http www irs gov businesses corporations article id html a


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date uil code contact person identification_number contact number employer_identification_number form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions you should follow the instructions in notice if you agree with our deletions you do not need to take any further action lf you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter about your federal_income_tax status and responsibilities please contact irs customer service at if you have any questions letter cg catalog number or the irs customer service number for businesses the irs customer service number for people with hearing impairments is sincerely lois g lerner director exempt_organizations enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter letter cg catalog number department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date contact person identification_number contact number fax number employer_identification_number vil legend b state c date d area e cities f river g area h dollar amount dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below issues do you qualify for exemption under sec_501 of the code no for the reasons described below facts you are a b nonprofit corporation incorporated on c your restated articles of letter cg catalog number 47628k incorporation provide that you are a non-profit corporation or guild for artistic or educational_purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual or member a club for pleasure recreation and other nonprofit purposes substantially_all of the activities of which are for such purposes and no part of net_earnings of which inures to the benefit of any private shareholder or member pursuant to the requirements of u s c sec_501 you describe yourself as the longest continuous craft guild west of the f providing a creative outlet for people living in the g area your members work year round to create unique and interesting crafts for sale at your bi-annual craft show and sale you state your primary purpose to be the promotion of your membership you are operated on a membership basis with your governing board being elected from your membership you have four classes of members general associate life and honorary members are required to stay current on dues as you have indicated in your newsletters to members those who do not pay current dues could lose voting rights may not be able to show at the annual shows and may not be included in the directory given out at the shows this directory is a roster on paper and via your web site that includes each member's name and contact business name and respective medium painting sewing woodcrafts etc the member roster is presented at each annual show in addition to this benefit members may also pay an extra fee to have their businesses linked directly through the online roster available on your web site enabling visitors to click through to their business web site through yours you listed the following activities with the approximate percentage of the organization's time listed next to the activity shows and meetings - you conduct monthly membership meetings which include a business meeting training sessions for upcoming shows and speakers of interest the meetings also offer a venue for the sharing of idea and materials education refreshments and fellowship with other members you conduct two annual craft shows in which your members display and sell their crafts all sales are processed through you with each member receiving their portion of sales proceeds after the event minus a commission to cover operating costs admission to the events is free and the events are open to the public letter cg catalog number 47628k you rent the building pay for advertising through flyers and radio secure insurance provide necessary materials_and_supplies and pay any applicable taxes in return members work necessary positions during the shows to ensure the event runs smoothly while brining in ‘high qualify handcrafted items for display and sale ’ you have a waiver form members must complete prior to show sales this form stipulates members agree that all funds received from you are contractor fees and each member is responsible for reporting said income and paying applicable taxes this waiver also describes the various positions members are required to fill at each show methods for determining prices of merchandise and for tracking and maintaining inventory members are instructed to ‘not discuss guild business while working the show’ you control and manage inventory and proceeds of sales in the following manner each item for sale has a price tag with a personalized member number and corresponding inventory sheet when purchased the tag is removed and retained by you after the show the tags are separated by member and sales totaled you retain and your treasurer then writes each member a check for the remainder of their individual sales programs and community presentations - you have a monthly meeting nine times annually after the business portion of each meeting you permit individuals from the community to participate in presentations on topics of relevance to the community past programs have included discussions on home break-ins and mail theft how to make the community a safer environment future road developments identify theft and how to prepare for a dry summer you plan to initiate a crafter of the month program in which one member will be featured each month to briefly discuss their special crafting talents the member will offer a short presentation on how they do what they do community donations - you distribute funds and goods to local charitable organizations and to individuals in need such as local fire departments and boy scout troops scholarships - you award one h dollars scholarship annually to a graduating senior in the local area selections are based on community involvement school participation and academic performance letter cg catalog number 47628k community events - your members are often invited to participate in numerous craft fairs community functions and events around the city these are usually hosted by local schools churches and charities portions of profits are often donated to the host entity by participating members revenue for the last four completed fiscal years and the total percentage of all revenue over that period includes the following numbers approximated member dues and fees sales advertising gifts other dollar_figure dollar_figure dollar_figure dollar_figure over that same period approximately of your total expenses consisted of payments back to members for sales the remainder was attributable mostly to show expenses taxes and advertising law sec_501 of the code provides for the exemption from federal_income_tax of clubs organized for pleasure recreation and other nonprofitable purposes substantially_all of the activities of which are for such purposes and no part of the net_earnings of which inures to the benefit of any private shareholder sec_1_501_c_7_-1 of the regulations states that the exemption provided by sec_501 of the code for an organization described in sec_501 of the code applies only to clubs which are organized and operated exclusively for pleasure recreation and other nonprofitable purposes but does not apply to any club if any part of its net_earnings inure to the benefit of any private shareholder in general this exemption extends to social and recreation clubs which are supported solely by membership fees dues and assessments however a club otherwise entitled to exemption will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities sec_1_501_c_7_-1 of the regulations states that a club which engages in business such as making its social and recreational facilities available to the general_public or by selling real_estate timber or other products is not organized and operated exclusively for pleasure recreation and other nonprofitable purposes and is not exempt under sec_501 of the code solicitation by advertisement or otherwise for public patronage of its facilities is prima facie evidence that the club is engaging in business letter cg catalog number 47628k and is not being operated exclusively for pleasure recreation or social purposes however an incidental sale of property will not deprive a club of its exemption revrul_69_527 1969_2_cb_125 a social_club formed to assist its members in their business endeavors through study and discussion of problems and other activities at weekly luncheon meetings does not qualify for exemption under sec_501 of the code the organization was formed and has been operated to study and discuss business and financial problems to interchange among its membership business and financial information in order to create and encourage efficiency in business and finance to assist its members in the expansion and development of their individual trades businesses and professions by encouraging the direct interchange of patronage among members and to assist its members in extending and establishing new trade business and professional contacts revrul_69_635 1969_2_cb_126 an automobile club whose principal activity is rendering automobile services to its members but has no significant social activities does not qualify for exemption under sec_501 the principal activity of this organization is the rendering of automobile services to its members most of the services offered are of a type generally available to motorists on a commercial basis the rendition of such services is not in the nature of pleasure or recreation within the meaning of the statute public law 1976_2_cb_596 provides that a social_club may receive up to percent of its gross_receipts including investment_income from sources outside its membership without losing exemption within thi sec_35 percent amount not more than percent of the gross_receipts should be derived from the use of a social club's facilities or services by the general_public application of law you do not meet the requirements of sec_501 of the code because substantially_all of your activities are not for pleasure recreation or other nonprofitable purposes you are formed primarily to benefit individual members by facilitating the sale of their products through the conduct of two annual craft shows open and advertised to the general_public as seen in sec_1_501_c_7_-1 of the regulations when a club engages in business it is not organized and operated exclusively for pleasure recreation and other nonprofitable purposes your sales activities are more than incidental and therefore preclude exemption under sec_501 of the code your income results from business done with the general_public and you are not supported solely by membership fees dues assessments or income derived from the social activities of your members by receiving over of your revenue from nonmembers in the four tax years preceding the submittal of your application_for tax letter cg catalog number 47628k exemption you fail the membership income tests set forth by public law you do not meet the facts and circumstances exception for this income test as this source_of_income is regular and substantial by collecting and afterward distributing sales proceeds to your members based on the sales of their show items your income is inuring directly to insiders per sec_1_501_c_7_-1 of the regulations exemption under c does not apply to any club if any part of its net_earnings inure to the benefit of any private shareholder similar to the organizations in revenue rulings and you are formed and operated not for social and recreational purposes but as a service to your members in helping them promote market and sell their products while you hold monthly meetings among your members which does constitute a level of comingling you describe your purpose as the promotion of your membership members are treated as contractors for the purposes of selling their items at your shows and receive direct benefits of being included in a directory detailing their products and including business contact information nearly all of your income is derived not from member dues but from sales to the general_public with a significant portion given back to members you list no scheduled social or recreational events outside of monthly meetings and there is no requirement for members to attend these meetings - paying dues is the only requirement of members to stay in good standing your two annual shows provide a convenience to your members to sell their products while retaining a significant portion of the proceeds you do not primarily serve a social or recreational but a business_purpose and do not meet the qualifications under c applicant’s position you state that your income does not inure to the benefit of its members you state that the shows give you the net_income necessary to meet your expenses and support your scholarship fund service response to applicant’s position when funds received by an organization are turned over to insiders in this case your members in a more then insubstantial or material manner this constitutes inurement members directly benefit from your earnings by retaining portions of sales minus your commission and from payment of advertising of their products through your two shows letter cg catalog number 47628k conclusion based on the facts provided above we hold that you do not meet the requirements for tax exemption under sec_501 of the code you are formed to promote your members and their products while operating primarily for business rather than social or recreational purposes you lack a significant level of comingling among members and your net_earnings inure to insiders further nearly all of your income is derived from non- members failing the membership income test for a c club you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if that information affects our determination lf your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues types of information that should be included in your appeal can be found on page of publication under the heading regional_office appeal item must be declared true under penalties of perjury to the appeal the following signed declaration this may be done by adding the statement of facts under penalties of perjury declare that have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my knowledge and belief they are true correct and complete your appeal will be considered incomplete without this statement if an organization’s representative submits the appeal a substitute declaration must be included stating that the representative prepared the appeal and accompanying documents and whether the representative knows personally that the statements of facts contained in the appeal and accompanying documents are true and correct an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process to be represented during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so for more information about representation see publication practice_before_the_irs and power_of_attorney ali forms and publications mentioned in this letter can be found at www irs gov forms and publications letter cg catalog number 47628k if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter to you that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you may also fax your statement using the fax number shown in the heading of this letter letter to confirm that he or she received your fax if you fax your statement please call the person identified in the heading of this if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lois g lerner director exempt_organizations enclosure publication letter cg catalog number 47628k


internal_revenue_service department of the eee uniform issue list washington dc contact person telephone number in reference to t ef r4 ti date apa attn legend state a participating employers plan x resolution m payroll authorization form n regulation o dear this is in response to a ruling_request dated date from your authorized representative concerning the federal tax treatment under sec_414 of the internal_revenue_code code of certain contributions to repay previously withdrawn contributions or to purchase additional service_credit under plan x ss the following facts and representations have been submitted pian x was established by state a for employees of participating employers plan x is a defined_benefit_plan that includes mandatory employee contributions participation in plan x is either mandatory or optional depending on the employee’s job classification plan x is qualified under code sec_401 and received a favorable determination_letter from the service on date plan x is a governmental_plan within the meaning of code sec_414 all participants in plan x are required to contribute a specified percentage of their compensation in addition the participating employers contribute a similar amount on behalf of the employees the current ruling_request seeks to apply code sec_414 to the elective contributions described below the calculation of benefits is based upon a formula that includes the member's age at retirement the member's highest three-year average salary upon which member contributions were made and years of creditable service in addition to the creditable service received as a result of mandatory_contributions as an active member of plan x participants may purchase credit for various types of past service the cost of purchasing past service is based on the actuarial cost of the incremental projected benefit to be purchased plan x provides that when a participant terminates employment the participant may receive a refund of contributions previously made to plan x upon receipt of these refunded contributions the participant's contributory service credits are forfeited if the former participant is subsequently rehired by a participating employer such participant may elect to redeposit an amount equal to any contributions that have previously been refunded plus interest making the repayment allows the participant to buy back prior service canceled upon the participant's earlier termination of employment repayment may be made at any time prior to the date of the participant's retirement the electing participant may make the redeposit in either a lump sum or installments under conditions specified by plan x participants may elect to purchase additional service_credit for example a participant may elect to purchase credit for certain years of employment in the public schools of state a on which contributions were not made for employment as a substitute teacher for time spent on sabbatical leave for employment covered by other retirement systems in state a and leave for certain active military service in addition participants may purchase credit for the following out-of- state service_credit and adjunct service_credit as with the redeposit election a member may pay for the additional service_credit in a lump sum or installments pursuant to state a statutes the board_of trustees of plan x the board has authority to promulgate regulations and to establish terms and conditions for the purchase of prior service_credit the board has proposed a regulation regulation oo so for the purpose of providing a pick-up of employee contributions under sec_414 of the code for contributions that are made for the purpose of purchasing additional service_credit or reinstating previously forfeited service_credit regulation o permits an active member of plan x who elects to purchase or reinstate service through installments to do so by payroll deductions in accordance with regulation o in order to permit the pick up of the above- referenced contributions made through payroll deduction a participating employer will adopt resolution m this resolution provides that such payroll deductions as are made pursuant to a binding irrevocable payroll deduction authorization between a plan x participant and a participating employer to have such amounts picked up even though designated as employee contributions are being paid_by the participating employer in lieu of said contributions by the employee payroll authorization form n will be used in conjunction with resolution m to effect the pick up of the above-referenced payroll deductions this form which is to be signed by the electing plan x participant and the participating employer subsequent to adoption of resolution m states that the employee authorizes the deduction from salary for pick-up purposes and understands that this authorization is binding and irrevocable the number of months during which the deductions will be made and the dollar amount of the deductions are designated on this form the authorization further states that it is irrevocable that the maximum duration is sixty months that after execution the employee does not have the option of receiving the reduction amounts directly instead of having them paid_by the employer to plan x that the contributions are being picked up by the employer that the employee may make more than one authorization so long as a subsequent authorization does not amend existing ones that with respect to the contribution covered by the authorization plan x will only accept payment from the employer and not the employee that amounts not covered by the authorization may be paid_by the employee directly to plan x using after-tax_dollars that on termination of employment or death of the employee the authorization expires and that the authorization is not effective until executed and that the pick up is only applicable to contributions to the extent the compensation which is reduced for the contributions is limited to compensation earned for services after the effective date of the pick up regulation o also states that a plan x participant having executed a binding irrevocable payroll deduction authorization with respect to the above-referenced contributions shall not be entitled to any option of choosing to receive the contributed amounts directly instead of having them paid_by the employer to plan x such contributions although designated as employee contributions will be paid_by the employer in lieu of contributions by the employee regulation o further provides that the contributions so assumed shall be treated as tax-deferred employer pick-up contributions pursuant to code sec_414 2s g a the pick-up arrangement with respect to the redeposit of previously refunded contributions or the purchase of additional service_credit will start only after the resolution described above is adopted by the relevant participating employer and only after the appropriate irrevocable agreement between the employee and employer has been signed by both parties based on the foregoing facts and representations you have requested the following rulings the amounts by which a participating employer reduces an employee’s compensation and pays to plan x in order to a redeposit previously withdrawn contributions or b purchase additional service_credit as described herein qualify as contributions that are picked up by the employer under code sec_414 the picked-up contributions will not be treated as annual_additions for purposes of code sec_415 regarding ruling_request code sec_414 provides that contributions otherwise designated as employee contributions shall be treated as employer contributions if such contributions are made to a plan described in sec_401 established by a state government or a political_subdivision thereof and are picked up by the employing unit the federal_income_tax treatment to be accorded contributions which are picked up by the employer within the meaning of code sec_414 is specified in revrul_77_462 1977_2_cb_358 in that revenue_ruling the employer school district agreed to assume and pay the amounts employees were required by state law to contribute to a state pension_plan revrul_77_462 concluded that the school district’s picked-up contributions to the plan are excluded from the employees’ gross_income until such time as they are distributed to the employees the revenue_ruling held further that under the provisions of code sec_3401 the schoo district’s contributions to the plan are excluded from wages for purposes of the collection of income_tax at source on wages therefore no withholding is required from the employees' salaries with respect to such picked-up contributions the issue of whether contributions have been picked up by an employer within the meaning of code sec_414 is addressed in revrul_81_35 1981_1_cb_255 and revrul_81_36 1981_1_cb_255 these revenue rulings established that the following two criteria must be met the employer must specify that the contributions although designated as employee contributions are being paid_by the employer in lieu of contributions by the employee and the employee must not be given the option of choosing to receive the contributed amounts directly instead of having them paid_by the employer to the pension_plan furthermore it is immaterial for purposes of the applicability of code sec_414 whether an employer picks up contributions through a reduction in salary an offset against future salary increases or a combination of both in revrul_87_10 1987_1_cb_136 the internal_revenue_service considered whether contributions designated as employee contributions to a governmental_plan are excludable from the gross_income of the employee the service concluded that to satisfy the criteria set forth in revenue rulings and with respect to particular contributions the required specification of designated employee contributions must be completed before the period to which such contributions relate regulation o resolution m and payroll authorization form n satisfy the criteria set forth in code sec_414 revrul_81_35 and revrul_81_36 by providing that the participating employers will make contributions in lieu of contributions by eligible employees and that no employee will have the option of receiving the contribution instead of having it contributed to plan x payroll authorization form n provide that the employee is not permitted to prepay the amounts covered by the authorization while it is in effect and the payroll deductions shall cease only after the authorization has expired by its terms or upon the employee's termination of employment or death in addition regulation o and the accordingly with respect to ruling_request we conclude that the amounts by which a participating employer reduces an empioyee’s compensation and pays to plan x in order to a redeposit previously withdrawn contributions or b purchase additional service_credit as described herein qualify as contributions that are picked up by the employer under code sec_414 regarding ruling_request sec_1 d of the income_tax regulations provides that where a defined_benefit_plan provides for mandatory employee contributions the annual_benefit attributable to such contributions is not taken into account for purposes of code sec_415 this regulation further provides that the mandatory employee contributions are considered a separate defined_contribution_plan maintained by the employer that is subject_to the limitations on contributions and other annual_additions described in sec_415 however employee contributions which are picked up by the employer pursuant to code sec_414 are treated as employer contributions and as such are not annual_additions to a separate defined_contribution_plan for purposes of sec_415 accordingly we conclude the picked-up contributions will not be treated as annual_additions for purposes of code sec_415 the effective date for the commencement of any proposed pick up cannot be any earlier than the latest of the later of the date regulation o is adopted or put into effect the later of the date resolution m is adopted or put into effect or the later ce st of the date payroll authorization form n is signed by both parties or put into effect these rulings are based on the assumption that plan x will be qualified under code sec_401 at the time of the proposed contributions and distributions no opinion is expressed as to whether the amounts in question are subject_to tax under the federal_insurance_contributions_act no opinion is expressed as to whether the amounts in question are paid pursuant to a salary reduction agreement’ within the meaning of code sec_3121 further this ruling is not a ruling with respect to the tax effects of the pick-up on employees of participating employers however in order for the tax effects that follow from this ruling to apply to those employees of a particular participating employer described in the preceding sentence the pick-up arrangement must be implemented by that participating employer in the manner described herein a copy of this ruling letter is being sent to your authorized representative pursuant to a power_of_attorney on file in this office sincerely yours ohne swiecg_ john swieca manager employee_plans technical group tax_exempt_and_government_entities_division enclosures deleted copy of the ruling notice cc


tcmemo_2006_160 united_states tax_court paul bi-yang chen and chiu-mei chen petitioners v commissioner of internal revenue respondent docket no filed date john gigounas edward simpson and gerald holmes for petitioners huong t duong for respondent memorandum findings_of_fact and opinion holmes judge paul chen and his wife chui-mei were both officers of a closely_held_business pcti pcti was a successful wholesaler of computer components for a few years but it began having a cashflow problem in mr chen tried to solve the problem by committing insurance fraud the fraud unraveled and both chens pleaded guilty to a variety of crimes neither pcti nor the chens reported the proceeds of the fraud as income the chens contest the resulting deficiency and fraud_penalty mrs chen seeks innocent spouse relief background the chens came to the united_states in from taiwan where mr chen had graduated from college and earned master’s degrees in civil engineering and architecture he had taught high school for years in taiwan but after immigrating he switched fields and worked for his brother’s computer business in he started up his own firm and began wholesaling computer parts under the name pc team within two years he incorporated that business as pcti he was pcti’s sole shareholder and its president and he named mrs chen vice president and administrator she worked at pcti full time managing the company’s inventory and running the business when mr chen was away she had full authority to sign checks and tax returns on behalf of pcti though the parties stipulated that she does not read write or speak english pcti made a valid s_corporation_election in and was still an s_corporation in the tax_year at issue its accounting system was not complex--mr chen simply dictated the company’s financial transactions to bo hua he pcti’s in-house accountant ms he also prepared many of the checks for the chens to sign these checks were drawn on accounts that pcti kept at several banks mr chen kept signature_authority over them all giving mrs chen cosigning authority over only one in date pcti contracted with beam technology a singapore company to buy computer processor chips the chips were shipped but then lost in transit mr chen spotted the opportunity he submitted a claim to his carrier chubb insurance stating that pcti had paid dollar_figure for the shipment this was a lie--pcti had paid nothing at all chubb relying on mr chen’s representation sent a dollar_figure check to pcti to cover the alleged loss less a dollar_figure deductible mr chen then directed mrs chen to open a new bank account in the name of beam technology no one ever told beam that the account existed and only the chens had signature_authority once the account was opened mr chen signed a check from pcti labeled refund prepaid for dollar_figure which mrs chen deposited we specifically find that the chens’ purpose in opening the account was to make it seem that the insurance proceeds were being used to pay off pcti’s debt to beam while allowing them unfettered access to the money after the check cleared mr chen transferred dollar_figure back to pcti he directed ms he to record the money on pcti’s books as payment on an outstanding account receivable from citirom one of pcti’s customers--one that had several outstanding invoices in and was having trouble making payments to pcti he then transferred another dollar_figure from the beam account into mrs chen’s personal account she in turn signed checks totaling dollar_figure from her account to pcti only to receive the money back from pcti a few days later she gave the other dollar_figure to mr chen to cover some of his gambling_losses the chens credibly testified that mr chen had a severe gambling compulsion the chens used an accounting firm chang accountancy corp to prepare both their own and pcti’s tax returns mr chen did not disclose pcti’s receipt of the chubb insurance proceeds to chang so the dollar_figure in proceeds was not reported on pcti’s return and did not flow through to the chens’ own joint_return chubb grew suspicious and began an investigation eventually referring the matter to law enforcement in date mr chen pleaded guilty to money laundering and filing a false tax_return likewise mrs chen pleaded guilty to wire fraud aiding_and_abetting mr chen’s crime and filing a false tax_return in their plea agreements the chens agreed to pay dollar_figure restitution to beam technology and they paid dollar_figure of the deficiency owed to the irs the commissioner determined a deficiency based on the chens’ failure to include the proceeds of the fraud in their reported income he also determined a fraud_penalty under sec_6663 the chens contest both the deficiency and the penalty mrs chen also asserts as a defense that she is an innocent spouse on the grounds that she could not communicate in english had nothing to do with the tax_return other than signing the return wrote checks only at mr chen’s direction and did not benefit from the additional income the commissioner denied her request as inconsistent with her signed plea agreement in which she had admitted participating in her husband’s fraudulent scheme mrs chen believes the commissioner abused his discretion in denying her request for innocent spouse relief both chens also assert a statute-of-limitations defense the commissioner admits that he sent the notice_of_deficiency more than three years after they filed their tax_return but argues that the chens’ fraud makes the notice_of_deficiency valid the chens also argue that even if they did commit fraud the amount of their understatement is exaggerated by the irs they argue that pcti was already taxed on a portion of the proceeds and argue as well that if the fraudulently obtained proceeds are no longer applied to the citirom account receivable that account section references are to the internal_revenue_code rule references are to the tax_court rules_of_practice and procedure should be considered a bad_debt and give rise to an offsetting deduction from pcti’s income trial was held in san francisco and the chens were california residents when they filed their petition i fraud discussion we first consider whether the commissioner has proven that the chens committed fraud because this will resolve the threshold question of the statute-of-limitations defense a fraud_penalty under sec_6663 requires proof that there is an underpayment_of_tax required to be shown on a return that the underpayment is due to fraud miller v commissioner tcmemo_1989_461 the commissioner has the burden of proving fraud by clear_and_convincing evidence sec_7454 rule b the commissioner shoulders the first part of his burden with a stipulation--the parties agree that the chens underpaid their taxes the dollar_figure of insurance proceeds was not reported as income on petitioners’ form_1040 the second part of the commissioner’s burden is to show that the chens’ underpayment was due to fraud we define fraud as the willful_attempt_to_evade_tax and look at the entire record of a case to see if it exists 55_tc_85 the indicia of fraud are numerous and varied and can include such circumstantial evidence as understatement of income inadequate records failure_to_file tax returns implausible or inconsistent explanations of behavior concealing assets and failure to cooperate with tax authorities 317_us_492 796_f2d_303 9th cir affg tcmemo_1984_601 but we begin with what we think is the most important bit of evidence in support of the commissioner’s position in their criminal plea agreements mr chen admitted that he conspired to commit fraud and mrs chen admitted to act ing with a specific intent to commit fraud they also both pleaded guilty under sec_7206 to willfully filing their income_tax return knowing it was false because it did not include the proceeds of their fraud we specifically note with regard to mrs chen that the plea agreement has a certificate of accurate translation and that mrs chen did not attack her consent to the plea agreement it is true that this is not enough for the commissioner to win on this issue through collateral estoppel--the fraud_penalty requires proof of an intent to evade taxes and we held in 84_tc_636 that a conviction under sec_7206 establishes as a matter of law only an intent to falsify a tax_return but a conviction for willful falsification under sec_7206 is certainly one of the facts to be considered in deciding whether the chens committed tax_fraud see id pincite see also welker v commissioner tcmemo_1997_472 and the chens’ specific acknowledgment of fraud in the plea agreements certainly weighs against their claims of innocence now but even without the acknowledgment of fraud and the guilty plea the badges_of_fraud in this case are plain mr chen intentionally submitted a false claim of loss to chubb insurance he concealed receipt of the resulting fraud proceeds from his tax preparer the chens’ testimony is replete with contradictory claims ranging from mr chen’s claim to know nothing about the financial aspect of the business-- i really am not too much concern ed about the finance s you know i am just a super-sales man only while later claiming the opposite-- i am like a dictator in the company to saying that he never touch ed the money flow and accounting issues or paid too much attention in this issue only to testify in answer to the question d id you tell the accountant what to do yes to mrs chen’s testimony both that she herself deposited the dollar_figure into the fake beam account and that ms he did implausible explanations--to take one example mr chen said he intended to split the insurance proceeds with beam’s owner yet mr chen never gave him any money such inconsistency cannot be chalked up to bad memory or simple misunderstanding as the chens argue the flip-flops are too numerous to discount and the court made sure that transla- tors were available at trial to guarantee that the chens under- stood the questions being asked arguing at one point that he kept the whole dollar_figure to cover a gambling loan of only dollar_figure and concealment of assets--when mr chen received the reimbursement check from chubb he directed his wife to open a fake account for beam into which he deposited the proceeds the chens’ counterargument is that despite these telltale signs of fraud they should be spared the penalty because they cooperated with the irs kept company records filed their tax returns etc however these actions are not enough to overcome the substantial evidence of fraudulent intent to evade tax on the ill-gotten insurance proceeds nor is the court able to rely on pcti’s records in the face of credible_evidence that those records were created to cover up the chens’ fraud by making it seem to be a payment on an account receivable we conclude that the commissioner has met his burden of proving fraud by clear_and_convincing evidence there is no statute-of-limitations problem in this case see sec_6501 ii innocent spouse relief the chens eloquently argued at trial that mr chen was the more guilty party--and the court does find that he was the architect of the fraud at issue it was also his gambling compulsion that motivated mrs chen to help him move the stolen money in and out of her account the chens argue from this lesser culpability that mrs chen should be relieved from joint liability for the deficiency sec_6015 allows relief from joint_and_several_liability on three grounds subsection b lets a spouse seek relief if she can show that she neither knew nor had reason to know of an understatement on the return subsection c lets divorced or separated spouses split their tax_liability and subsection f allows relief where it is inequitable to hold the individual liable for any unpaid tax or any deficiency or any portion thereof mrs chen’s first problem is sec_1_6015-1 income_tax regs applicable to all these subsections it provides if the secretary establishes that a spouse transferred assets to the other spouse as part of a fraudulent scheme relief is not available under sec_6015 for purposes of this section a fraudulent scheme includes a scheme to defraud the service or another third party we hold that this section alone supports the commissioner’s refusal to grant mrs chen innocent spouse relief under any subsection of section 6015--mrs chen admitted after all to helping to defraud chubb another third party as alternative grounds however we discuss each of the two subsections that mrs chen relies on a sec_6015 relief sec_6015 requires among other elements the spouse asking for relief to prove that in signing the return she did not know and had no reason to know that there was such an understatement sec_6015 mrs chen’s claim for relief under subsection b turns on whether she can prove this she argues that despite her status as an officer of pcti hers was only a clerical position giving her no comprehension of what was happening when she signed corporate checks and documents she says that she just signed whatever mr chen or ms he gave her without asking questions mrs chen’s limited english skill is a fact that would seem to support her position but the regulations interpreting subsection b direct us to look at all of the facts and circumstances sec_1_6015-2 income_tax regs and there are other facts weighing against relief perhaps most damning is mrs chen’s admission of guilt in committing wire fraud filing a false tax_return and aiding_and_abetting her husband to launder money mrs chen’s plea agreement which she signed specifically indicated that she acted with a specific intent to commit fraud even though mrs chen is not as well educated as her husband she was too deeply involved to be characterized as playing an unsuspecting dupe in his fraud we also do not give much weight to mrs chen’s inability to communicate in english pcti’s office was staffed petitioners have the burden_of_proof under sec_6015 but need only persuade us by a preponderance_of_the_evidence rather than that the commissioner abused his discretion see haltom v commissioner tcmemo_2005_209 with chinese speakers and we infer from the evidence and observation during trial that the chens simply worked together in chinese we find that mrs chen knew exactly what she was doing when she wrote mr chen a dollar_figure check to cover some of his gambling debts the regulations direct us to look not at whether a spouse requesting relief knows specifically of the understatement as the chens argue but at whether the requesting spouse had actual knowledge of an erroneous item sec_1_6015-3 income_tax regs incorporated by sec_1_6015-2 income_tax regs the regulation specifically directs us to look at whether the spouses jointly owned the property that resulted in the erroneous item sec_1 c iv income_tax regs and the situation here is even more egregious since mrs chen had sole power and control of the fake beam account we therefore conclude after considering all these facts and circumstances that mrs chen knew of mr chen’s fraud when she signed the joint tax_return for she is not entitled to relief under subsection b b sec_6015 relief mrs chen also argues for relief under subsection f arguing that it would be inequitable to hold her liable for the unpaid tax revproc_2003_61 2003_2_cb_296 sets out our jurisdiction to review mrs chen’s claim for continued general conditions a requesting spouse must meet in order to be eligible for subsection f relief one of these is the absence of fraudulent transfers of assets between the spouses as we have already found the chens transferred assets back and forth between mrs chen mr chen and pcti in order to hide the trail of fraud and this enabled mrs chen to give dollar_figure to mr chen to cover some of his gambling_losses moreover mrs chen admitted that she acted with fraudulent intent this means that the commissioner did not abuse his discretion in concluding that she did not qualify for f relief iii amount of deficiency the only remaining issue is the amount of the deficiency which the chens argue should not reflect the full amount of the continued subsection f relief stems from the existence of an assertion of a deficiency in this case compare 439_f3d_1009 9th cir no tax_court jurisdiction when no deficiency involved revg 122_tc_32 with 114_tc_276 tax_court does have jurisdiction when f relief is sought as defense to deficiency this new revenue_procedure replaced revproc_2000_15 2000_1_cb_447 and became effective on date for all pending or subsequently filed requests for relief the principal change in the new irs guidance is revision of the weight given to the knowledge factor see baumann v commissioner tcmemo_2005_31 the standard of review we apply differs between sec_6015 and f cases in sec_6015 cases we review the commissioner’s denial of relief for abuse_of_discretion 114_tc_276 stolen insurance money the chens are certainly right about part of this of the dollar_figure deposited into the beam account dollar_figure was transferred to pcti with dollar_figure applied to a citirom receivable the commissioner concedes that dollar_figure of the proceeds was reported by pcti and thus flowed through to the chens in leaving dollar_figure in unreported income the chens argue however that the dollar_figure that they transferred to pcti after a short detour through the fake beam account should be regarded as pcti’s income not their own the problem with this argument is that pcti was an s_corporation and an s corporation’s income is generally taxable to its owners not to the corporation itself sec_1363 and whether or not the income is distributed sec_1366 in any event the chens never identified any exception to the general rules making pcti’s income taxable to them the dollar_figure is therefore income to the chens in and the irs is right that the total amount of unreported income is dollar_figure the chens also argue that if the insurance proceeds had not been misapplied by pcti’s accountant to wipe out one of citirom’s outstanding accounts_receivable pcti would have been entitled to a bad_debt deduction for dollar_figure on its return the citirom receivable was held by pcti and so flowed through to the the commissioner’s concession is derived by subtracting the total transferred back to pcti from the amount applied to the citirom account dollar_figure - dollar_figure dollar_figure chens this meets the code’s requirement of a debt relating to a business activity because the debt is a business one the chens could deduct it if they proved the other elements of a bad_debt deduction a valid debtor-creditor relationship the amount of the debt its worthlessness and the year it became worthless see 88_tc_122 affd 866_f2d_852 6th cir we have no reason to doubt that citirom and pcti had a valid debtor-creditor relationship the chens also proved the amount of the receivable through pcti’s business records so far so good however they stumble over the last two hurdles worthlessness and worthlessness in mr chen did credibly testify that pcti had trouble collecting from citirom in but though citirom was a slow payer it did continue to make payments throughout the year on a number of other outstanding invoices a taxpayer’s mere belief that a debt is worthless won’t support a deduction 50_tc_813 affd per curiam aftr 2d ustc par 9th cir sec_1_166-2 income_tax regs we look instead for facts that establish reasonable grounds for abandoning any hope of recovery--proof of the customer’s insolvency a description of action taken to recover the debt or an explanation of why no action was taken 105_tc_126 77_tc_582 the chens did not do this and so cannot offset their gross_income with a business_bad_debt deduction conclusion we reject each of the chens’ arguments because of the fraud involved the irs has no time limit for assessing the unpaid tax so the statute_of_limitations had not passed unreported income of dollar_figure was omitted from the chens’ return the chens are liable for the fraud_penalty due to their intentional failure to report the insurance proceeds and finally mrs chen does not qualify for innocent spouse relief to reflect the commissioner’s concession however decision will be entered under rule