internal_revenue_service number release date index number --------------------------- ----------------------------- --------------------------------------------------- ---------- -------------------------- ------------------------------------ in re department of the treasury washington dc person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 - plr-165079-04 date june --------------------------------------------------- ------------------------ - legend legend decedent ------------------------ spouse ------------------------------- son ----------------------------- daughter ----------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- grandson ------------ granddaughter -------------- daughter -------------------------------------- grandson -------------- grandson ------------------- daughter ------------------------ will --------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ main trust ---------------------------- -------------------------------------------- court ---------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ court ------------------------------------------------------------------------------- daughter trust ---------------------------------------------------------------------------------- ------------------------------------------------------------------------------ state ------------- bank ---------------------------------------------------- plr-165079-04 date -------------------------- date ------------------ date -------------------------- date --------------------- date ----------------- date ------------------ --- date ------------------ year ------- year ------- date ---------------------- date ----------------------- this is in response to a letter dated date and other dear ---------------- correspondence requesting rulings regarding the income and generation-skipping_transfer gst tax consequences of proposed modifications of to the main trust facts prior to date survived by his spouse spouse his son son and three daughters daughter daughter and daughter daughter subsequently died in year survived by two children grandson and grandson daughter died in year survived by her two children grandson and granddaughter under article fifth of his will decedent devised and bequeathed the residue of his estate in trust and directed the trustee to divide the property into trust a and trust b spouse was the lifetime beneficiary of both trusts and had a testamentary general_power_of_appointment over the assets of trust a spouse died prior to date without exercising her general_power_of_appointment under decedent's will any assets in trust a at spouse's death passed to trust b hereinafter referred to as main trust the facts submitted and representations made are as follows decedent died paragraph of article fifth of decedent's will provides as follows upon the death of my wife spouse trust b and trust a to the extent that my wife shall make no different disposition thereof shall continue and the net_income therefrom shall be paid to my daughters daughter daughter and daughter in equal shares share and share alike for their respective lifetimes if one or more of my said daughters shall fail to survive me the share such predeceased daughter would have received shall be paid to her surviving issue by right of representation upon the death of the last surviving daughter this trust shall terminate and the corpus together with accrued and undistributed_income shall be plr-165079-04 distributed to my grandchildren by right of representation and including in this instance any lawful issue of my son son paragraph of article fifth of decedent’s will hereinafter referred to as the income equalization provision provides as follows if at any time after the death of my wife spouse and before the termination of my trust estate the gross_income from all sources in any one year of my son son shall be less than one-third of the net_income distributable under the trust estate during said year the trustee shall distribute to my said son an amount of money sufficient to make his annual gross_income equal to the share received from my trust estate during such year by each of my daughters or their issue by right of representation if one or more of them shall have died on date court issued a decree of final distribution of decedent's_estate the decree was filed with court on date follows on date court construed paragraph of article fifth of decedent's will as upon the death of either daughter daughter or daughter the share of the net_income that would have been received by that deceased daughter pursuant to paragraph of article fifth on page of the will of decedent shall be paid to her surviving issue by right of representation in the event such deceased daughter is not survived by any issue the share of the net_income that would have been received by the deceased daughter shall be distributed to the survivor s of daughter daughter or daughter in the same order court construed paragraph of article fifth of decedent's will the income equalization provision as follows a son's right to receive a distribution from the trust each year shall be determined on the gross_income of son for the previous year and the net_income distributable for the trust for the current_year b if son's gross_income for the previous year is less than one-third of the trust's net_income distributable for the current_year then son shall be entitled to receive a distribution from the trust in an amount equal to seventy-five percent of the difference between the trust's net_income distributable for the current_year and son's gross_income for the previous year c any distribution from the trust to son shall reduce the amount to be distributed by the trust to daughter daughter and daughter or their successors on a pro_rata basis plr-165079-04 ordered that on date upon petition of individual as trustee for instructions court trust income distributable to son during the period january through april of each year shall be calculated based upon his gross_income for the year which i sec_2 years before the current_year thereafter his income distributions for the period may through december of each year will be adjusted to account for his actual gross_income for the year before the current_year under the terms of the settlement agreement and the first amendment to the on date settlement agreement was executed construing and modifying main trust in settlement of litigation that had been commenced regarding main trust on date court approved the settlement agreement settlement agreement one-fourth of the assets held in main trust were transferred to a separate trust for the benefit of daughter and her issue daughter trust until the death of the last to die of daughter and daughter daughter having died survived by grandson and grandson the income of the daughter trust will be distributed to daughter during her life and after her death will be distributed to the then-living issue of daughter by right of representation should daughter die without issue while daughter is still living the trust income will be paid to daughter until her death upon the death of the last to die of daughter and daughter the daughter trust will terminate and the corpus will be distributed outright to daughter 3's then-living issue or if none will augment equally the shares distributed from the main trust regarding the assets that continued to be held in main trust main trust income was divided into two equal shares one share was payable to daughter for life and at her death to her then-living issue by right of representation the other share was divided into two equal shares one share for each of the two children of daughter grandson and grandson at the death of either child of daughter the deceased child's share will be paid to that child's then-living issue by right of representation should daughter die without issue while daughter is still living daughter 1's share of the trust income was to be paid to daughter upon the death of the last to die of daughter and daughter the main trust will terminate and the corpus will be divided into three equal shares daughter 1's share daughter 2's share and son's share daughter 1's share and daughter 2's share will each be distributed to the respective daughter's then-living issue per stirpes or if none will augment equally the daughter trust and the other shares being distributed from the main trust son's share will be distributed to the then-living lawful issue of son per stirpes or if none will augment equally the daughter trust and the other shares being distributed from the main trust plr-165079-04 in addition under the settlement agreement and the first amendment to the settlement agreement the income equalization provision of paragraph of article fifth of decedent's will was modified to ensure that son daughter sec_1 and or their issue and the issue of daughter would receive the share of income each would have received under the original terms of the main trust during son’s life if in any year before the termination of the main trust son's gross_income from other sources for the year immediately preceding the current_year is less than of the main trust net_income for the current_year the trustee of the main trust will distribute to son an amount of cash or other comparable liquid_assets sufficient so that when added to his gross_income from other sources for the prior year the sum thereof is equal to of the sum of the main trust's net_income for the current_year and son's gross_income for the prior year if during his life son receives any distributions from the main trust pursuant to the income equalization provision the daughter trust will receive from the main trust an amount equal to of son’s gross_income from other sources starting at son’s death if daughter is then still living the daughter trust will receive from the main trust a distribution in an amount equal to of the main trust net_income on date court issued an order instructing the trustee that none of the main trust income was to be paid to son’s heirs during the period between son’s death and the termination of the main trust on the death of the last to die of daughter or daughter on termination of the main trust son’s share of the corpus of the main trust is to be distributed to son’s issue as described above main trust for gst tax purposes would not be adversely affected by the modification of the main trust to establish the daughter trust in addition the daughter trust would also be exempt for gst tax purposes constructively added to the main trust or the daughter trust since the death of spouse before date daughter 2’s children grandson and grandson are currently each receiving one-fourth of the income of the main trust subject_to the income equalization provision in favor of son similarly daughter 1’s children grandson and granddaughter are currently each receiving one-fourth of the income of the main trust subject_to the income equalization provision in favor of son son and daughter are still living grandson desires that his interest in the main trust be severed and held as a separate trust if the main trust terminated immediately grandson would be entitled to receive one-sixth of the main trust corpus on date agreement was executed by grandson bank as trustee of the main trust and by or on behalf of most individuals among the current and contingent beneficiaries of the main trust currently bank is the trustee of the main trust no assets have been directly or on date the irs issued a private_letter_ruling that the exempt status of the on date court issued an order approving the agreement to modify and pursuant to the court order the main trust will be partitioned into two separate plr-165079-04 partition the main trust subject_to the issuance of a favorable private_letter_ruling from the irs the agreement in its entirety is incorporated by reference into court 2's order court 2’s order approved the proposed language for the grandson trust and the main trust as modified under the agreement trusts the grandson trust and the main trust the grandson trust will consist of the assets held in the grandson subaccount discussed below immediately before the partition and the remaining assets in the main trust immediately before the partition will be held as the main trust under the terms of the court order until daughter 3's death the income of the grandson trust will be distributed to grandson during his life and at his death will be distributed to the then-living issue of grandson by right of representation the beneficiaries of the grandson trust acting by majority vote may remove an acting trustee and may also appoint a trustee or co-trustees if no trustee is then serving who may be any person or persons other than a beneficiary a beneficiary's spouse or a person related or subordinate to a beneficiary within the meaning of sec_672 of the internal_revenue_code until her death divided into three equal shares one share will be paid to granddaughter for life and at her death to her then-living issue by right of representation one share will be paid to grandson for life and at his death to his then-living issue by right of representation one share will be paid to grandson for life and at his death to his then-living issue by right of representation the distributable income of the main trust is defined as the net_income of the main trust reduced as described below by any payments of the main trust net_income to son during his life under the income equalization provision and payments of the main trust net_income to the grandson trust and the daughter trust article fifth of decedent's will under this modification each year during son’s life the main trust will distribute to the grandson trust the lesser_of of son’s outside gross_income or of the main trust net_income and to the daughter trust the lesser_of ¼ of son’s outside gross_income or of the main trust net_income each year after son’s death the main trust will distribute to the grandson trust of the main trust net_income and to the daughter trust of the main trust net_income during the life of son if in any year prior to the termination of the main trust son's gross_income from other sources for the year immediately preceding the current_year is less than of the main trust net_income for the current_year the trustee of the main the income of the daughter trust will continue to be distributed to daughter the agreement modifies the income equalization provision of paragraph of until daughter 3's death the distributable income of the main trust will be plr-165079-04 trust will distribute to son an amount of cash or other comparable liquid_assets sufficient so that when added to his gross_income from other sources for the prior year the sum thereof is equal to of the sum of the trust's net_income for the current_year plus son's gross_income for the prior year minus the amounts distributed by the main trust to the daughter trust and the grandson trust upon the death of daughter the daughter trust the grandson trust and the main trust will terminate the daughter trust will be distributed to daughter 3's then-living issue or if none will augment proportionately the shares distributed from the main trust the grandson trust will be distributed to grandson if he is then living or if not to his then-living issue by right of representation or if none will augment proportionately the shares distributed from the main trust the main trust will be divided into five equal shares one share called the daughter share two shares collectively called the daughter share and two shares collectively called son's share the daughter share will be distributed to granddaughter if she is then living or if not to her then-living issue by right of representation or if none to the then-living issue of daughter or if none will augment proportionately the daughter trust the grandson trust and the other shares being distributed from the main trust the daughter share will be divided into subshares by right of representation among and will be distributed to daughter 2’s then-living children and the then-living issue of a deceased child or if daughter has no then-living issue will augment proportionately the daughter trust the grandson trust and the other shares being distributed from the main trust son's share will be distributed to the then-living lawful issue of son or if none will augment proportionately the daughter trust the grandson trust and the other shares being distributed from the main trust letter_ruling from the irs and a court order approving the agreement the grandson subaccount was established and funded with one-sixth of each asset of the main trust that could be divided and an undivided interest in and to each asset that could not be divided as long as the grandson subaccount is in existence the main trust beneficiaries will have no current interest in the assets held in the grandson subaccount or in the income gains expenses or losses attributable to such assets the income from the assets held in the grandson subaccount will be distributed solely to grandson and will not be considered in determining the income distributable to the main trust beneficiaries none of the assets in the grandson subaccount will be distributed to son under to the income equalization provision or the corresponding provision of the main trust in favor of daughter current interest in the assets of the main trust which are not held in the grandson subaccount or in the income gains expenses or losses attributable to such assets except as follows as long as the grandson subaccount is in existence grandson will have no effective as of date and pending the taxpayer’s receipt of a favorable private plr-165079-04 each year during son’s life the trustee will allocate to the grandson subaccount from the assets of the main trust which are not held in the grandson subaccount an amount equal to the lesser_of i one-eighth of son’s outside gross_income for the prior year or ii one-fifteenth of the net_income of the main trust upon son’s death if daughter is then living and until the termination of the main trust the trustee will allocate to the grandson subaccount an amount equal to of all the main trust income distributions as long as the grandson subaccount is in existence the amount of the main trust income required to be distributed to son under the income equalization provision will be calculated as follows if son’s outside gross_income for the prior year is less than of the income of the main trust son will receive that amount of income from the main trust necessary so that his total income including his prior year outside gross_income will equal two-fifths of the following the income of the main trust plus son’s prior year outside gross_income minus the amounts the main trust distributes to the daughter trust and allocates to the grandson subaccount as noted above upon the receipt of a favorable ruling from the irs and a final order from court approving the agreement the grandson trust will be established and funded with the assets held in the grandson subaccount the taxpayers have requested the following rulings the proposed division of the main trust into the grandson trust and the main trust will not cause the main trust or the grandson trust to lose exempt status for generation-skipping_transfer_tax purposes or otherwise be subject_to chapter trust will not constitute a sale_or_exchange or other taxable disposition of assets under sec_61 and sec_1001 by the main trust the grandson trust or any beneficiary thereof ruling_request the implementation of the proposed transaction to divide the main sec_2601 imposes a tax on each generation-skipping_transfer made by a transferor to a skip_person under a of the tax_reform_act_of_1986 the generation-skipping_transfer_tax is generally applicable to generation-skipping transfers made after date however under b a of the tax reform act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer from a_trust if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date under sec_26 plr-165079-04 b ii any trust in existence on date will be considered irrevocable unless the settlor had a power that would have caused inclusion of the trust in his or her gross_estate under sec_2038 or sec_2042 if the settlor had died on date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax will not cause the trust to lose its exempt status the regulation provides that the rules contained in the paragraph are generally applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes unless noted otherwise the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a modification will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the 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 gst transfer or the creation of a new gst transfer a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust example contained in sec_26_2601-1 considers a situation where in grantor established an irrevocable_trust for the benefit of his two children a and b and their issue under the terms of the trust the trustee has the discretion to distribute income and principal to a b and their issue in such amounts as the trustee deems appropriate on the death of the last to die of a and b the trust principal is to be distributed to the living issue of a and b per stirpes in the appropriate local court approved the division of the trust into two equal trusts one for the benefit of a and a's issue and one for the benefit of b and b’s issue the trust for a and a's issue provides that the trustee has the discretion to distribute trust income and principal to a and a's issue in such amounts as the trustee deems appropriate on a's death the trust principal is to be distributed equally to a’s issue per stirpes if a dies with no living descendants the principal will be added to the trust for b and b's issue the trust for b and b 's issue is identical except for the beneficiaries and terminates at b 's death at which time the trust principal is to be distributed equally to b 's issue per stirpes if b dies with no living descendants principal will be added to the trust for a and a's issue the division of the trust into two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the division in addition the division revrul_95_58 1995_2_cb_191 concludes that a settlor's retained power to plr-165079-04 does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust therefore the two partitioned trusts resulting from the division will not be subject_to the provisions of chapter remove a trustee and appoint an individual or corporate trustee or successor that is not related or subordinate to the settlor within the meaning of sec_672 will not be considered retention of the trustee's discretionary powers for purposes of sec_2036 and sec_2038 the daughter trust is deemed to have been irrevocable as of that date it is represented that no additions actual or constructive were made to the main trust and the daughter trust after date trust is substantially_similar to the situation described in example of ' b i e under the proposed modification and division the grandson trust and the main trust will except as discussed below be administered under the original terms of the main trust as provided in decedent's will as construed and modified by the orders of court on date and date in the present case the main trust was irrevocable on date and the proposed division of the main trust into the grandson trust and the main the modifications governing income payments to the grandson trust the daughter trust and to the main trust beneficiaries are intended to ensure that the beneficiaries will receive the same shares of income they would have received under the original terms of the main trust as construed by court on date similarly the modification to the income equalization provision is intended to ensure that the beneficiaries receive the same shares of income they would have received under the terms of the main trust as construed by court on date and date further under the proposed modification and division the grandson trust the daughter trust and the main trust will terminate at the same time as provided under the original terms of main trust under court 2's date order the beneficiaries of the grandson trust are granted a power that is not contained in the main trust instrument to remove and replace trustees or co-trustees the trustees appointed pursuant to this replacement power cannot be a beneficiary of the grandson trust the spouse of such beneficiary or subordinate or related to such beneficiary within the meaning of sec_672 thus the removal and replacement power satisfies the standards contained in revrul_95_58 and therefore the possession of the power would not generally subject the trust corpus to inclusion in the possessor’s gross_estate consequently we conclude that the division of the main trust into the grandson trust and the main trust and the modifications as described above will not result in a shift of any beneficial_interest in trust assets to any beneficiary who occupies a plr-165079-04 generation lower than the persons holding the beneficial interests prior to the partition and modification in addition the modification and division will not extend the time for vesting of any beneficial_interest in the grandson trust the daughter trust and the main trust beyond the period provided for under the original terms of the main trust the provisions governing income payments under the grandson subaccount are identical to those governing income payments under the grandson trust and the subaccount and the grandson trust are subject_to the identical modified income equalization provision further the grandson subaccount will be transferred to the grandson trust on receipt of the favorable private_letter_ruling thus as discussed above the temporary allocation of the assets of the main trust to the grandson subaccount will not result in a shift of any beneficial_interest in trust assets to any beneficiary who occupies a generation lower than the persons holding the beneficial interests prior to the establishment of the subaccount further the allocation of assets of the main trust to the grandson subaccount will not extend the time for vesting of any beneficial_interest in the grandson subaccount the daughter trust and the main trust beyond the period provided for under the original terms of the main trust accordingly based on the facts submitted and the representations made sec_1001 provides that the gain from the sale_or_other_disposition of sec_61 provides that gross_income includes gains derived from dealings and assuming the transaction is carried out and is effective under state law we conclude that the proposed division of the main trust into the grandson trust and the main trust will not cause the main trust or the grandson trust to lose exempt status for generation-skipping_transfer_tax purposes or otherwise be subject_to chapter ruling_request in property property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 of the code on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained sec_1001 states that the amount_realized from the sale_or_other_disposition in 499_us_554 the court in revrul_69_486 1969_2_cb_159 distinguished by revrul_83_61 plr-165079-04 a partition of jointly owned property is not a sale_or_other_disposition of property where the co-owners of the joint property sever their joint_interests but do not acquire a new or additional interest as a result of the transaction thus neither gain nor loss is realized on a partition see revrul_56_437 1956_2_cb_507 c b a non-pro rata distribution of trust property was made in_kind by the trustee although the trust instrument and local law did not convey authority to the trustee to make a non-pro rata distribution_of_property in_kind the distribution was effected as a result of a mutual agreement between the trustee and the beneficiaries because neither the trust instrument nor local law conveyed authority to the trustee to make a non-pro rata distribution revrul_69_486 held that the transaction was equivalent to a pro_rata distribution followed by an exchange between the beneficiaries and was subject_to the provisions of sec_1001 and sec_1002 considered whether a sale_or_exchange that has taken place results in the realization of gain_or_loss under sec_1001 in cottage savings a financial_institution exchanged its interests in one group of residential mortgage loans for another lender's interests in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution the court concluded that sec_1_1001-1 reasonably interprets sec_1001 and therefore an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material so long as their respective possessors enjoy legal entitlements that are different in_kind or extent cottage savings u s pincite the court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements therefore the taxpayer realized losses when it exchanged interests in the loans cottage savings u s pincite appropriate state court grandson 1’s interest will be severed from the main trust to pursue a different investment policy however the beneficiaries’ interests in the main trust and the daughter trust will not change in_kind or extent and no interests will be created all of the provisions of the main trust will remain unchanged thus consistent with the court’s opinion in cottage savings the interests of the beneficiaries of the main trust daughter trust and the grandson trust will not differ materially from their current interests in the main trust and daughter trust in addition the present case is distinguishable from the facts of revrul_69_486 because the state probate code authorizes the trustee to make non-pro rata distributions accordingly we conclude that the proposed transaction will not result in a material difference in_kind or extent of the legal entitlements enjoyed by the beneficiaries and no gain_or_loss is recognized by the beneficiaries or the trusts on the division for purposes of sec_1001 in the present case under the proposed division that was approved by the this ruling is directed only to the taxpayer who requested it sec_6110 except as specifically ruled herein we express no opinion on the federal tax plr-165079-04 consequences of the proposed modifications under the cited provisions or under any other provisions of the code provides that it may not be used or cited as precedent george masnik chief branch office of associate chief_counsel enclosure copy for sec_6110 purposes passthroughs and special industries _________________________ sincerely yours


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division mar 20ti uniform issue list ep ra t legend taxpayer a ira b financial_institution c ira d account e financial_institution f amount dear l i this letter is in response to a request for a letter_ruling dated date as supplemented by additional information dated january and date from your authorized representative in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a age represents that he took a distribution from ira b totaling amount taxpayer a asserts that his failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code was due to an error by financial_institution e taxpayer a further asserts that amount has not been used for any purpose in april of taxpayer a taxpayer a maintained ira b an individual_retirement_account under sec_408 of the code with financial_institution c opened both ira d and a roth_ira with financial_institution f soon thereafter taxpayer a began transferring funds from various sources to both accounts without incident on date taxpayer a initiated a rollover of amount ira b to ira d the check was received by financial_institution f on date despite taxpayer a’s instructions to financial_institution f that amount be deposited in ira d it was deposited into account e a non ira account while the check did not indicate it was from an ira financial_institution c prepared a form 1099--r using code g in box indicating the distribution was considered a direct_rollover financial_institution f has acknowledged in writing a miscommunication between members of its staff caused the failure to deposit amount into taxpayer a’s ira d in based on the above facts and representations you request that the internal_revenue_service service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distribution of amount sec_408 of the code provides that except as otherwise provided in sec_408 of the code any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if - i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 of the code sec_408 of the code provides that sec_408 of the code does not apply to any amount described in sec_408 of the code received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 of the code from an ira which was not includible in gross_income because of the application of sec_408 of the code p1218 t a b h sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and the documentation submitted by taxpayer a is consistent with his assertion that his failure to accomplish a timely rollover of amount was due to an error by financial_institution f therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount from ira b taxpayer a is granted a period of days from the issuance of this letter_ruling to contribute amount into a rollover ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contribution amount will be considered a rollover_contribution within the meaning of sec_408 no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent ‘ a copy of this letter_ruling has been sent to your authorized representative pursuant to a power_of_attorney on file in this office this ruling please contact if you wish to inquire about i d at sincerely y yours co wh lrrttle caller a employee_plans technical group enclosures deleted copy of this letter notice of intention to disclose notice cc


internal_revenue_service number info release date uilc cc psi 1-genin-110759-02 date in response to your letter dated date and pursuant to our conversation by telephone on date we have informed you that may request late s election relief in order to establish date as the effective date directly with the appropriate service_center under revproc_98_55 as long as the request is made on or before date we hope that the information proves helpful therefore we are closing our file sincerely yours s dianna k miosi chief branch associate chief_counsel passthroughs and special industries


t c memo united_states tax_court talley industries inc and consolidated subsidiaries petitioner v commissioner of internal revenue respondent docket no filed date james g phillipp and dora arash for petitioner daniel m whitley and bradley t stanek for respondent supplemental memorandum findings_of_fact and opinion fay judge this case was assigned to chief special_trial_judge peter j panuthos pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_183 the court agrees with supplementing tcmemo_1994_608 all section references are to the internal_revenue_code continued - - and adopts the opinion of the special_trial_judge which is set forth below opinion of the special_trial_judge panuthos chief special_trial_judge this matter is before the court on remand from the court_of_appeals for the ninth circuit see 116_f3d_382 9th cir revg and remanding tcmemo_1994_608 in talley indus inc consol subs v commissioner tcmemo_1994_608 we granted petitioner's motion for summary_judgment in part----holding that petitioner was entitled to a deduction of dollar_figure million less dollar_figure which was characterized as a fine pursuant to criminal charges reflecting the amount that petitioner paid to the government to settle its civil liability for submitting false claims under certain federal contracts the court_of_appeals reversed and remanded the case on the ground that a genuine issue of material fact exists as to the characterization and the purpose of the dollar_figure portion of the settlement talley indus inc consol subs v commissioner f 3d pincite the court_of_appeals summarized the matters to be decided on remand as follows if the dollar_figure represents compensation to the government for its losses the sum is deductible if however the dollar_figure represents a payment of double damages under the false claims act it may not be ' continued in effect for the year in issue unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure - - deductible if the dollar_figure represents a payment of double damages a further genuine issue of fact exists as to whether the parties intended the payment to compensate the government for its losses deductible or to punish or deter talley and stencel nondeductible citation omitted findings_of_fact stencel aero engineering corp stencel a wholly owned subsidiary of talley industries inc talley or petitioner manufactured ejection seats for military aircraft during the early 1980's stencel's primary customer was the u s department of the navy navy department stencel's work for the navy department involved both the production of ejection seats and research_and_development projects r d projects stencel's employees generally were required to maintain daily timecards showing the number of hours devoted to specific production contracts or r d projects stencel used the data from these records to determine its costs under a particular production contract or r d project and in the case of all contracts with the navy department those data were incorporated directly or indirectly in the invoices or requests for progress payments that stencel submitted to the navy department on date the defense criminal investigative service executed a search warrant at stencel's plant in arden north carolina and seized certain of stencel's records including certain employee timecards on date a q4e- federal grand jury sitting in the western district of north carolina returned a criminal indictment against stencel and three of its senior employees stencel was charged in the indictment with one count of violating u s c section filing a false claim for payment with the federal government one count of violating u s c section conspiracy to file a false claim for payment with the federal government and counts of violating u s c sec_1001 submission of a false claim in writing to an agency of the federal government or u s c sec_2 aiding_and_abetting in the commission of such an offense on date the navy department suspended talley and stencel from further government contract work by placing the two companies on the consolidated list of debarred suspended and ineligible contractors on date stencel entered into a plea agreement with the government under which stencel agreed to plead guilty to counts of making false statements to the government in violation of u s c sec_1001 in exchange the government agreed not to prosecute certain of stencel's officers and to dismiss the remaining counts against stencel the plea agreement was accepted by the u s district_court for the western district of north carolina and on date the court entered a judgment and probation commitment order against stencel the judgment and - - probation commitment order stated in pertinent part that stencel would pay a fine of dollar_figure dollar_figure for each of the agreed counts and that stencel shall make full restitution for all losses to be determined by the u s navy at a later date on date the navy department lifted the suspension order against talley and all of its subsidiaries with the exception of stencel during the time that stencel remained in suspended status the navy department generally was prohibited from purchasing either new ejection seats or replacement parts for ejection seats from stencel in date joyce r branda ms branda a trial attorney with the fraud section commercial litigation branch civil division u s department of justice was assigned to represent the government in the stencel matter upon assignment to the case ms branda received evidence that all four of stencel's major departments----production engineering inspection and quality assurance---had engaged in labor mischarging and that mischarging may have occurred as early as as a result of the alleged mischarging talley and stencel faced potential civil liability under the false claims act fca u s c section the truth in negotiation act at the time of stencel's indictment u s c sec provided in pertinent part a person not a member of an armed force of the continued tina u s c section f and common_law continued united_states is liable to the united_states government for a civil penalty of dollar_figure an amount equal to times the amount of damages the government sustains because of the act of that person and costs of the civil_action if the person-- knowingly presents or causes to be presented to an officer_or_employee of the government or a member of an armed force a false or fraudulent claim for payment or approval knowingly makes uses or causes to be made or used a false record or statement to get a false or fraudulent claim paid or approved at the time of stencel's indictment u s c sec f provided in pertinent part a prime contractor or any subcontractor shall be reguired to submit cost or pricing data under the circumstances listed below and shall be required to certify that to the best of his knowledge and belief the cost or pricing data he submitted was accurate complete and current--- a prior to the award of any negotiated prime contract under this title where the price is expected to exceed dollar_figure any prime contract or change or modification thereto under which such certificate is required shall contain a provision that the price to the government including profit or fee shall be adjusted to exclude any significant sums by which it may be determined by the head of the agency as defined in section to include the secretary of the navy that such price was increased because the contractor or any subcontractor required to furnish such a certificate furnished cost or pricing data which as of a date agreed upon between the parties which date shall be as close to the date of agreement on the negotiated price as is practicable was inaccurate incomplete or noncurrent k k contract claims talley and stencel were represented by among others private attorneys william j kilberg mr kilberg and john chierichella and by mark s dickerson talley's secretary and general counsel during a date meeting in asheville north carolina the government provided talley and stencel with a schedule the asheville damages schedule summarizing the government's estimate of its damages during attributable to the specific acts of labor mischarging described in the indictment as well as the additional labor mischarging that the government suspected in stencel's four major departments the asheville damages schedule included an estimate of total damages for of dollar_figure and an estimate of forfeitures under the fca of dollar_figure alleged acts of labor mischarging multiplied by dollar_figure the asheville damages schedule did not include an estimate of the government's incidental damages such as the costs associated with the investigation the suspension and debarment proceedings the grounding of any navy aircraft for lack of replacement parts or the government's loss of use of funds improperly paid to stencel although the government believed that labor mischarging had occurred as early as neither party examined or analyzed stencel's billing data or other records for the years to - - to the extent necessary to calculate the government's actual losses for any of those years because the navy department was stencel's largest customer and since stencel was one of only a few companies in the world gualified to produce ejection seats for navy department aircraft the government and stencel both recognized the urgency of reaching an agreement sufficient to permit the navy department to lift stencel's suspension in date ms branda offered to settle the government's claims against talley and stencel for dollar_figure million ms branda arrived at the dollar_figure million figure by assuming an average of dollar_figure in singles damages per year for the 6-year period through for total singles damages of dollar_figure million and then doubling that amount singles damages is a term of art under the fca which provides for an award of double the government's actual damages on or about date talley and stencel countered ms branda's dollar_figure million settlement offer by offering to settle the government's claims for dollar_figure talley and stencel calculated the government's total damages for labor mischarging for and at dollar_figure in addition although talley and stencel denied liability for labor mischarging before their settlement offer included amounts for alleged labor mischarging in stencel's production department from to talley and --- - stencel arrived at the dollar_figure figure by doubling the amount that they believed represented the government's actual losses on date walter t skallerup jr general counsel of the navy responded as follows to ms branda's request for a recommendation of the minimum settlement value of the government's claims against talley and stencel the investigation leading to the guilty plea focused primarily on evidence of mischarging during there is reason to believe however that mischarging began in and continued throughout the period from to the amount of such mischarging cannot now be quantified nevertheless we believe that any settlement offer should include an amount for the full false claims act liability for the provable losses in and a substantial amount for the possible liability for losses in prior years or a total of dollar_figure million on date ms branda submitted a memorandum to the assistant attorney_general civil division in which she proposed to reject the pending dollar_figure settlement offer and suggested that the case should be settled in the range of dollar_figure million to dollar_figure million ms branda summarized her position as follows thus we think that the singles figure of dollar_figure million adequately compensates the government for its losses based upon a fair and defensible projection we also believe that here where stencel has pled guilty to related criminal charges and where civil proceedings have not begun it is premature to accept only an estimate of our single losses and that assessment of a penalty as a portion of our double damages and or forfeitures is appropriate a settlement of dollar_figure --- million represents compensation_for an estimate of losses plus assessment of a penalty - on date ms branda was given authorization to reject the pending dollar_figure settlement offer and to make a counteroffer of dollar_figure million on date talley stencel and the navy department executed an interim agreement under which the navy department agreed to end stencel's suspension and stencel agreed in turn to pay the navy department dollar_figure and to continue negotiating in good_faith to settle the potential liability by late date talley stencel and the government had agreed to assume solely for purposes of settlement discussions that stencel's labor mischarging had occurred in each of the years through at a constant rate in relation to stencel's direct labor charges for such years they further agreed that the navy department's total losses of the type described in the asheville damages schedule for through were dollar_figure by letter dated date mr kilberg made a new offer to settle the government's claims against talley and stencel for dollar_figure million with an offset of the dollar_figure that stencel had paid earlier mr kilberg's letter stated in pertinent part stencel has offered the united_states a total of two million dollars inclusive of the dollar_figure previously paid pursuant to agreement with the department of the navy this sum shall be compensation_for any and all restitution and damages that may be owing by stencel to the united_states for any possible labor mischarging that may have occurred prior to date and shall release stencel from any liability to the united_states for any and all possible violations of the false claims act any and all possible violations of the truth in negotiations act emphasis added mr kilberg's letter included a third numbered paragraph describing the releases of liability set forth in the first and second numbered paragraphs mr kilberg's letter also included a statement that the offer was intended to represent double damages by letter dated date ms branda rejected mr kilberg's dollar_figure million settlement offer but made a counteroffer to settle the matter for dollar_figure million with an offset for the dollar_figure that stencel had already paid under the interim agreement ms branda's letter stated in pertinent part stencel's offer has been carefully considered by this office the navy's office of general counsel the defense contract audit agency and defense contract administration services in atlanta while we believe that the offer is made in good_faith we cannot accept its terms however i am prepared to make the following counter offer subject_to final department approval stencel agrees to pay to the united_states the sum of dollar_figure inclusive of the dollar_figure paid to the navy pursuant to the agreement dated date emphasis added -- in extending her counteroffer ms branda expressly adopted the first and second numbered paragraphs in mr kilberg's date letter quoted above and partially adopted and modified the third numbered paragraph therein ms branda did not specifically characterize the settlement payment or any part thereof as either compensation_for the government's losses or as a penalty on date the parties executed a settlement agreement that was consistent with ms branda's date counteroffer the settlement agreement provided that talley and stencel would pay the government dollar_figure million dollar_figure million less an offset of dollar_figure that talley and stencel would pay dollar_figure upon execution of the agreement and that talley and stencel would pay the remaining dollar_figure million no later than date with simple interest computed at the rate established by the secretary_of_the_treasury pursuant to the renegotiation act amendments publaw_92_41 85_stat_97 the settlement agreement provided that talley and stencel were relieved of liability under the fca and the tina and that the settlement satisfied stencel's obligation to provide restitution under the judgment and probation commitment order entered on date the settlement agreement did not characterize the payment as either compensation to the government for its losses or as a penalty - - talley reported the dollar_figure million payment as an ordinary and necessary business_expense on its consolidated federal_income_tax return for the taxable_year upon examining the return respondent disallowed the deduction and determined a deficiency in petitioner's federal_income_tax for in the amount of dollar_figure petitioner invoked the court's jurisdiction by filing a petition for redetermination at the time the petition was filed petitioner's principal_place_of_business was located in phoenix arizona opinion sec_162 provides the general_rule that a taxpayer is allowed a deduction for all ordinary and necessary expenses paid_or_incurred by the taxpayer in carrying_on_a_trade_or_business sec_162 however proscribes a deduction under sec_162 for any fine or similar penalty paid to a government for the violation of any law the phrase fine or similar penalty is defined in sec_1_162-21 income_tax regs as follows b definition for purposes of this section a fine or similar penalty includes an amount--- paid pursuant to conviction or a plea of guilty or nolo contendere for a crime felony or misdemeanor in a criminal proceeding paid as a civil penalty imposed by federal state or local law paid in settlement of the taxpayer's actual or potential liability for a fine or penalty civil or criminal xk -- sec_1_162-21 income_tax regs provides that compensatory_damages paid to a government do not constitute a fine or penalty deductions are a matter of legislative grace and the taxpayer must show that he comes squarely within the terms of the law conferring the benefit sought see rule a 503_us_79 292_us_435 290_us_111 applying this principle in the instant case petitioner bears the burden of proving that in settling the stencel matter the parties intended for the entire dollar_figure million payment including the dollar_figure portion of the payment that exceeded the government's dollar_figure million singles damages to represent compensation to the government for its losses the first issue to be resolved is whether the parties intended the stencel settlement to include double damages under the fca although the settlement agreement does not characterize the dollar_figure million payment or any part thereof as double damages we conclude that the parties intended the settlement to include double damages under the fca in short the parties' various offers and counteroffers repeatedly referred to the settlement as including double damages next we must consider whether the purpose of the dollar_figure double damage payment was to compensate the government for its -- - losses or to deter or punish stencel the court_of_appeals stated the double damages provision of the fca has both compensatory and deterrence purposes see 721_f2d_282 9th cir see also 934_f2d_209 9th cir 59_f3d_953 9th cir t he double damages provision of the fca is meant not only to compensate the government fully but also to deter fraudulent claims from being filed against it mcleod f 2d pincite congress chose the double damage provision 'to make sure that the government would be made completely whole ' id quoting 317_us_537 63_sct_379 87_led_443 at the same time however the double damage provision 'maximizes the deterrent impact ' mcleod f 2d pincite quoting 423_us_303 96_sct_523 46_led_514 talley indus inc consol subs v commissioner f 3d pincite the settlement agreement does not characterize the dollar_figure million payment or any portion thereof as either compensation_for the government's losses or as a penalty in light of this ambiguity the court_of_appeals indicated that the deductibility of the dollar_figure amount would have to be resolved by determining the parties' intent see id petitioner contends that no portion of the dollar_figure in dispute can be considered a penalty because the government's actual losses--including its incidental losses such as the costs associated with the investigation the suspension and debarment proceedings the grounding of navy aircraft for lack of -- - replacement parts and the government's loss of use of funds improperly paid to stencel---exceeded the dollar_figure million that petitioner paid under the settlement agreement petitioner further contends that its representatives and attorneys always intended for the entire settlement to represent compensation to the government for its losses respondent counters that regardless of the amount of the government's actual losses the government intended that the disputed portion of the settlement payment would serve as a penalty to deter stencel and other government contractors from submitting false claims the parties present opposing positions respecting the correct characterization of the disputed portion of the settlement payment justice oliver wendell holmes stated that the making_of_a_contract depends not on the agreement of two minds in one intention but on the agreement of two sets of external signs --not on the parties' having meant the same thing but on their having said the same thing holmes the path of the law harv l rev we reject petitioner's contention that the disputed portion of the settlement agreement cannot be considered a penalty because the government's actual losses purportedly exceeded the entire dollar_figure million settlement payment neither party made a serious effort to quantify the government's actual losses in excess of its singles damages of dollar_figure million moreover the settlement by its very nature reflects a compromise influenced by a number of factors including the hazards_of_litigation the need for an expedited settlement and possibly the character of the payment to accept petitioner's position we would have to ignore evidence that the government was willing to accept the settlement on the belief that a portion of the settlement in excess of its singles damages would amount to a penalty it follows that we must proceed to consider the parties' intent as mandated by the court_of_appeals see talley indus inc consol subs v commissioner f 3d pincite a settlement agreement is treated like any other contract for purposes of interpretation see 962_f2d_853 9th cir see also 26_tc_171 fisher v commissioner tcmemo_1994_434 in the case of an ambiguous contract the court may consider extrinsic evidence such as evidence of the parties' prior negotiations and communications in order to ascertain the parties' intent see 557_f2d_218 9th cir restatement contract sec_2d sec_214 see also united commercial ins serv inc v paymaster corp supra pincite 381_f2d_29 9th cir -- - the record shows that in negotiations leading up to the settlement agreement petitioner took the position that its settlement offer would serve to compensate the government for its losses in this regard mr kilberg's date letter stated this sum shall be compensation_for any and all restitution and damages that may be owing by stencel to the united_states for any possible labor mischarging that may have occurred prior to date however ms branda rejected mr kilberg's date settlement offer in particular by letter to mr kilberg dated date ms branda stated while we believe that the offer is made in good_faith we cannot accept its terms ms branda went on to present a counteroffer in which she expressly adopted specific portions of mr kilberg's earlier offer ms branda did not adopt mr kilberg's characterization of the settlement payment as compensation in fact although ms branda had characterized a portion of the settlement as a penalty in her in-house communications ms branda did not characterize the settlement payment at all in her counteroffer to mr kilberg petitioner did not clarify the matter the parties executed a settlement agreement that is silent on the subject of the characterization of the settlement payment the court_of_appeals emphasized that petitioner suffers the consequence if evidence to establish entitlement to the disputed deduction is lacking talley indus inc consol subs v commissioner f 3d pincite the record shows that the parties did not agree whether the portion of the settlement in excess of the government's singles damages would constitute compensation to the government for its losses or a penalty against stencel it thus follows that petitioner has failed to establish entitlement to a deduction for the disputed portion of the settlement consistent with the foregoing decision will be entered under rule