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 b04 plr-126079-07 date date re ---------------------------- re ---------------------------- legend decedent ---------------- spouse -------------------------------------- son --------------------------------------- spouse ------------------------------- son ------------------------------------- spouse --------------------------------- son -------------------------------------- daughter ------------------------------------------------ spouse -------------------------------------- grandchild ----------------------------------- grandchild -------------------------------- grandchild -------------------------------------- grantor -------------- grantor’s spouse -------------- trust ------------------------------------------------------------- trustee ---------------------- year ------- date -------------------------- date -------------------------- date --------------------------- a ---- b ------ c -------- plr-126079-07 d ------ e ------ state -------- state statute ---------------------------------------------- state statute ------------------------------------------------------------------- court ------------------------------------------------------------ agreement --------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- dear ------------ this is in response to a letter dated date from your authorized representative in which you request rulings concerning the gift estate and generation- skipping transfer gst tax consequences of a proposed settlement agreement and proposed disclaimers facts in year grantor and grantor's spouse created the trust for the benefit of decedent year is prior to date the instrument states that grantor and grantor's spouse are the parents of decedent and it is the desire and purpose of the said grantor and grantor's spouse to create an irrevocable_trust known as the decedent trust estate for the use and benefit of decedent article iii sec_1 provides that no beneficiary can require distribution of trust corpus or partition or termination of the trust article iii sec_2 and state as follows sec_2 the death insolvency or bankruptcy of the beneficiary hereunder or the transfer of his interest in any manner or by descent or otherwise during the continuance of this trust shall not operate as a dissolution of nor terminate the trust nor shall it have any effect whatever upon said trust estate its operation or mode of business nor shall it entitle his heirs or assigns or representatives to take any_action in the courts of law or equity against the estate its trustees or property or its business operations of any kind all of which shall remain intact and undisturbed thereby but they shall succeed only to the rights of the original beneficiary as herein set forth sec_3 at the time of the death of beneficiary his equitable interest in said trust estate unless disposed of otherwise by said beneficiary shall pass to and vest in his heirs in accordance with the laws of descent and distribution then in force applicable to the equitable interest of such beneficiary in said trust the term 'beneficiary' applies not only to decedent but to all his successors to beneficial interests under this trust plr-126079-07 article iv sec_3 provides that the trust will terminate years after decedent's death when the trustee will distribute the trust corpus among the then existing beneficiaries article iv sec_4 provides that the beneficiary may receive from time to time a portion of the net profits accruing from time to time to the trust as the trustee acting with the advice and consent of the advisory board may see fit to pay over and deliver to the beneficiary no duty is imposed upon the trustee to distribute net profits but the power is conferred upon the trustee acting with advice and consent of the advisory board to do so and in exercising this discretion the trustee and advisory board must give full consideration to the interest of both the beneficiary and the trust estate decedent died on date survived by spouse son son son and daughter pursuant to article vi sec_3 the trust will terminate on date pursuant to article iii and article iv of the trust each beneficiary has three separate interests in the trust which passed to him or her on the decedent’s death the right to receive net profits in the discretion of the trustee and the advisory board the income_interest the right to dispose_of his or her share of the trust if the beneficiary dies before the trust terminates on date the power_of_appointment and the right to receive his or her share of the trust if living on date the remainder spouse spouse and spouse are each married to a child of decedent under article iii sec_3 of the trust if a child of decedent dies prior to date the termination_date of the trust or disclaims any interest such child has in the trust spouse spouse and spouse would be entitled as an heir of such respective deceased child of decedent under the law of state to succeed as a new beneficiary similarly spouse son son son and daughter are potential heirs under certain circumstances the potential future heirs are collectively referred to as the new trust beneficiaries to the trust as a new trust_beneficiary each would have three separate interests namely an income_interest a power_of_appointment and a remainder_interest referred to hereinafter as the future income_interest future power_of_appointment and future remainder_interest questions have arisen regarding the meaning of certain terms and provisions in the trust in order to resolve the controversy without litigation the parties have reached a settlement agreement agreement agreement resolves the ambiguities with respect to certain terms and modifies the trust during the negotiations that lead to the proposed order discussed below that incorporates the agreement all of the beneficiaries of the trust including unborn and contingent beneficiaries were represented by legal counsel other than spouse who declined to be represented by counsel agreement provides as follows i at his death decedent had the unrestricted right to appoint his interest in the trust plr-126079-07 ii at decedent’s death his interest in the trust passed to his heirs a the identity of decedent’s heirs and the portion of the trust each inherited was determined in accordance with the intestacy laws of the state of state in force at the date of decedent’s death and applicable to an intestate’s separate personal_property b decedent’s five heirs referred to throughout this private_letter_ruling as beneficiaries and the share allocated to each of them are spouse son daughter son and son c each beneficiary succeeded to the rights that decedent has as the beneficiary under the terms of the trust agreement so that each of them became the beneficiary with respect to his or her own share iii after decedent’s death the trust will be accounted for as separate shares a decisions regarding distributions of net profits as net profits is used in the trust agreement will be made separately for each share b undistributed net profits of any share will be added to that share iv each beneficiary will have the right to assign his or her interest in the trust ie the trust agreement does not have a spendthrift_clause v each beneficiary will have an unrestricted testamentary right to appoint his or her share of the trust if he or she dies before the trust terminates vi if a beneficiary dies within years after decedent’s death without appointing his or her share of the trust then pursuant to the terms of the trust agreement the beneficiary’s entire share in the trust the income_interest the remainder_interest and the power_of_appointment will pass to the persons who are the beneficiary’s heirs determined in accordance with the intestacy laws of the state of state in force at the date of the beneficiary’s death and applicable to an intestate’s separate personal_property vii if a beneficiary disclaims a remainder_interest and a power_of_appointment but not an income_interest and if the beneficiary survives for years after decedent’s death the beneficiary’s income_interest in his or her share will terminate on date years after decedent’s death and the disclaimed portion of the remainder_interest in his or her plr-126079-07 share will pass to the persons who would have been the beneficiary’s heirs determined as if the beneficiary had died on date in accordance with the intestacy laws of the state of state then in force and applicable to an intestate’s separate personal_property viii when the trust terminates on date years after decedent’s death any property that would pass to a person who has not yet reached his or her 35th birthday will be retained in a vested interest trust for that person the parties propose to petition court for approval of the terms of agreement the parties to the petition include guardians ad litem for minor and unborn beneficiaries the proposed order by court would enter a judgment construing the trust as set forth in agreement and declaring as follows a from the time of decedent’s death i proper accounting requires that the trust be accounted for as separate shares for decedent’s heirs and the heirs or appointees of any other beneficiary each of whom becomes the beneficiary of his or her share and that each such beneficiary succeeds to the rights with respect to his or her own share that decedent had as the beneficiary under the terms of the trust agreement ii each such share is separate and the beneficiaries do not become common beneficiaries of an undivided trust and iii consequently the interests and power of a beneficiary with respect to his or her share extend only to that beneficiary’s respective share and not to any share held for any other beneficiary b decisions regarding distributions of net profits as net profits is used in the trust agreement will be made separately for each share with undistributed net profits of any share added to the principal of that share c a beneficiary may disclaim all or a portion of his or her interest in the remainder_interest and a commensurate part of his or her testamentary general_power_of_appointment without disclaiming ie while retaining a commensurate part of his or her income_interest with the result that the disclaimed remainder_interest will pass to others even though the disclaimant may be living when and receiving distributions of income until the trust terminates d if a beneficiary a disclaims his or her remainder_interest in and testamentary general_power_of_appointment over all or part of his or her share but does not disclaim the income_interest in that share or part thereof and b survives for years after decedent’s death then the beneficiary’s income_interest in the share will terminate on date years after decedent’s death the beneficiary will have no right to affect the disposition of the disclaimed portion and thus the disclaimed portion of the remainder_interest in the share will pass to the persons who would be the beneficiary’s heirs determined as if the beneficiary had died on plr-126079-07 date and in accordance with the intestacy laws of state then in force and applicable to an intestate’s separate personal_property e if a beneficiary a disclaims his or her remainder_interest in and testamentary general_power_of_appointment over all or part of his or her share but does not disclaim the income_interest in that share or part thereof and b dies within years of decedent’s death then i the disclaimer shall be of no effect with respect to the disclaimed remainder_interest because under the trust agreement only persons who are then living will share in the remainder of the trust when the trust terminates ii on the beneficiary’s death with respect to any disclaimed portion the beneficial_ownership of the beneficiary’s share cannot be diverted because the power_of_appointment exercisable at the beneficiary’s death was disclaimed and does not pass to any other person and thus will pass to the beneficiary’s heirs determined at the beneficiary’s death under the applicable intestacy laws of state then in force that govern an intestate’s separate personal_property and iii on the beneficiary’s death with respect to any undisclaimed portion the beneficial_ownership of the beneficiary’s share will pass to the beneficiary’s heirs determined at the beneficiary’s death under the applicable intestacy laws of state then in force that govern an intestate’s separate personal_property but only to the extent that the beneficiary does not exercise his or her testamentary general_power_of_appointment over the undisclaimed portion f under current law a surviving_spouse is an heir with respect to property if current law remains unchanged the surviving_spouse of a beneficiary would succeed to a portion of the beneficiary’s share as an heir of the beneficiary if a the beneficiary dies within years of decedent’s death or b the beneficiary disclaims and survives until the trust terminates with respect to the latter event if a beneficiary i disclaims a remainder_interest in and testamentary general_power_of_appointment over all or part of his or her share but does not disclaim the income_interest in that share or part thereof and ii survives until the trust terminates if current law remains unchanged the person who is the spouse of the beneficiary at the time of the trust’s termination succeeds to a portion of the beneficiary’s share as a person who would be an heir of the beneficiary if the beneficiary had died at the time of the trust’s termination in either event to the extent the spouse of a beneficiary disclaims his or her interest in the beneficiary’s share the beneficial_ownership of the beneficiary’s share shall pass as if that spouse had predeceased the beneficiary and neither that spouse nor any heir of that spouse as such but not as an heir of the beneficiary will have any interest in such beneficiary’s share however any such disclaimer shall not affect the rights of any subsequent spouse of such beneficiary plr-126079-07 in addition the proposed order would modify the trust to add the following provision to the end of article iv of the trust sec_5 notwithstanding sec_3 of this article iv if property is to be distributed upon the termination of the trust the original trust to a person who has not then attained thirty-five years of age the trustee shall anything in this agreement and declaration of trust notwithstanding and even though that property is vested in that person make payment or distribution of that property to the trustee to be held in a_trust for that person under this sec_5 a sec_5 trust if that person attains thirty years of age after the termination of the original trust one-half of the funds held for that person shall be distributed to that person free of trust with the other half continuing to be held in trust until that person attains thirty-five years of age provided however that while the person is under age thirty-five years of age the trustee may withhold any of the property otherwise distributable as long as the trustee believes that it would not be in the best interests of the person to receive such property before attaining age thirty-five if that person has attained thirty years of age upon the termination of the original trust but not thirty-five years of age then only one-half of that property shall be held in trust for that person with the other half distributed to that person outright and free of trust upon the termination of the original trust provided however that while the person is under age thirty-five years of age the trustee may withhold any of the property otherwise distributable as long as the trustee believes that it would not be in the best interests of the person to receive such property before attaining age thirty-five any sec_5 trust shall be held until the person for whom it is held attains thirty-five years of age or dies whichever event occurs first at that time trustee shall pay all property then on hand in that person’s sec_5 trust to that person or if that person is not then living as that person may appoint by his or her will including to that person’s estate or to the creditor’s of that person or that person’s estate if that person is not then living and fails to exercise his or her testamentary general_power_of_appointment set forth in the preceding sentence trustee shall pay all property then on hand in that person’s sec_5 trust to the personal representative of that person’s probate_estate equitable_title to the property held in that person’s sec_5 trust shall be vested in that person and alienable no election shall be made so as to violate any applicable rule_against_perpetuities or rule against restraint on alienation while property is held in that person’s sec_5 trust the net_income and principal thereon in whole or in part may be paid to that person to such extent as trustee in its sole judgment may determine the following disclaimers are proposed plr-126079-07 spouse proposes to disclaim an amount equal to the disclaimed fraction of the remainder of her share of the trust the power_of_appointment with respect to the disclaimed fraction of her share of the trust and each interest to which spouse may become entitled with respect to each disclaiming person’s share if the disclaimer giving rise to such interest is effective on or before date the disclaimed fraction for spouse is a son proposes to disclaim an amount equal to the disclaimed fraction of the remainder of his share of the trust the power_of_appointment with respect to the disclaimed fraction of his share of the trust and each interest to which son may become entitled with respect to each disclaiming person’s share if the disclaimer giving rise to such interest is effective on or before date the disclaimed fraction for son is b son proposes to disclaim an amount equal to the disclaimed fraction of the remainder of his share of the trust the power_of_appointment with respect to the disclaimed fraction of his share of the trust and each interest to which son may become entitled with respect to each disclaiming person’s share if the disclaimer giving rise to such interest is effective on or before date the disclaimed fraction for son is c son proposes to disclaim an amount equal to the disclaimed fraction of the remainder of his share of the trust the power_of_appointment with respect to the disclaimed fraction of his share of the trust and each interest to which son may become entitled with respect to each disclaiming person’s share if the disclaimer giving rise to such interest is effective on or before date the disclaimed fraction for son is d daughter proposes to disclaim an amount equal to the disclaimed fraction of the remainder of her share of the trust the power_of_appointment with respect to the disclaimed fraction of her share of the trust and each interest to which daughter may become entitled with respect to each disclaiming person’s share if the disclaimer giving rise to such interest is effective on or before date the disclaimed fraction for daughter is e spouse spouse and spouse each propose to disclaim any future_interest in the trust that her or she may have as a new trust_beneficiary specifically spouse spouse and spouse will disclaim all future income interests to which he or she may become entitled all future powers of appointment to which he or she may become entitled and all future remainder interests to which he or she may become entitled each disclaimant represents that he or she has not exercised dominion or control_over any interest in the trust nor have they received or accepted any rights titles power or interests in or benefits under the trust under state statute acceptance by a beneficiary of an interest in a_trust is presumed a beneficiary of a_trust may disclaim an interest in the trust in whole or in plr-126079-07 part the disclaimer must be in writing evidencing the disclaimant’s irrevocable and unqualified refusal to accept the interest and delivered to the trustee no later than nine months after the later of the day on which the transfer creating the interest in the beneficiary is made the day on which the beneficiary attains age or in the case of a future_interest the date of the event that causes the taker of the interest to be finally ascertained and the interest to be indefeasibly vested under state statute a disclaimer is effective as of the date of the transfer of the interest involved and relates back for all purposes to the date of the transfer and is not subject_to the claims of any creditor of the disclaimant unless the terms of the trust provide otherwise the interest that is the subject of the disclaimer passes as if the person disclaiming had predeceased the transfer and a future_interest that would otherwise take effect in possession or enjoyment after the termination of the estate or interest that is disclaimed takes effect as if the disclaiming beneficiary had predeceased the transfer under state statute the terms of a_trust may be modified as long as the change is not inconsistent with a material purpose of the trust and provided that all beneficiaries of the trust have consented to the order or are deemed to have consented to the order you have represented that there have been no additions to the trust after date the following rulings have been requested the decedent had a general_power_of_appointment created before date with respect to the trust the release or lapse of which is nontaxable for federal estate and gift_tax purposes with respect to the decedent the decedent’s power lapsed at his death on date and thus the trust is not included in decedent’s gross_estate each beneficiary’s power_of_appointment over his or her respective share of the trust is a general_power_of_appointment created on or before date a court order that adopts the terms of the agreement in the form of the proposed order will not result in a a taxable gift_for federal gift_tax purposes by any of the beneficiaries b inclusion of any portion of the trust in the gross_estate of any beneficiary whose death occurs prior to termination of the trust or c a loss of gst tax effective date exempt status for any portion of the trust the proposed disclaimers of interests in the trust by any of the beneficiaries a will be qualified_disclaimer and will not result in a taxable gift_for federal gift_tax purposes by any of the beneficiaries b will not subject any portion of the trust to federal estate_tax in the gross_estate of any beneficiary and c will not result in a loss of gst tax effective date exempt status with respect to any portion of the trust plr-126079-07 law and analysis ruling_request sec_1 and sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which a general_power_of_appointment created on or before date is exercised by the decedent a by will or b by a disposition which is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent's gross_estate under sec_2035 to inclusive but the failure to exercise such a power or the complete release of such a power shall not be deemed an exercise thereof sec_2041 defines the term general_power_of_appointment as a power exercisable in favor of the decedent the decedent's_estate the decedent's creditors or creditors of the decedent's_estate sec_20_2041-1 of the estate_tax regulations states that a power_of_appointment includes all powers that are in substance and effect powers of appointment regardless of the nomenclature used in creating the power sec_20_2041-2 provides that a failure to exercise a general_power_of_appointment created before date or a complete release of the power is not an exercise of the power the phrase a complete release means a release of all powers over all or part of the property subject_to the power_of_appointment as distinguished from the reduction of a power_of_appointment to a lesser power thus if the decedent completely relinquished all powers over one-half of the property subject_to a power_of_appointment the power is completely released as to that one-half sec_2514 provides that an exercise of a general_power_of_appointment created on or before date shall be deemed a transfer of property by the individual possessing such power but the failure to exercise such a power or the complete release of such a power shall not be deemed an exercise thereof sec_25_2514-2 of the gift_tax regulations provides that a failure to exercise a general_power_of_appointment created on or before date or a complete release of such a power is not considered to be an exercise of a general_power_of_appointment the phrase a complete release means a release of all powers over all or a portion of the property subject_to a power_of_appointment as distinguished from the reduction of a power_of_appointment to a lesser power thus if the possessor completely relinquished all powers over one-half of the property subject_to a power_of_appointment the power is completely released as to that one-half the trust was created in year prior to date during his life decedent was the sole beneficiary of the trust under sec_3 of article iii decedent was granted a general power to appoint the income and corpus of the trust if decedent did not exercise this power the power would lapse at his death and decedent’s heirs under the laws of descent and distribution would as takers in default of his exercise of the power succeed him as beneficiaries of the trust decedent did not exercise his power therefore under article iii sec_3 of the trust decedent’s plr-126079-07 heirs under state law succeed him as beneficiaries of the trust decedent’s heirs under state law are decedent’s spouse spouse who will receive a one-third share of the trust and decedent’s four children son son son and daughter each of whom will receive a one-sixth share of the trust collectively referred to as the beneficiaries based on the facts submitted and the representations made we conclude that decedent possessed a general_power_of_appointment created before date because decedent did not exercise his general_power_of_appointment the power lapsed on decedent’s death a lapse of a power created prior to date is not an exercise of that power therefore the trust is not included in decedent’s gross_estate for federal estate_tax purposes in addition as discussed above under sec_3 of article iii each beneficiary of the trust was granted a general power to appoint the income and corpus of the trust if a beneficiary did not exercise this power the power would lapse at his or her death and the beneficiary’s heirs under the laws of descent and distribution would as takers in default of his or her exercise of the power succeed him as beneficiaries of the trust sec_3 specifically states that the term beneficiary applies not only to decedent but to all his successors to beneficial interests under the trust therefore based on the facts submitted and the representations made we also conclude that each beneficiary’s power_of_appointment over his or her respective share of the trust is a general_power_of_appointment created before date ruling_request generation-skipping_transfer_tax sec_2601 imposes a tax on each generation-skipping_transfer sec_2611 defines a generation-skipping_transfer to mean a taxable_distribution a taxable_termination or a direct_skip section a of the tax_reform_act_of_1986 tra of provides that except as provided in b the gst tax applies to generation-skipping transfers made after date section b a of the tra of provides that the gst tax does not apply to transfers under a_trust that was irrevocable on date but only to the extent that the transfer is not made out of corpus added to the trust after date sec_26_2601-1 of the generation-skipping_transfer_tax regulations provides that a_trust qualifies for transitional rule relief from the provisions of chapter of the code if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date under sec_26_2601-1 any trust in existence on date will be considered an irrevocable_trust except as provided in sec_26_2601-1 or c relating to property includible in a grantor's gross_estate under sec_2038 and sec_2042 plr-126079-07 sec_26_2601-1 provides that an addition made after date to an irrevocable_trust will subject_to the provisions of chapter a proportionate amount of distributions from and terminations of interests in property held in the trust generally if any portion of a_trust remains in the trust after the taxable exercise release or lapse of a general_power_of_appointment over that portion of the trust the value of the entire portion of the trust subject_to the power that was exercised released or lapsed will be treated as an addition to the trust however the portion of a_trust that remains after a nontaxable release or lapse of a general_power_of_appointment is not treated as a constructive_addition see sec_26_2601-1 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 gst tax under sec_26_2601-1 or will not cause the trust to lose its exempt status the rules contained in sec_26_2601-1 are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purpose of sec_1001 sec_26_2601-1 provides that a court-approved settlement of a bona_fide issue regarding the administration of the trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject_to chapter if the settlement is the product of arm’s length negotiations and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement a settlement that results in a compromise between the position of the litigating parties and reflects the parties’ assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy paragraph b i a b or c of this section by judicial reformation or nonjudicial reformation that is valid under applicable state law 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 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 sec_26_2601-1 example describes a situation where in plr-126079-07 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 example concludes that 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 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 sec_26_2601-1 example illustrates a situation where the trustee of a_trust files a construction suit with the appropriate local court to resolve an ambiguity in the trust instrument and the court issues an order construing the terms of the trust instrument the court’s construction resolves a bona_fide issue regarding the proper interpretation of the instrument and is consistent with applicable state law as it would be interpreted by the highest court of the state therefore the trust will not be subject_to chapter in this case the trust was irrevocable on date as noted above the lapse of decedent’s general_power_of_appointment with respect to trust did not constitute a taxable transfer for estate or gift_tax purposes further it is represented that there have been no actual or constructive additions to the trust after date accordingly the trust is exempt from gst tax under sec_26 b term i of agreement provides that decedent had an unrestricted right to appoint his interest in the trust term ii provides that decedent’s interest in the trust passed to his heirs the identity of decedent’s heirs and the share allocated to each heir under state law term ii also addresses beneficiaries who succeed to decedent’s rights under the trust terms i and ii restate and clarify the provisions of the trust see sec_26_2601-1 example plr-126079-07 term iii and paragraphs a and b of the proposed order provide that after the decedent’s death the trust will be accounted for as separate shares term iii is similar to the modification described in sec_26_2601-1 example term iv provides that each beneficiary has the right to assign his or her interest in the trust term v provides that each beneficiary has an unrestricted testamentary right to appoint his or her share of the trust if he or she dies before the trust terminates pursuant to term vi if a beneficiary dies within years after the decedent’s death without appointing his or her share the beneficiary’s entire share will pass to the persons who are the beneficiary’s heirs determined in accordance with the intestacy law of state in force at the date of the beneficiary’s death terms iv v and vi are consistent with the trust and clarify the provisions of the trust see sec_26 b i e example term vii provides that if a beneficiary disclaims a remainder_interest and a power_of_appointment but not an income_interest and if the beneficiary survives for years after decedent’s death the beneficiary’s income_interest in his or her share will terminate on date and the disclaimed portion of the remainder_interest in his or her share will pass to the persons who would have been the beneficiary’s heirs determined as if the beneficiary had died on date paragraphs c d e and f of the proposed order also address the proposed disclaimers article iii sec_3 of the trust provides that a t the time of the death of beneficiary his equitable interest in said trust estate unless disposed of otherwise by said beneficiary shall pass to and vest in his heirs in accordance with the laws of descent and distribution then in force applicable to the equitable interest of such beneficiary in said trust the trust does not specifically provide for disclaimers by a beneficiary pursuant to state statute a disclaimer is effective as of the date of the transfer of the interest involved and relates back for all purposes to the date of the transfer state statute does not define the word transfer in the present case the meaning of transfer and thus when a disclaimant is deemed to have died affects who takes a disclaimed remainder_interest if the disclaimant is deemed to have died immediately before the remainder becomes possessory the takers are the beneficiary’s heirs if the beneficiary is deemed to have predeceased either the creation of the trust or the decedent’s death the remainder would pass to the decedent’s heirs the heirs of decedent differ from the heirs of the disclaiming beneficiaries term vii represents the parties’ resolution of this issue certain parties propose to disclaim all or a portion of their remainder and the power_of_appointment with respect to the disclaimed portion but will retain their current income_interest with respect to the disclaimed portion a power_of_appointment is plr-126079-07 personal to the donee if the donee dies the power terminates see simes and smith the law of future interests sec_943 based on the facts and representations term vii is a settlement of a bona_fide issue represents a compromise between the positions of the parties and reflects the parties’ assessments of the relative strengths of their positions term vii of agreement is within the range of reasonable outcomes term viii and the addition of article vi sec_5 to the trust under the proposed order provide that any property that would pass to a person who has not yet reached his or her 35th birthday will be retained in a vested interest trust for that person article iv sec_3 of the trust provides for outright distribution to the beneficiaries on the trust’s termination unlike the above-discussed terms term viii proposes a specific modification to the trust under term viii the assets in each trust will immediately vest in the named beneficiary and will be held for the exclusive benefit of the named beneficiary each such beneficiary will have a testamentary general_power_of_appointment if a beneficiary fails to exercise such power the trust property will be distributed to the beneficiary’s estate therefore if not earlier terminated through distributions to the named beneficiary on the death of the named beneficiary any remaining principal and undistributed_income will be includible in the beneficiary’s gross_estate of federal estate_tax purposes under these circumstances term viii does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation than the person or persons who held the beneficial_interest prior to the modification nor does term viii extend the time for vesting of any beneficial_interest in the trust beyond the period provided in the trust based on the facts submitted and representations made we conclude that a court order that adopts the proposed terms under agreement will not subject the trust the separate shares created under term iii of agreement or any distributions therefrom to the gst tax imposed by sec_2601 gift_tax sec_2501 provides that a tax is imposed for each calendar_year on the sec_2511 provides that the gift_tax applies whether the transfer is in trust transfer of property by gift during such calendar_year or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible_property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in him or her no power to change its disposition whether for his or her own benefit or for the benefit of another the gift is complete but sec_25_2511-1 of the gift_tax regulations provides that as to any whether an agreement settling a dispute is effective for gift_tax purposes sec_25_2511-1 provides that any transaction in which an interest in plr-126079-07 if upon a transfer a donor reserves any power over its disposition the gift may be wholly incomplete or may be partially complete and partially incomplete depending upon all the fact in the particular case property is gratuitously passed or conferred upon another regardless of the means or device employed constitutes a gift subject_to tax depends on whether the settlement is based on a valid enforceable claim asserted by the parties and to the extent feasible produces an economically fair result see 674_f2d_761 9th cir citing 387_us_456 thus state law must be examined to ascertain the legitimacy of each party’s claim if it is determined that each party has a valid claim the service must determine that the distribution under the settlement reflects the result that would apply under state law if there is a difference it is necessary to consider whether the difference may be justified because of the uncertainty of the result if the question were litigated fide controversy between the parties and the proposed settlement is based on arm’s length negotiations among all the interested parties other than spouse all parties who hold an interest in the trust including any minors and unborn heirs have been represented in the negotiations that preceded the proposed order that incorporates the agreement with respect to terms i ii iii iv v vi and viii the interests of the parties remain the same after the agreement of the rights of the parties under applicable state law that would be applied by the highest court of state accordingly based on the facts submitted and representations made we conclude that a court order that adopts the terms of agreement will not cause any of the beneficiaries to have made a taxable gift_for purposes of the federal gift_tax under sec_2501 all property to the extent of the interest therein of the decedent at the time of his or her death as discussed above term vii of agreement represents the resolution of a bona the terms of agreement clarify ambiguous terms of the trust and are reflective sec_2033 provides that the value of the gross_estate shall include the value of estate_tax sec_2036 provides generally that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or plr-126079-07 for any period which does not in fact end before his death the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2037 provides generally that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise if possession or enjoyment of the property can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property and the value of such reversionary_interest immediately before the death of the decedent exceeds five percent of the value of such property sec_2038 provides generally that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power to alter amend revoke or terminate or where any such power is relinquished during the 3-year period ending on the date of the decedent's death in order for to apply a decedent must have made a transfer of property of any interest therein except in case of a bona_fide sale for adequate_and_full_consideration in money_or_money's_worth under which the decedent retained an interest in or power over the income or corpus of the transferred property in the present case the terms of agreement do not constitute transfers within the meaning of therefore based on the facts and representations we conclude that a court order that adopts the terms of agreement will not result in inclusion of any portion of the trust in the gross_estate under of any beneficiary whose death occurs prior to the termination of the trust ruling_request sec_2046 provides that for estate_tax purposes disclaimers of property interests passing upon death are treated as provided in sec_2518 sec_2518 provides that if a person makes a qualified_disclaimer with respect to any interest in property then for purposes of the estate and gift_tax the disclaimed interest is treated as if it never passed to that person sec_2518 defines a qualified_disclaimer as an irrevocable and unqualified refusal by a person to accept an interest in property but only if -- the refusal is in writing plr-126079-07 the writing is received by the transferor of the interest the transferor’s legal_representative or the holder of the legal_title to the property to which the interest relates not later than the date that is months after the later of -- a the date on which the transfer creating the interest in the person is made or b the day on which the person attains age the person disclaiming the interest has not accepted the interest or any of its benefits and as a result of such refusal the interest passes without any direction on the part of the person making the disclaimer and passes either - a to the spouse of the decedent or b to a person other than the person making the disclaimer sec_2518 provides that a disclaimer with respect to an undivided portion of an interest which meets the requirements of sec_2518 shall be treated as a qualified_disclaimer of such portion of the interest under sec_25_2518-1 if a qualified_disclaimer is made the property is treated for federal gift estate and generation-skipping_transfer_tax purposes as passing directly from the transferor and not from the disclaimant to the person entitled to receive the property as a result of the disclaimer thus the disclaimant is not treated as making a gift sec_25_2518-3 provides that if the requirements of the section are satisfied the disclaimer of all or an undivided portion of any separate interest in property may be a qualified_disclaimer even if the disclaimant has another interest in the same property sec_25_2518-3 provides that a power_of_appointment with respect to property is treated as a separate interest in such property and such power_of_appointment with respect to all or an undivided portion of such property may be disclaimed independently from any other interests separately created by the transferor in the property further a disclaimer of a power_of_appointment with respect to property is a qualified_disclaimer only if any right to direct the beneficial_enjoyment of the property which is retained by the disclaimant is limited by an ascertainable_standard sec_25_2518-3 provides that the disclaimer of an undivided portion of a separate interest in property which meets the other requirements of a qualified_disclaimer under sec_2518 and the corresponding regulations is a qualified_disclaimer an undivided portion of a disclaimant's separate interest in property must consist of a fraction or percentage of each and every substantial interest or right owned by the disclaimant in such property and must extend over the entire term of the disclaimant's interest in such property see sec_25_2518-3 example regarding the disclaimer of a fractional share of a residuary bequest plr-126079-07 sec_25_2518-2 provides that for purposes of the time limitation the month period from making a disclaimer generally is to be determined with reference to the taxable transfer creating the interest in the disclaimant in the case of a general_power_of_appointment the holder of the power has a 9-month period after the creation of the power in which to disclaim a person to whom any interest in property passes by reason of the exercise or lapse of a general power may disclaim such interest within a 9-month period after the exercise or lapse in the present case spouse son son son daughter spouse spouse and spouse each propose to disclaim the above described interests in the trust each disclaimer will be in writing each disclaimant represents that he or she has not accepted any benefits in the property subject_to the disclaimers and that the disclaimers are valid under state law the disclaimed interest will pass without any direction on the part of any disclaimant as discussed above decedent’s power_of_appointment under trust was created before date and is a general_power_of_appointment described in sec_2041 and sec_2514 decedent did not exercise his power and therefore under sec_25_2518-2 the period for making the disclaimer is measured from the date of decedent’s death the date when the interest is deemed created based on the facts and representations if the proposed disclaimers by spouse son son son daughter spouse spouse and spouse are delivered to trustee within nine months of decedent’s death and provided the disclaimers are valid under state law the disclaimers will be qualified disclaimers for purposes sec_2518 therefore the disclaimers by any of the beneficiaries will not result in a taxable gift_for federal gift_tax purposes by any of the beneficiaries will not subject any portion of the trust to federal estate_tax in the gross_estate of any beneficiary and will not result in a loss of gst tax effective date exempt status with respect to any portion of the trust it should be noted however that a recipient of a disclaimed interest under the above- proposed disclaimers must disclaim that interest within months of date see sec_25_2518-2 the rulings contained in this letter are based upon information submitted and representations made by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayers requesting it sec_6110 provides that it may not be used or cited as precedent plr-126079-07 in accordance with the power_of_attorney on file with this office a copy of this sincerely james f hogan senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries letter is being sent to the taxpayer enclosures copy for sec_6110 purposes copy of this letter cc


internal_revenue_service number release date index number ---------------------------- ------------------------------ ------------------------------------------- ------------- -------------------------------- in re ------------------------------------ department of the treasury washington dc person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b09 plr-101753-04 date march legend decedent ------------------------------------------------------------------------------------------------- ------------------------- trust a date trust b ------------------------------------------------------------------------------------------------- ----------------------- ------------------- ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ----------------------- ------------------- ----------- --------- ------- ------------------ date x y year date dear ---------- extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-3 of the procedure and administration regulations to make an allocation of taxpayer’s generation-skipping_transfer gst tax exemption created trust a on date trust a is an irrevocable_trust for the primary benefit of decedent’s daughter and her descendants decedent created trust b on date trust b is an irrevocable_trust for the primary benefit of decedent’s son and his descendants the dispositive provisions of the trusts are identical with only the this is in response to your letter dated date requesting an the facts and representations submitted are summarized as follows decedent plr-101753-04 intended beneficiaries and the identity of the second trustee differing each of the trusts was funded in year with dollar_figurex in cash and bonds valued at dollar_figurey article second of each trust agreement provides that decedent intends that each trust to the maximum permissible degree shall be exempt from the federal generation- skipping transfer_tax because of allocations made under sec_2631 of the internal_revenue_code benefit of the named beneficiary and directs the trustees to pay the net_income to the named beneficiary in quarterly or more frequent installments article third b provides for discretionary distributions of principal to the named beneficiary by any trustee who is not a descendant of decedent article third a of each trust agreement provides that the trust is held for the article third c of each trust agreement provides that upon the death of the potential beneficiaries include individuals who are two or more generations below named beneficiary the trustees shall distribute the assets among a class consisting of decedent’s issue other than the named beneficiary and the spouses of the issue including the named beneficiary’s spouse in such proportions and manner as the named beneficiary appoints in his or her last will and testament if the named beneficiary does not exercise the limited_power_of_appointment the trust property shall be held in trust for the named beneficiary’s spouse if then living article third d provides that on the death of the survivor of the named beneficiary and the named beneficiary’s spouse the trust property shall be divided into shares for the then living issue of the named beneficiary per stirpes the grantors’ generation therefore distributions from trusts a and b may be subject_to the gst tax united_states gift and generation-skipping_transfer_tax return for year the gift_tax_return was prepared by a certified_public_accountant on whom the decedent relied to advise her on tax matters for many years the transfers were reported on the gift_tax_return and copies of the trust agreements were attached to the return the accountant however inadvertently failed to allocate decedent’s available gst_exemption to the transfers exemption to the year transfers to trust a and trust b was discovered by decedent’s estate_planning attorney during the administration of decedent’s estate time to make allocations of her gst tax exemption under sec_2642 with respect to the assets transferred to trust a and trust b in year in addition taxpayer requests that the personal representative for decedent’s estate has requested an extension of decedent reported the transfer to trust a and trust b on a timely filed form_709 decedent died on date the failure to allocate decedent’s available gst sec_2631 provides that for purposes of determining the inclusion_ratio sec_2601 imposes a tax on every generation-skipping_transfer a generation- sec_2632 provides that any allocation by an individual of his or her gst sec_2642 provides that except as provided in sec_2642 if the allocation plr-101753-04 the allocation be based on the value of the assets transferred to the trusts as of the original transfers so that each trust has an inclusion_ratio of zero skipping transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip every individual shall be allowed a gst tax exemption of dollar_figure adjusted for inflation under sec_2631 which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor tax exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed of the gst tax exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer or is deemed to be made under sec_2632 or c the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period on and after the close of such estate_tax_inclusion_period prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst tax exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute for allocating the gst tax exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a gst_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an sec_2642 provides generally that the secretary shall by regulation sec_2642 provides that in determining whether to grant relief under notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time requests for relief under sec_301_9100-3 will be granted when the taxpayer under sec_301_9100-1 a regulatory election includes an election whose due sec_301_9100-3 provides that in general requests for extensions of time plr-101753-04 allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except in subtitles e g h and i for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under the rules of sec_301_9100-3 date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an election described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or to advise the taxpayer to make the election the requirements of sec_301_9100-3 have been satisfied therefore decedent’s estate is granted an extension of time of days from the date of this letter to file a supplemental form_709 for the year transfers to trust a and trust b the form_709 should include a notice of allocation properly allocating taxpayer’s gst_exemption to the year transfers the allocations will be effective as of the date of the transfer and the gift_tax value of the transfers to trust a and trust b will be used in determining the amount of gst tax exemption to be allocated to the trusts the inclusion ratios for trust a and trust b will be determined under sec_2642 and sec_2642 because the amount of decedent’s remaining gst_exemption at the time of the year transfers exceeded the amount of the transfers to trust a and trust b each trust will have an inclusion_ratio of zero for gst tax purposes a copy of this letter should be attached to the supplemental form sec_709 and filed with the internal_revenue_service center cincinnati ohio a copy is included for this purpose based on the facts submitted and the representations made we conclude that sec_301_9100-3 provides that a taxpayer is deemed to have acted the rulings contained in this letter are based upon information and except as expressly provided herein no opinion is expressed or implied plr-101753-04 concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter we are specifically not ruling on the gift_tax value of the transfers to trust a and trust b representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination to the taxpayers’ representative provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office this letter is being sent this ruling is directed only to the taxpayers requesting it sec_6110 sincerely heather c maloy heather c maloy associate chief_counsel passthroughs special industries enclosures cc ------------------------------------ ------------------------------------------ ---------------------------------------------------------------------- ------------------------------------- -------------------------------- ------------------------------------- ------------------------ -----------------------------


department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n contact person telephone number identification_number number release date se t eo ra g date date uil index legend m n p q b dear ------------------ this responds to a letter from the authorized representatives of m and p who request rulings under sec_501 and sec_4976 of the internal_revenue_code on behalf of m and p facts m a b sponsors a collectively-bargained disability plan n n benefits are paid from p p is a voluntary employees’ beneficiary association which is recognized exempt from federal income_taxation as an organization described in sec_501 of the code presently n pays temporary disability td benefits pincite of pre-disability earnings to eligible employees td benefits begin upon expiration of employer-funded sick_pay sick_pay benefits and end after weeks of disability when a disabled_employee may qualify for long- term disability ltd benefits pincite of pre-disability earnings in addition to disability benefits n provides monthly survivor income benefits to family members of deceased covered employees and former employees sick_pay is a payroll practice funded by m from its general assets and is paid pincite of pre- disability earnings the duration of sick_pay varies with the employee’s years_of_service due to changes in m’s competitive environment and financial circumstances m intends to seek q’s approval to eliminate sick_pay and to amend n’s disability benefit arrangements q is a union that represents employees of m that are eligible for sick_pay and n benefits subject_to q’s approval m contemplates no longer providing sick_pay instead n will be amended so that sickness and disability benefits under n begin sooner while the specific terms of the amended n are subject_to the collective bargaining process the amended n benefit structure is expected to pay sickness and disability benefits pincite of pre-disability earnings for a set number of hours after which benefits will be reduced to a lower level eg and then to for the remainder of the 26-week period at the end of weeks ltd benefits may begin additional qualifying benefits as agreed to by q may also be paid from n and p rulings requested m and p request the following rulings contingent on q’s approval of the changes to n and p the use of p’s assets to pay expanded collectively-bargained benefit obligations for disability and sick_pay benefits and other permissible benefits under an amended n will not adversely affect p’s tax exempt status under sec_501 of the code and will not be considered prohibited private_inurement to m the use of p’s assets to pay expanded collectively-bargained benefit obligations for disability and sick_pay benefits and other permissible benefits under an amended n will not be a prohibited reversion that is subject_to the excise_tax under sec_4976 of the code law sec_501 of the code exempts organizations described in sec_501 from federal income_taxation sec_501 of the code describes voluntary employees’ beneficiary associations providing for the payment of life sick accident or other_benefits to the members of such association or their dependents or designated beneficiaries if no part of the net_earnings of such association inures other than through such payments to the benefit of any private_shareholder_or_individual sec_1_501_c_9_-3 of the income_tax regulations provides that the life sick accident or other_benefits provided by a voluntary employees’ beneficiary association must be payable to its members their dependents or their designated beneficiaries a voluntary employees’ beneficiary association is not operated for the purpose of providing life sick accident or other_benefits unless substantially_all of its operations are in furtherance of the provision of such benefits further an organization is not described in sec_501 if it systematically and knowingly provides benefits of more than a de_minimis amount that are not permitted life sick accident or other_benefits sec_1_501_c_9_-3 of the regulations provides that the term sick_and_accident_benefits means amounts furnished to or on behalf of a member or a member’s dependents in the event of illness or personal injury to the member or dependent a sick and accident benefit includes an amount_paid to a member in lieu of income during a period in which the member is unable to work due to sickness or injury sec_1_501_c_9_-4 of the regulations provides that no part of the net_earnings of an employees’ association may inure to the benefit of any private_shareholder_or_individual other than through the payment of benefits permitted by sec_1_501_c_9_-3 the disposition of property to or the performance of services for a person for less than the greater of fair_market_value or cost including indirect_costs to the association other than as a life sick accident or other permissible benefit constitutes prohibited inurement sec_4976 of the code imposes an excise_tax on an employer that maintains a welfare_benefit_fund if the fund provides a disqualified_benefit the tax is equal to percent of the disqualified_benefit sec_419 of the code explains that a welfare_benefit_fund includes any organization described in sec_501 under sec_4976 of the code a disqualified_benefit includes any portion of a welfare_benefit_fund reverting to the benefit of the employer analysis if q agrees m will no longer provide sick_pay rather if approved through collective bargaining benefits under n for sickness and disability will begin earlier these collectively- bargained expanded benefits will be paid under n from p it is possible that other qualifying benefits may be offered through the amended n and p as a result of the collective bargaining process m will amend n only upon receiving approval from q the sickness and disability benefits that m intends to provide through n and p with q’s approval are benefits described in sec_1_501_c_9_-3 and c of the regulations that an organization described in sec_501 of the code is allowed to provide its members the payment of benefits permitted under sec_1_501_c_9_-3 does not constitute prohibited inurement for purposes of sec_1_501_c_9_-4 therefore the use of p’s assets to fund collectively- bargained sickness disability and other permissible benefits would not adversely affect p’s status as an organization described in sec_501 of the code and would not result in prohibited inurement furthermore the use of p’s assets to provide disability sickness and other permissible benefits to members and their dependents would not be considered a reversion of p’s assets to m within the meaning of sec_4976 conclusion accordingly based on the information submitted and contingent upon q’s approval of the sickness disability and other permissible benefits provided through n and p as described above we rule as follows the use of p’s assets to fund disability sickness and other_benefits permitted under sec_1_501_c_9_-3 of the regulations will not adversely affect the status of p as an organization described in sec_501 of the code the use of p’s assets to fund disability sickness and other_benefits permitted under sec_1_501_c_9_-3 of the regulations will not result in inurement that is prohibited under sec_1_501_c_9_-4 of the regulations the use of p’s assets to fund disability sickness and other_benefits permitted under sec_1_501_c_9_-3 of the regulations will not result in any portion of p’s assets reverting to the benefit of m and m will not be considered to have provided a disqualified_benefit under sec_4976 of the code these rulings are made on the understanding that there will be no material changes in the facts upon which they are based except as specifically ruled on above no opinion is expressed concerning the federal_income_tax consequences of the transactions described above under any other provision of the code this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to the authorized representatives of m and p a copy of this letter should be kept in the permanent records of m and p this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter enclosure notice michael seto manager exempt_organizations technical guidance group robert fontenrose sincerely


t c memo united_states tax_court james p and marilyn s cashman petitioners v commissioner of internal revenue respondent docket no filed date james p cashman pro_se eric w johnson for respondent memorandum opinion pajak special_trial_judge respondent determined a deficiency of dollar_figure in petitioners' federal income taxes unless otherwise indicated section references are to the internal_revenue_code in effect for the year in issue respondent conceded the adjustments for the increase to taxable_income of dollar_figure for a state_income_tax refund and for the self-employment_tax of dollar_figure and its corresponding dollar_figure deduction respondent filed a motion to dismiss for lack of prosecution with respect to petitioner marilyn s cashman which was granted pursuant to this court's order we held that marilyn s cashman is liable for a deficiency in federal_income_tax for in a reduced_amount after concessions this court must decide whether james cashman petitioner is entitled to deduct dollar_figure of claimed schedule c profit or loss from business_expenses in if petitioner is not entitled to deduct this amount both petitioners will be liable for a deficiency in federal_income_tax for in the reduced_amount of dollar_figure some of the facts in this case have been stipulated and are so found petitioners resided in stillwater minnesota at the time they filed their petition in petitioner incorporated world youth foundation inc under the laws of minnesota the corporation's name was changed to i d solutions inc in the corporation's name was again changed in to i d club inc 1i d club in i d club was involuntary dissolved by the minnesota secretary of state i d club was a private 24-hour emergency information relay service where a family could register children or any other individual it d club would maintain information on each registered individual that could be used in emergency situations petitioner testified that he did not consider i d club to be a corporation because it never filed corporate returns never had minutes or meetings and was not in good standing with the state he stated this business was not turned on it was not in operation it was all being set up to be turned on to be a corporation at some point this was not an operating system in from the time i d club and its predecessors were initially incorporated throughout the corporation never had any gross_receipts however in i d club entered into various agreements with third parties petitioner would sign for the corporation or as its president no documents were signed in petitioner's name personally without the corporation listed under his name petitioner took no steps to dissolve the corporation prior to when it was automatically dissolved by the state petitioners reported dollar_figure of expenses on their schedule c for i d club the expenses consisted of car and truck expenses of dollar_figure legal and professional services of dollar_figure office expense of dollar_figure supplies of dollar_figure meals and entertainment of dollar_figure utilities of dollar_figure and other expenses of dollar_figure because there was no income reported on the schedule c petitioners claimed a dollar_figure loss respondent disallowed the deductions for all of these expenses respondent argues that the business was a corporation and its losses may not be taken on petitioners' individual tax_return that because the business was not an ongoing business research into a future business is not a deductible loss and that petitioner failed to substantiate the claimed expenses because we agree with respondent as to the first contention we need not address respondent's other arguments usually an individual may not claim the deductions of a corporation 319_us_436 payments made by a shareholder to his corporation or a third person for the benefit of the corporation are neither deductible business_expenses of the shareholder nor expenses_incurred for the production_of_income 64_tc_989 such payments are treated as contributions to capital by the shareholder and must be regarded as an additional cost of the stock id a deduction is allowable only if the expenditures are made to protect or promote the shareholder's own trade_or_business id the trade_or_business of the corporation must be considered separately from the trade_or_business of the shareholder id the corporate form may be disregarded where it is a sham or unreal moline properties v commissioner supra pincite in this case petitioner did not operate any trade_or_business on his own the only business he was involved with was i d club petitioner argues that the corporate identity should be disregarded because he did not think of it as a separate_entity from himself while this may be the case petitioner is the one who elected the corporate form for i d club when it was initially created petitioner received the benefits of the election of the corporate status for i d club moreover i d club was operating as a corporation when petitioner entered into agreements on i d club's behalf i d club was created with a real business_purpose and in its initial operations it conducted legitimate business transactions i d club was not a sham corporation there is no reason why we should disregard the corporate entity accordingly petitioner is not entitled to deduct expenses of i d club we sustain respondent's determination to reflect the foregoing decision will be entered for respondent in the amount of the reduced deficiency


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division uniform issue list no sep op br ty legend state a employer m plan x group b employees proposed ordinance o form f ladies and gentlemen in reply to this letter is a request for as supplemented by letters dated date and date hereafter the original request made on behalf of employer m concerning the federal tax treatment of certain contributions made to plan x under sec_414 of the internal_revenue_code code the original request has been revised amended and replaced by your request for a letter_ruling dated date as supplemented and amended by letters dated date date date date date date and date a letter_ruling dated september you have submitted the following facts and representations employer m is a political_subdivision of state a employer m maintains plan x a defined_benefit_plan that provides pension disability survivorship and death_benefits for group b employees plan x is a qualified_plan under sec_401 a of the code and its most recent favorable determination_letter was issued on date plan x receives mandatory_contributions from employees which are picked up by employer m pursuant to sec_414 of the code plan x provides a defined benefit at normal_retirement_date which for group b employees is the attainment of age or if earlier the completion of years of credited service employer m grants to group b employees paid time off for absences from work due to illness known as sick leave vacations known as annual leave as a substitute for working on holidays known as holiday leave and as compensation_for working overtime known as compensatory time such paid time off is accrued by each group b employee as it is earned subject_to a maximum cap the total number of hours of the various types of unused paid time off accrued by a group b employee is known as that employee's accrued unused leave upon retirement or other termination of employment employer m pays a group b employee his or her termination pay which is the value of the employee's accrued unused leave as of his or her retirement or termination_date at the employee's hourly rate in effect at the time of retirement or termination employer m proposes to permit group b employees who have served in the military or engaged in other law enforcement activities prior to being employed by employer m to purchase credited service under plan x for that military service or other law enforcement service up to a maximum of four years ‘the proposed transaction would permit group b employees purchasing such credited service to elect to pay for such purchase by having employer m pick up these additional service_credit contributions under sec_414 of the code when these contributions are made through payroll deduction a participant is required at the time of choosing to purchase credited service to elect whether to make additional contributions by a single lump sum payment pay in installments or pay a single payment for part of the purchase_price with the balance paid in installments a participant electing installment payments could elect to have those payments made through payroll deduction and picked up by employer m in order to permit the pick up of the above referenced contributions employer m proposes to adopt proposed ordinance o to pick up such contributions through payroll deduction proposed ordinance o requires employer m to pick up the contributions made pursuant to an irrevocable payroll deduction authorization form this form form f which is signed by both the group b employee and employer m states that the group b employee authorizes the deduction from salary for pick up purposes and understands that this authorization is binding and irrevocable form f includes the number of months during which the deductions will be made and the dollar amount of the deductions -3- further the group b employee agrees in form f that with respect to the additional service_credit being purchased by the picked-up contributions designated therein plan x will only accept payment from employer m and not directly from the group b employee plan x precludes prepayment by the group b employee of any amounts designated in form f the group b employees are thus precluded from revoking the pick-up election by making payments directly to plan x form f also provides that the contributions are being picked up by employer m and paid directly to plan x and the group b employee does not have the option of receiving the amounts directly in case the group b employee retires or such employee's employment is otherwise terminated before all the contributions which are due to plan x for additional service_credit are made proposed ordinance o and form f authorize employer m to deduct and pick up the balance due from the payment for accrued unused leave termination pay which is paid_by employer m to the group b employee upon termination these termination_payments for accrued unused leave which are paid at the group b employee's hourly wage rate in effect at the time of termination would be reportable on form_w-2 as taxable wages but for the pick up should the amount of termination pay be more than the balance due to plan x then plan x will first be paid the full balance due by employer pickup and then the remaining termination pay will be paid to the group b employee as taxable wages reportable on form_w-2 should the amount of termination pay not be enough to pay the full balance due to plan x then the entire termination_payment would be picked up and paid to plan x then the amount of additional service_credit to be purchased would either be pro-rated or the group b employee could elect to make a lump sum payment of the balance due from his or her own after-tax funds payable prior to the payment of the employee's first pension benefit check you represent that a group b employee is paid termination_payment within two pay periods after termination of employment further you represent that the pay_period is weekly ‘thursday through wednesday and the employees are paid each week so a retiring employee receives payment for all sums due within weeks of retirement proposed ordinance o and form f provide that with respect to the pick up by employer m from payments for accrued unused leave termination pay such pick ups from termination pay can only be made if form f is signed by both employer m and the group b employee at least three months before such employee's termination_date the election made by the group b employee will further provide that the contributions being picked up although designated as employee contributions are being paid_by employer m directly to plan x in lieu of contributions by the group b employee and that the group b employee may not choose to directly receive the amounts deducted from the employee's termination pay instead of having them paid_by employer m to plan x with respect to irrevocable elections you represent that i a group b employee who elects to purchase a particular type of past_service_credit may not make more than one irrevocable election to purchase that type of service_credit ii a group b employee may make more than one irrevocable election to purchase past_service_credit provided any subsequent election is for the purchase of a different type of the past_service_credit is irrevocable and does not alter or amend the terms and conditions of any prior election to purchase past_service_credit and iii a group b employee may not make more than one irrevocable election to use termination pay as herein described the effective date of this pick-up arrangement is the later of or as follows the later of the date that proposed ordinance o is adopted by employer m or the date it is put into effect or the later of the date that form f has been signed by both parties or the date it is put into effect the pick up from both regular payroll and termination pay does not apply to any contribution made before the effective date or to any contribution that relates to compensation earned for services before the effective date except with respect to termination pay for which the pick up may apply to accrued unused leave which was earned but had not yet been paid as of the effective date of the employer pick up based on the above facts and representations you have requested the following rulings that the amounts deducted by employer m from group b employees' regular compensation or termination pay and paid to plan x for the purchase of additional service_credit i qualify as contributions that are picked up by employer m under sec_414 of the code it are excluded from the group b employees’ gross_income until such time as they are distributed to the employees iii under the provisions of sec_3401 of the code are excluded from wages for purposes of the collection of income_tax at source on wages so that no withholding is required from the group b employees’ wages with respect to such picked-up contributions and iv that the picked-up contributions will not be treated as annual_additions for purposes of sec_415 c of the code sec_414 of the code 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 a or a of the code established by a state government or political_subdivision thereof or by any agency_or_instrumentality of the foregoing where the contributions of employing units are designated as employee contributions but where any employing unit picks up the contributions the contributions so picked up shall be treated as employer contributions revrul_77_462 1977_2_cb_358 addresses the federal_income_tax treatment of contributions picked up by the employer within the meaning of sec_41 h of the code in revrul_77_462 the employer school district agreed to pick up the required contributions of the eligible employees under the plan the revenue_ruling held that under the provisions of sec_3401 a a of the code the school district’s picked-up contributions to the plan are excluded from wages for purposes of the collection of income_tax at source on wages and no federal_income_tax withholding is required from employees’ salaries with respect to the said picked-up contributions ‘the revenue_ruling further held that the school district’s picked-up contributions are excluded from the gross_income of employees until such time as they are distributed to the employees revrul_81_35 1981_1_cb_255 and revrul_81_36 1981_1_cb_255 provide guidance as to whether contributions will be considered as picked up by the employer both revenue rulings establish that the following two criteria must be satisfied the employer must specify that contributions although designated as employee contributions are being paid_by the employer in lieu of contributions by the employee and the employee must not have an option of choosing to receive the contributed amounts directly or to have them paid_by the employer to the plan in revrul_87_10 1987_1_cb_136 the 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 under the proposed transaction group b employees owing money for the purchase of additional service_credit can elect through a binding irrevocable election to have employer m pick up the contributions due from the group b employee for group b employees so electing employer m will make the contributions on behalf of the group b employee in lieu of contributions made by the employee no group b employee electing employer pick up will have the option of receiving the contribution directly instead of having said amount contributed to plan x the proposed pick-up election agreement form f provides that the contributions are being picked up by employer m and paid directly to plan x and the group b employee does not have the option of receiving the amounts directly the pick up from both regular payroll and termination pay does not apply to any contribution made before the effective date of the pick-up arrangement or to any contribution that relates to compensation earned for services before the effective date except with respect to termination pay for which the pick up may apply to accrued unused leave which was earned but had not yet been paid as of the effective date of the employer pick up with respect to the pick up from payments for accrued unused leave termination pay to pay for any balance due to plan x upon the employee's retirement or termination said pick up will be made pursuant to the binding irrevocable election made at the time the group b employee elected to purchase such service provided form f was signed by both employer m and the group b employee at least three months before the employee's termination_date under the binding irrevocable election employer m will pick up and pay directly to plan x any balance which remains due from the group b employee to plan x at the time of retirement or termination the group b employee will not have the option of choosing to receive the contributed amounts directly instead of having them paid_by employer m to plan x the binding irrevocable election form f signed at the time the group b employee agrees to purchase the additional service_credit through employer pick up will serve to authorize both the deduction from regular payroll and the deduction from termination pay the pick up from both regular payroll and termination pay does not apply to any contribution made before the effective date of the pick-up arrangement or to any contribution that relates to compensation earned for services before the effective date except with respect to termination pay for which the pick up may apply to accrued unused leave which was earned but had not yet been paid as of the effective date of the employer pick up in this case the amounts deducted by employer m from group b employees’ regular compensation and termination pay and contributed to plan x for the purchase of additional service_credit in accordance with form f described above and the provisions of proposed ordinance o meet the requirements of revrul_81_35 and revrul_81_36 by providing that employer m will make contributions on behalf of the group b employees and in lieu of the contributions by such employees and that no group b employee will have the option of receiving the contribution directly instead of having said amount contributed to plan x further form f will be implemented so as to specify the designated pick up contributions as such before the period to which such contributions relate accordingly we conclude that the amounts deducted by employer m from group b employees’ regular compensation or termination pay and paid to plan x for the purchase of additional service_credit i qualify as contributions that are picked up by employer m under sec_414 of the code ii are excluded from the group b employees' gross_income until such time as they are distributed to the employees iii are excluded from wages for purposes of the collection of income_tax at source on wages under sec_3401 a a of the code so that no withholding is required from group b employees’ wages with respect to such picked-up contributions with respect to ruling_request number iv 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 sec_415 of the code sec_1 d 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 of the code employee contributions to a defined_benefit_plan however that are picked up by the employer pursuant to sec_414 are treated as employer contributions and as such are not annual_additions to a separate defined_contribution_plan for purposes of section c and that the benefits attributable to employer contributions including benefits attributable to picked up contributions are subject_to the limits of sec_415 b of the code accordingly with respect to ruling_request number iv we conclude that the picked-up contributions will not be treated as annual_additions for purposes of sec_415 of the code ‘these rulings apply only if the effective date for the commencement of any proposed pick up as specified in proposed ordinance o cannot be any earlier than the later of or as follows the later of the date employer m adopts proposed ordinance o or puts it into effect or the later of the date form f is signed by both employer m and the group b employee or the date it is put into effect these rulings are based on the assumption that plan x meets the requirements for qualification under sec_401 of the code 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 sec_3121 of the code this ruling is limited to the pick up of contributions to purchase credited service for prior military or law enforcement services pursuant to sec_3 e of plan x this ruling expresses no opinion as to the validity of the pick-up arrangement pertaining to the mandatory employee contributions under plan x ‘this ruling is based on the conditions that a a group b employee who elects to purchase a particular type of past_service_credit may not make more than one irrevocable election to purchase that type of service_credit b a group b employee may make more than one irrevocable election to purchase past_service_credit provided any subsequent election is for the purchase of a different type of the past_service_credit is irrevocable and does not alter or amend the terms and conditions of any prior election to purchase past_service_credit and c a group b employee may not make more than one irrevocable election to use termination pay as herein described further this ruling is based on form f and proposed ordinance o as set forth in your letters dated november and date respectively this letter_ruling is directed only to the taxpayer that requested it sec_61 k of the code provides that it may not be used or cited by others as precedent the original of this letter_ruling is being sent to your authorized representative in accordance with a power_of_attorney on file in this office if you have any questions please contact sincerely yours eigncd joyce ls eluyd joyce e floyd manager employee_plans technical group enclosures deleted copy of the letter notice