internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi - plr-118637-00 date date x a b c trust trust trust trust trust d1 d2 d3 d4 plr-118637-00 d5 d6 year year year year dear this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting relief under sec_1362 of the internal_revenue_code the information submitted states that effective d1 x elected to be an s_corporation on d2 a transferred shares of x to trust and b transferred shares of x to trust trust trust and trust trusts a and b the grantors of trusts intended for each of the trusts to be treated as an electing_small_business_trust esbt a and b relied on their attorneys to file elections on behalf of trust trust trust trust and trust to be treated as esbts however the service_center has no evidence of receiving elections to be treated as esbts from any of the trusts additionally in d3 although none of the trusts met the requirements to be a qualified_subchapter_s_trust qsst trust trust trust and trust each received correspondence from the service accepting an election to be a qsst upon receiving acceptance as qssts c x’s chief financial officer questioned x’s attorneys concerning the correspondence from the service according to c’s representations x’s attorneys promised to correct the mistaken election acceptance to ensure that each of the trusts was a valid esbt until d4 c continued to question x’s attorneys regarding the elections however x’s attorneys failed to respond to inquiries in d5 c met with new attorneys and expressed concern about the trusts’ elections shortly after this meeting the new attorneys began working with c to try to resolve the situation in d6 the new attorneys concluded that x’s s election terminated on d2 as a result of the transfer of the x stock to trusts which were not eligible shareholders because no timely filed esbt elections on behalf of trusts were received by the service_center for year year year and year trusts x and x’s shareholders filed their federal_income_tax returns incorrectly plr-118637-00 c represents that the circumstances resulting in the termination of x’s election to be an s_corporation were inadvertent c represents also that x and its shareholders did not intend to engage in tax_avoidance or retroactive tax planning x and each person who was or is a shareholder of x at any time since d2 agree to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary with respect to such period sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that a small_business_corporation cannot have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that an electing_small_business_trust may be a shareholder in an s_corporation sec_1361 provides that the term electing_small_business_trust means any trust if i such trust does not have as a beneficiary any person other than i an individual ii an estate or iii an organization described in paragraph of sec_170 ii no interest in such trust was acquired by purchase and iii an election under sec_1361 applies to such trust sec_1361 provides that the term electing_small_business_trust shall not include i any qualified_subchapter_s_trust as defined in sec_1361 if an election under sec_1361 applies to any corporation the stock of which is held by such trust ii any trust exempt from tax under subtitle a and iii any charitable_remainder_annuity_trust or charitable_remainder_unitrust as defined in sec_664 sec_1361 provides that an election under sec_1361 shall be made by the trustee any such election shall apply to the taxable_year of the trust for which made and all subsequent taxable years of such trust unless revoked with the consent of the secretary notice_97_12 1997_1_cb_385 provides that the trustee of the esbt must file the esbt election within the time requirements prescribed in sec_1_1361-1 for plr-118637-00 filing qualified_subchapter_s_trust elections generally within the 16-day-and-2-month period beginning on the day that the stock is transferred to the trust sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that any termination under sec_1362 shall be effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or was terminated under paragraph or of sec_1362 the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken so that the corporation is a small_business_corporation or to acquire the required shareholder consents and the corporation and each person who was a shareholder in the corporation at any time during the period specified pursuant to sec_1362 agree to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we hold that x’s election to be an s_corporation effective d1 terminated on d2 because trust trust trust trust and trust failed to file esbt elections and were therefore ineligible shareholders we hold also that the termination of x’s s_corporation_election was inadvertent within the meaning of sec_1362 we further hold that under the provisions of sec_1362 x will be treated as an s_corporation effective d2 and thereafter provided x’s election to be an s_corporation was not invalid and provided that the election was not otherwise terminated under sec_1362 trust sec_1 through will be treated as electing small_business trusts under sec_1361 beginning on d2 for year year year and year the items of income deduction and credit attributable to any portion of the trusts treated as owned by a person under the grantor_trust_rules of subpart e including s_corporation stock and other_property the grantor portion must be taken into account on that individual’s tax_return pursuant to the rules applicable to grantor trusts under subpart e of subchapter_j other items of income deduction and credit must be attributed to either the s portion which includes the s_corporation stock or the non-s portion which includes all other assets of the trust the s portion is subject_to tax under the special rules of sec_641 while the non-s portion is subject_to the trust_taxation rules of subparts a through d of subchapter_j the grantor or another person who is treated as the owner plr-118637-00 of a portion of trusts includes in computing taxable_income items of deduction and credits against tax attributable to that portion of trusts under sec_671 additionally x’s shareholders must include their pro_rata share of the separately and non-separately computed items as provided in sec_1366 make adjustments to stock basis as provided in sec_1367 and take into account any distributions made by x as provided by sec_1368 additionally this ruling is conditioned upon the trusts filing within days following the date of this letter esbt elections pursuant to the procedures set forth in notice_97_12 with an effective date of d2 with the appropriate service_center a copy of this letter should be attached to the esbt elections if x trusts or any of x’s other shareholders fail to treat themselves as described above this ruling shall be null and void except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provision of the code specifically we express no opinion regarding whether x is otherwise eligible to be an s_corporation or whether trusts are valid esbts this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office we are forwarding a copy of this letter to x’s authorized representative sincerely yours j thomas hines chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number --------------------------------------------------- ------------------------------------- -------------------------- ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------- id no ------------- telephone number -------------------- refer reply to cc corp b02 plr-120261-12 date november legend foreign parent ----------------------------------------------- ------------------------------- ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------ ---------------------------------------- us parent ----------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------- ------------------------------------------------ intermediate parent ----------------------------------------------------------- -------------------------------------------------------------------- ---------------------------------------------------- ---------------------- sub ----------------------------------------------------------- --------------------------------------------------------------------------- proxy sub ----------------------------------------------------------- -------------------------------------------------------------------- --------------------------------------------- acquiring ----------------------------------------------------------- --------------------------------- agency ---------------------------------- plr-120261-12 department country x state a state b state c ------------------------------- -------- ------------- ------------- -------------------- business a ----------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------------------------- date date -------------------------- ----------------------- dear ---------------- this letter responds to your request for rulings dated date submitted by your authorized representatives on behalf of us parent and its affiliates the information provided in that letter and in later correspondence on date is summarized below the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination summary of facts on date foreign parent acquired all of the outstanding_stock in intermediate parent from third parties intermediate parent wholly owns sub which wholly owns proxy sub on date foreign parent contributed its stock in intermediate parent to us parent for no consideration after the transaction proxy sub was an indirect subsidiary of foreign parent prior to and following its acquisition by foreign parent and us parent proxy sub engaged in business a and has provided services to the department and various other u s government departments and agencies in order to perform certain services proxy sub is required to have security clearances granted by the department pursuant to a plan that is overseen by the agency because of the foreign indirect ownership of plr-120261-12 stock in proxy sub the department requires that proxy sub be effectively insulated from foreign ownership control or influence foci in order to maintain those clearances in order to create a security measure designed to insulate proxy sub from any foreign control or influence that might arise from foreign parent’s indirect ownership for stock in proxy sub foreign parent us parent intermediate parent sub proxy sub and the department have entered into a proxy agreement proxy agreement foreign parent us parent intermediate parent sub proxy sub and the department have executed the proxy agreement pursuant to the proxy agreement sub selected all of the initial proxy holders the proxy holders who are individuals required to be resident u s citizens have no prior contractual financial or employment relationships with foreign parent or entities controlled by foreign parent certify their willingness to accept their security responsibilities be eligible for the requisite security clearance and be approved by the agency sub’s interest in proxy sub was deposited with the proxy holders in order to enforce the terms of the proxy agreement however the proxy holders will not own an economic_interest in proxy sub pursuant to the proxy agreement the proxy holders became directors of proxy sub they are the only parties with the right to vote with respect to the management of proxy sub in their role as directors the proxy holders are specifically authorized to take certain actions such as the appointing or removing of non-proxy holder directors at their sole discretion the proxy holders are not authorized to undertake certain actions without the express written approval of sub or a successor to sub together shareholder such actions include the sale or disposal in any manner of capital assets or business of proxy sub including without limitation the issuance of any securities of proxy sub pledging mortgaging or encumbering proxy sub’s assets for purposes other than obtaining working_capital or the merger consolidation reorganization or dissolution of proxy sub selling transferring pledging or otherwise encumbering proxy sub’s stock and the filing or making any petition under the federal bankruptcy laws or any similar law or statute of any state or foreign_country furthermore at shareholder’s written request the proxy holders must take such action as necessary to recommend authorize approve or disapprove of these actions improvements for capital funds the proxy holders are required to act in good_faith as reasonably prudent business persons to protect sub’s legitimate economic interests in proxy sub as an ongoing business concern the proxy holders are required to act in the national interest but plr-120261-12 where it is not inconsistent with the national interest the proxy holders must act in the best interests of proxy sub in accordance with the corporate law of state a a proxy holder holds a limited term in that position however once appointed a proxy holder may be removed by shareholder before the end of his or her term only for acts of gross negligence or willful misconduct or acts in violation of the proxy agreement including his or her inability to protect the legitimate economic interests of proxy sub if agency approves the removal in the event of the end of term resignation removal death or the inability to act of any proxy holder shareholder will nominate a successor proxy holder which must be approved by the remaining proxy holders and the agency the proxy agreement is for a term of years if the proxy agreement is not terminated within five years it will continue in successive day periods until the agreement is revised restated or an alternate agreement is reached the proxy agreement may only be terminated by department and only in the following cases the sale of all of the business or stock of proxy sub to an entity not under foci when the existence of the proxy agreement is no longer necessary to maintain a facility security clearance for proxy sub when proxy sub is no longer required to maintain facility security clearance if there is a breach of the proxy agreement that requires the agreement to be terminated or the department determines that termination is in the national interest for any reason starting years from the effective date of the proxy agreement and when proxy sub and shareholder for any reason at any time petition the agency and the agency agrees the department may refuse to terminate the proxy agreement if its continuance is in the national interest and security the proxy agreement applies to and is binding upon all current and future subsidiaries of proxy sub however the proxy agreement does not apply to any subsidiary of proxy sub that is wholly or partially sold or transferred such that proxy sub no longer controls that subsidiary plr-120261-12 proposed transaction sub plans to transfer its stock in proxy sub to another member of the us parent’s affiliated_group acquiring after the transaction proxy sub will be wholly owned by acquiring us parent has not yet determined which member of us parent’s affiliated_group will receive the proxy sub stock that sub currently holds representation sec_1 sub and acquiring are each members of the us parent’s affiliated_group the proxy agreement is the only agreement affecting the legal or beneficial_ownership of proxy sub after the proposed transaction acquiring will be subject_to the proxy agreement to the same extent as sub prior to the proposed transaction and acquiring will have the same rights with respect to the stock of proxy sub as those sub had prior to the proposed transaction proxy sub is an includible_corporation as defined by sec_1504 any extension or revision of the proxy agreement successor agreement will contain terms similar to and not materially different from the initial proxy agreement rulings based solely upon the information and representations set forth above and in your submission we rule as follows during the period in which the proxy agreement or successor agreement is in place sub’s ownership of the stock of proxy sub constitutes beneficial and therefore direct ownership for purposes of sec_1504 following the proposed transaction acquiring’s ownership of the stock of proxy sub will constitute beneficial and therefore direct ownership for purposes of sec_1504 while sub continues its ownership of proxy sub proxy sub will be a member of us parent’s affiliated_group and will be permitted to join in the filing of a consolidated federal_income_tax return within the meaning of sec_1501 and sec_1502 of the code and regulations thereunder with us parent’s affiliated_group plr-120261-12 following the proposed transaction proxy sub will be a member of us parent’s affiliated_group and will be permitted to join in the filing of a consolidated federal_income_tax return within the meaning of sec_1501 and sec_1502 of the code and regulations thereunder with us parent’s affiliated_group procedural statements except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely gerald b fleming senior technician reviewer branch office of associate chief_counsel corporate


t c summary opinion united_states tax_court reginald james smith petitioner v commissioner of internal revenue respondent docket no 8241-06s filed date reginald james smith pro_se catherine g chang for respondent panuthos chief special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency in petitioner’s federal_income_tax of dollar_figure respondent also determined an accuracy-related_penalty in accordance with sec_6662 in the amount of dollar_figure for after concessions the issues for decision are whether a settlement payment received by petitioner is excludable from gross_income under sec_104 and whether petitioner is liable under sec_6662 for an accuracy-related_penalty background some of the facts have been stipulated and are so found the stipulation of facts and attached exhibits are incorporated herein by this reference at the time of the filing of the petition petitioner resided in oakland california petitioner worked as a warehouse employee at onyx environmental services hereinafter onyx from date through date when he was terminated on date petitioner and another individual filed a complaint for respondent concedes that petitioner is not liable for self-employment_tax additionally respondent introduced a form_4340 certificate of assessments payments and other specified matters showing an assessment of tax on date months after petitioner timely filed a petition with this court respondent was uncertain as to the basis for the assessment we presume that respondent has abated or will abate the assessment and will make no further assessments until the decision of the court is final see sec_6213 damages for sexual and racial harassment failure to take reasonable steps to prevent and correct harassment and retaliation against onyx and petitioner’s former supervisor in the superior court of the state of california county of contra costa in his suit against onyx petitioner stated a prayer for relief for compensatory_damages mental and emotional distress damages punitive_damages interest attorney’s fees and costs of suit incurred in date petitioner reached a settlement agreement with onyx and petitioner’s former supervisor with respect to the suit he filed on date pursuant to the settlement agreement onyx paid petitioner dollar_figure in petitioner timely filed his federal_income_tax return but he did not report the amount received from the settlement on the return respondent determined that dollar_figure was includable in petitioner’s gross_income and issued a notice_of_deficiency to petitioner on date discussion in general the commissioner’s determinations set forth in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving that these determinations are in error rule a 290_us_111 the 81-cent difference between the amount_paid and listed in the notice_of_deficiency is presumably due to rounding by respondent pursuant to sec_7491 the burden_of_proof as to factual matters shifts to respondent under certain circumstances because the facts are not in dispute we decide this case without regard to the burden_of_proof i taxability of payment petitioner received a taxpayer’s gross_income includes all income from whatever source derived unless excluded by a specific provision of the internal_revenue_code sec_61 gross_income does not include the amount of any damages other than punitive_damages received whether by suit or agreement and whether as lump sums or as periodic_payments on account of personal physical injuries or physical sickness sec_104 to qualify for this exclusion the taxpayer must demonstrate the underlying cause of action giving rise to the recovery is based upon tort or tort type rights and the damages were received on account of personal physical injuries or physical sickness 515_us_323 allum v commissioner tcmemo_2005_177 affd aftr 2d ustc par 9th cir the terms physical injury and physical sickness do not include emotional distress except to the extent of damages not in excess of the amount_paid for medical_care attributable to emotional distress sec_104 see also prasil v commissioner tcmemo_2003_100 when damages are received pursuant to a settlement agreement the nature of the claim that was the actual basis for settlement controls whether such amounts are excludable under sec_104 504_us_229 prasil v commissioner supra the determination of the nature of the claim is a factual inquiry and is generally made by reference to the settlement agreement 102_tc_116 affd in part and revd in part 70_f3d_34 5th cir if the settlement agreement lacks express language stating what the settlement amount was paid to settle we look to the intent of the payor based on all the facts and circumstances of the case including the complaint that was filed and the details surrounding the litigation 349_f2d_610 10th cir affg tcmemo_1964_33 allum v commissioner supra here the settlement agreement provides that onyx will pay petitioner dollar_figure in exchange for petitioner’s release and discharge of all claims against onyx the settlement agreement does not mention any physical injury or sickness it refers generally to all issues and claims surrounding petitioner’s employment at onyx and releases onyx from all claims rights demands actions obligations and causes of action of any and every kind known or unknown by petitioner looking beyond the settlement agreement we likewise find no indication that onyx intended the dollar_figure to compensate petitioner for physical injury as mentioned supra the complaint that petitioner filed in state court alleges sexual and racial harassment failure to take reasonable steps to prevent and correct harassment and retaliation and the prayer for relief requests compensatory_damages mental and emotional distress damages punitive_damages interest attorney’s fees and costs incurred the complaint says nothing about physical injury or physical sickness sustained by petitioner there is nothing in the record linking the settlement proceeds to any physical injury or sickness accordingly respondent’s determination on this issue is sustained based on our resolution of this issue we do not address whether the underlying cause of the state court action was based upon tort or tort type rights see allum v commissioner supra ii accuracy-related_penalty under sec_6662 sec_6662 provides that a taxpayer may be liable for a penalty of percent of the portion of an underpayment_of_tax attributable to negligence or disregard of rules or regulations sec_6662 and b the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code sec_6662 the term disregard includes any careless reckless or intentional disregard id the commissioner bears the burden of production with respect to the accuracy-related_penalty see sec_7491 116_tc_438 an exception to the sec_6662 penalty applies when the taxpayer demonstrates there was reasonable_cause for the underpayment and the taxpayer acted in good_faith with respect to the underpayment sec_6664 whether the taxpayer acted with reasonable_cause and in good_faith is determined by the relevant facts and circumstances on a case-by-case basis see stubblefield v commissioner tcmemo_1996_537 sec_1_6664-4 income_tax regs circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all the facts and circumstances including the experience knowledge and education of the taxpayer sec_1_6664-4 income_tax regs the most important factor is the extent of the taxpayer’s effort to assess the proper tax_liability stubblefield v commissioner supra sec_1_6664-4 income_tax regs as discussed above petitioner worked for onyx as a warehouse employee stocking and keeping inventory after he was terminated in petitioner had difficulty finding a new job petitioner was evicted from his home and lived in his car for several months because he could not pay the rent and had no other place to stay petitioner also fell behind on paying bills and student loans although petitioner eventually found a new job it paid close to minimum wage and provided no health benefits petitioner sustained at least one injury from an accident while he was uninsured and he had to pay the related expenses out of pocket the record is unclear as to whether petitioner received the form 1099-misc miscellaneous income issued by onyx given the circumstances described herein it seems unlikely that petitioner would have appreciated the significance of the form 1099-misc even if he did receive it even though failure to receive a form 1099-misc does not necessarily constitute reasonable_cause for failure to report income see goode v commissioner tcmemo_2006_48 we find that petitioner’s termination from employment his eviction resulting in temporary homelessness his health issues and the technical nature of the law as to the exclusion of income under sec_104 are factors that weigh in his favor viewing all the facts and circumstances including the experience knowledge and education of the taxpayer we conclude that petitioner has demonstrated reasonable_cause for failing to the parties stipulated that petitioner received the settlement proceeds and that onyx issued a form 1099-misc which was submitted as an exhibit the record does not state that petitioner actually received the form 1099-misc report the settlement proceeds as income and that he acted in good_faith see sec_6664 accordingly he is not liable for the accuracy-related_penalty under sec_6662 to reflect the foregoing decision will be entered under rule


t c memo united_states tax_court michael p coghlan petitioner v commissioner of internal revenue respondent docket no 19460-06l filed date michael p coghlan pro_se gregory j stull for respondent memorandum findings_of_fact and opinion foley judge the issue for decision is whether respondent abused his discretion in sustaining the decision to file a notice_of_federal_tax_lien relating to petitioner’s and tax_liabilities findings_of_fact on date petitioner untimely filed his federal_income_tax return on which he reported but did not pay a dollar_figure outstanding liability and elected married_filing_separately status in a notice_and_demand for payment issued on date respondent determined that petitioner was liable for the self-reported underpayment and sec_6651 and additions to tax bringing his total outstanding liability to dollar_figure on date respondent placed petitioner’s account in currently noncollectible cnc status and on date issued petitioner a final notice_of_intent_to_levy and notice of your right to a hearing relating to petitioner’s and unpaid income_tax liabilities on date respondent received petitioner’s form request for a collection_due_process_hearing in which petitioner disputed the proposed levy on date ms norman a settlement officer held a face-to-face hearing levy hearing with petitioner during the levy hearing petitioner disputed the balance due with respect to the tax_liability respondent in a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination issued on date recommended unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as amended and in effect for the years in issue that petitioner’s cnc status remain in effect until his financial status improved on date petitioner submitted to respondent a dollar_figure offer-in-compromise oic on date petitioner increased the oic to dollar_figure on date respondent rejected the revised oic and petitioner appealed the rejection respondent subsequently sustained his decision on date respondent issued petitioner a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 lien notice relating to and on date petitioner filed the form to dispute the validity of the tax_lien and the underlying liability relating to on date mr engelbrecht a settlement officer in memphis scheduled a telephone hearing for date by a letter dated date petitioner requested a face-to- face hearing on date the memphis appeals_office transferred the hearing request to respondent’s chicago appeals_office in a letter dated date ms dismukes a settlement officer in chicago scheduled a date telephone hearing with petitioner on date petitioner who had financial information he wanted the settlement officer to review left ms dismukes a voice mail message requesting a face-to-face hearing on date ms dismukes returned petitioner’s call during the telephone conversation petitioner requested that the lien be released explained the circumstances relating to the filing of his income_tax return and reiterated his desire for a face-to-face hearing in response ms dismukes explained the appeals process informed petitioner that he had not established a basis for withdrawal of the lien and scheduled a face-to-face hearing for date on date petitioner left ms dismukes a voicemail message stating that he would like to reschedule the hearing ms dismukes did not return petitioner’s call or reschedule the hearing on date respondent issued a notice_of_determination denying petitioner’s appeal relating to the filing of the tax_lien on date petitioner while residing in illinois filed his petition with this court seeking a review of the notice_of_determination opinion sec_6320 provides for tax_court review of the commissioner’s administrative determinations to proceed with the collection of tax_liabilities sec_6320 provides that if a taxpayer requests a hearing such hearing shall be held by the internal_revenue_service office of appeals sec_6320 provides that sec_6330 shall apply to the conduct and judicial review of the hearing sec_6320 hearings are informal proceedings and may but are not required to consist of a face-to-face meeting one or more written or oral communications between an appeals officer and the taxpayer or some combination thereof sec_301_6320-1 q a-d6 proced admin regs see 115_tc_329 ordinarily a taxpayer who presents in the request relevant nonfrivolous reasons for disagreement with the proposed levy will be offered an opportunity for a face-to-face hearing at the appeals_office closest to the taxpayer’s residence sec_301_6320-1 q a-d7 proced admin regs the taxpayer may raise at the appeals_office hearing any relevant issue relating to the unpaid tax or the lien notice including spousal defenses challenges to the appropriateness of the collection actions and offers of collection alternatives sec_6330 a taxpayer may also raise the underlying tax_liability if the person did not receive a notice_of_deficiency for or did not otherwise have an opportunity to dispute the tax_liability sec_6330 following the hearing the appeals officer must determine whether the collection action may proceed taking into account verification that all requirements of any applicable law or administrative procedure have been met relevant issues raised during the hearing and whether the collection action balanced the need for the efficient collection_of_taxes with the intrusiveness of the collection action see sec_6330 petitioner contends that he was not afforded an appropriate hearing and that ms dismukes failed to meet him face-to-face ms dismukes and petitioner had a telephone conversation on date during which petitioner raised issues relating to the tax_liability and the lien action on multiple occasions petitioner requested a face-to-face hearing to allow him to present information regarding his financial status and responsibilities ie child_support payments counseling expenses and health insurance premiums petitioner further contends that he was not given the opportunity to assert that these financial considerations were justifications to abate his tax_liability even though petitioner was not afforded a face-to-face hearing he has not been prejudiced furthermore petitioner requested that the court not remand his case to the appeals_office it is neither necessary nor productive to remand this case see 118_tc_162 117_tc_183 moreover release of the lien is not justified see sec_6325 petitioner also contends that he was defrauded by his former wife who elected married_filing_separately rather than married_filing_jointly status petitioner claims that his tax_liability would have been lower had they filed a joint return petitioner however had the opportunity to dispute the underlying liability at the levy hearing and thus is not entitled to challenge the underlying liability see 126_tc_356 where the validity of the liability is not properly part of the appeal the court reviews the appeals officer’s administrative determination for abuse_of_discretion see 115_tc_35 see also 114_tc_176 petitioner contends that in determining whether to sustain the lien notice respondent abused his discretion by failing to consider petitioner’s financial responsibilities and the revised oic respondent’s determination however had a sound basis in fact and law and was not arbitrary or capricious first the oic was submitted and rejected before respondent issued the lien notice second petitioner did not raise any collection alternatives third respondent pursuant to sec_6330 properly weighed the intrusiveness of the collection action against the need for the efficient collection_of_taxes finally the assessment of taxes and the recordation of the lien were carried out in accordance with all appropriate statutes and regulations accordingly we sustain respondent’s determination contentions we have not addressed are irrelevant moot or meritless to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc fip 4-plr-126743-02 date date legend taxpayer parent state x form1 form_2 form x form y dear this is in response to your submission dated date and subsequent submissions requesting rulings regarding the treatment for federal_income_tax purposes of certain payments under certain annuity_contracts issued by taxpayer facts taxpayer represents that it is a life_insurance_company within the meaning of sec_816 of the internal_revenue_code taxable as such under sec_801 plr-126743-02 taxpayer is a wholly owned subsidiary of parent parent and its subsidiaries have elected under sec_1504 of the code to file a life non-life consolidated federal_income_tax return as the common parent parent reports the group's income using the accrual_method and files the consolidated_return on a calendar_year basis taxpayer is a stock_life_insurance_company organized under the laws of state x it is licensed to conduct insurance_business in all states the district of columbia and puerto rico among other business activities taxpayer issues group annuity_contracts with individual certificates this request concerns certificates issued to individuals under taxpayer’s form_1 and form_2 labels the form_1 contract is comprised of a group_annuity_contract form x the form_1 certificate and data pages form y the form_2 contract which is substantially identical to the form_1 contract is comprised of the same group_annuity_contract and the form_2 certificate and data pages hereinafter the form_1 and form_2 contracts are referred to as the contracts the contracts are the type of annuity_contract commonly referred to as non- qualified deferred variable_annuity contracts purchased with after-tax money premiums for the contracts called contributions may be paid at any time before the annuity commencement_date acd the contractowner may allocate its contributions and earnings thereon among various variable investment options and fixed investment options available under the contracts each variable investment option corresponds to an investment fund of a taxpayer separate_account the sum of the amounts held for the contractowner in the investment options is called the annuity account value taxpayer represents that each investment fund of each separate_account underlying the contracts will at all relevant times meet the asset diversification requirements of sec_817 and sec_1_817-5 taxpayer further represents that it is the owner for federal_income_tax purposes of the assets of the separate_accounts underlying the contracts additional features of the contracts are described further below differences between the form_1 contract and the form_2 contract relate primarily to the periods during which they have been marketed the distribution channels used some of the investment options and a few of the product features none of the differences are relevant to this request the group_annuity_contract defines the acd as the date on which annuity payments are to commence compare this to the definition of annuity_starting_date in sec_72 and sec_1_72-4 the two definitions are not identical plr-126743-02 settlement provisions a at a contract's acd the annuity account value is applied to provide the normal form of annuity benefit which is an annuity payable for the life of the annuitant with years certain the purchase_price of the annuity is determined from the annuity purchase rate schedule guaranteed under and set forth in the contract the owner may alternatively elect an annuity benefit in another form offered by taxpayer which include a life_annuity a life_annuity with refund certain and a period certain annuity with the exception of the period certain annuity the annuity payout options are available on a single life or joint and survivor life basis b withdrawals at any time before a contract's acd the contractowner may request a withdrawal from or may surrender the contract such withdrawals and surrender benefits may be subject_to withdrawal charges c death_benefits in the event that the annuitant under a contract dies before the acd a death_benefit is paid as an annuity benefit or in a single sum as selected by each primary beneficiary3 under the contract the amount of this death_benefit is set forth on the contract's data page as a general_rule the death_benefit is equal to the annuity account value or if greater the guaranteed minimum death_benefit the guaranteed minimum death_benefit generally equals depending on the contractholder's election upon issuance of the contract the net contributions accumulated pincite interest to age or the highest annuity account value on a preceding anniversary plus contributions since that date and less withdrawals since that date the guaranteed minimum death_benefit for annuitants age at issue is equal to the total contributions paid for the contract less any withdrawals moreover as nonqualified_annuity contracts the contracts provide for distributions following the death of the owner of a contract in accordance with the requirements of sec_72 these provisions are contained in an endorsement attached to each contract used in the nonqualified market as relevant here under the current endorsement in the event of the death of the owner of a contract who is also the annuitant the beneficiary may elect to i continue the contract if the beneficiary is the while more than one individual may be named a primary beneficiary the text will sometimes refer to the beneficiary of a contract this guaranteed minimum death_benefit is not available in state x note that the contracts are not issued to applicants over age since the acd is the processing date which follows the applicant’ sec_90th birthday plr-126743-02 owner's spouse or ii receive an annuity benefit otherwise the amount will be paid in a lump sum the annuity benefit if elected will be paid out over the life of the beneficiary or for a period not extending beyond the beneficiary's life expectancy and payments must begin within one year after the owner's death if the owner is not the annuitant the named beneficiary must receive the entire annuity account value within five years or over a period not longer than his her life expectancy with annuity payments beginning within one year after the owner's death taxpayer seeks rulings regarding proposed changes to these provisions of the endorsements as described below d proposed additional distribution methods upon death of the owner in order to market effectively the contracts taxpayer believes that it must provide owners of the contracts and beneficiaries of deceased owners with more flexible distribution options in accordance with this goal of increasing the flexibility of the distribution methods available to the beneficiaries of deceased owners of contracts taxpayer proposes to revise its endorsements for the contracts among the changes as relevant here the revised endorsement would make available alternative distribution methods in cases where the owner dies and the named beneficiary is an individual who elects to receive payments over a period not extending beyond his her life expectancy specifically in the event that the owner of the contract dies before the acd a named beneficiary who is an individual may elect the beneficiary continuation option the bco under the bco if the annuity account value at the date of the owner's death is less than the guaranteed minimum death_benefit and the owner was the annuitant the annuity account value will be reset to equal the guaranteed minimum death_benefit only named beneficiaries who are individuals may elect the bco each electing named beneficiary is called a continuation beneficiary with respect to his her portion of the annuity account value taxpayer’s ruling requests only concern situations where the owner of the contract dies before the acd taxpayer represents that the requirements of sec_72 are met if the owner dies on or after the acd a named beneficiary for this purpose includes a successor owner in cases where the deceased owner is not the annuitant plr-126743-02 a continuation beneficiary will become the distributee8 under the contract with respect to that beneficiary's portion of the annuity account value distributions of the annuity account value will be made at least annually over a period not extending beyond the life expectancy of a continuation beneficiary will be made over a period of more than one full year from the acd and the first payment will begin no later than one year after the death of the owner of the contract in this regard a continuation beneficiary may irrevocably elect to receive its distributions in accordance with one of the three methods set forth in q a-12 of notice_89_25 1989_1_cb_662 as modified by revrul_2002_62 2002_42_irb_710 as follows a the required_minimum_distribution method life expectancy fraction method for this purpose a continuation beneficiary may elect that payments be determined based on his her life expectancy or any period certain that does not exceed his her life expectancy life expectancy will be determined in accordance with sec_1_401_a_9_-5 q a-6 b the fixed amortization_method amortization_method for this purpose a continuation beneficiary may also elect that payments be determined based on his her life expectancy or any period certain that does not exceed his her life expectancy life expectancy will be determined in accordance with sec_1_401_a_9_-5 q a-6 and the interest rate will be a chosen interest rate that complies with sec_2 c of revrul_2002_62 c the fixed annuitization method annuity factor method for this purpose a continuation beneficiary may also elect that payment be determined based on his her life expectancy or any period certain that does not exceed his her life expectancy the annuity factor will be derived using the single life table in sec_1_401_a_9_-9 q a-1 and using a chosen interest rate that complies with sec_2 c of revrul_2002_62 a continuation beneficiary receiving periodic_payments under one of these three distribution methods will have the right to transfer amounts among the investment options with respect to his her share of the annuity account value while receiving payments a continuation beneficiary may irrevocably elect at the time one of the three distribution methods is elected one of two withdrawal options under withdrawal taxpayer’s submission uses the term annuitant instead of distributee however one of the issues in this ruling letter is whether a continuation beneficiary is receiving amounts as an annuity under one of the proposed alternative methods of distribution this table is printed as appendix b to revrul_2002_62 plr-126743-02 option a continuation beneficiary may withdraw the entire remaining annuity account value apportioned to such continuation beneficiary at any time with the result that all other_payments will cease under withdrawal_option a continuation beneficiary may make additional withdrawals at any time the exercise of withdrawal_option may reduce future payments to the beneficiary because of its effect on the annuity account value a continuation beneficiary cannot make additional contributions to the contract or assign his her interest under the contract upon a continuation beneficiary's death his her remaining annuity account value will be paid in a lump sum unless the person designated by such deceased continuation beneficiary elects to continue the payment method over any remaining portion of the period initially selected by such continuation beneficiary rulings requested the distribution of the annuity account value payable to a continuation beneficiary under a contract in accordance with the life expectancy fraction method will satisfy the requirements of sec_72 the distribution of the annuity account value payable to a continuation beneficiary under a contract in accordance with the amortization_method will satisfy the requirements of sec_72 the distribution of the annuity account value to a continuation beneficiary under a contract in accordance with the annuity factor method will satisfy the requirements of sec_72 the answers under will not be affected by the fact that a continuation beneficiary has the right under withdrawal_option or withdrawal_option as applicable to receive additional payments from the annuity account value where such additional payments do not reduce any future payment except to the extent that the annuity account value under the contract is reduced and thus as a consequence there is a reduction in the future payments to the beneficiary where payments are made to a continuation beneficiary under the distribution methods described in above no amount will be constructively received by such continuation beneficiary before its actual payment under the specified distribution method where a continuation beneficiary has irrevocably elected withdrawal_option each periodic_payment made to such continuation beneficiary under the life expectancy fraction method the amortization_method and the annuity factor method shall be considered an amount_received_as_an_annuity to the extent that it does not plr-126743-02 exceed the amount computed by dividing the investment_in_the_contract at the date of death of the owner by the number of periodic_payments selected by such continuation beneficiary which period cannot exceed the life expectancy of such continuation beneficiary if payments are to be made more frequently than annually the amount so computed shall be multiplied by the number of periodic_payments to be made during the taxable_year for the purpose of determining the total amount which may be considered received as an annuity during such year to this extent the payments received shall be excludable from gross_income in the taxable_year in which received to the extent that the periodic_payments received under the contract during the taxable_year exceeds the amount thus considered to be received as an annuity during such year they shall be considered to be an amount not received as an annuity and shall be included in the gross_income of such continuation beneficiary where a continuation beneficiary has irrevocably elected withdrawal_option and subsequently exercises such option the complete surrender of the contract will be treated as an amount not received as an annuity the amount received shall be includible in the gross_income of such continuation beneficiary to the extent it exceeds the remaining investment_in_the_contract law and analysis sec_72 provides that except as otherwise provided in chapter of the code gross_income includes any amount_received_as_an_annuity whether for a period certain or during one or more lives under an annuity endowment or life_insurance_contract sec_72 provides in general that gross_income does not include that part of any amount_received_as_an_annuity under an annuity endowment or life_insurance_contract which bears the same ratio to such amount as the investment_in_the_contract as of the annuity_starting_date asd bears to the expected_return under the contract as of such date sec_72 provides that the portion of any amount_received_as_an_annuity which is excluded from gross_income under sec_72 shall not exceed the unrecovered investment_in_the_contract immediately before the receipt of such amount sec_72 provides generally for purposes of sec_72 that the asd in the case of any contract is the first day of the first period for which an amount is received as an annuity under the contract sec_1_72-4 provides generally that the first day of the first period for which an amount is received as an annuity under the contract is the later of i the date upon which the obligations under the contract become fixed or ii the first day of the period which ends on the date of the first annuity_payment plr-126743-02 sec_1_72-2 provides that amounts subject_to sec_72 are considered amounts received as an annuity only in the event that all of the following tests are met i they must be received on or after the annuity_starting_date as that term is defined in sec_1_72-4 ii they must be payable in periodic installments at regular intervals whether annually semiannually quarterly monthly weekly or otherwise over a period of more than one full year from the asd and iii except as indicated in sec_1_72-2 the total of the amounts payable must be determinable at the asd either directly from the terms of the contract or indirectly by the use of either mortality tables or compound interest computations or both in conjunction with such terms and in accordance with sound actuarial theory sec_1_72-2 provides notwithstanding the requirement of sec_1_72-2 if amounts are to be received for a definite or determinable time whether for a period certain or for a life or lives under a contract which provides that the amount of the periodic_payments may vary with investment experience then each such payment received shall be considered as an amount_received_as_an_annuity only to the extent that it does not exceed the amount computed by dividing the investment_in_the_contract as adjusted for any refund_feature by the number of periodic_payments anticipated during the time periodic_payments are to be made if payments are to be made more frequently than annually the amount so computed shall be multiplied by the number of periodic_payments to be made during the taxable_year for the purpose of determining the total amount which may be considered received as an annuity during such year to this extent the payments received shall be considered to represent a return of premiums or other consideration paid and shall be excludable from gross_income in the taxable_year in which received to the extent that the payments received under the contract during the taxable_year exceed the total amount thus considered to be received as an annuity during such year they shall be considered to be amounts_not_received_as_an_annuity and shall be included in the gross_income of the recipient sec_72 provides in general that sec_72 shall apply to any amount that is received under an annuity_contract and is not received as an annuity if no provision of the income_tax law other than sec_72 applies with respect to such amount sec_72 provides that any amount to which sec_72 applies if received on or after the asd shall be included in gross_income sec_72 provides that this rule shall not apply however to i any amount received whether in a single sum or otherwise under a contract in full discharge of the obligation under the contract which is in the nature of a refund of the plr-126743-02 consideration paid for the contract and ii any amount received under a contract on its complete surrender redemption or maturity in these circumstances the amount received shall be included in gross_income but only to the extent it exceeds the investment_in_the_contract sec_72 provides as a general_rule that any amount to which sec_72 applies if received before the asd - i shall be included in gross_income to the extent allocable to income_on_the_contract and ii shall not be included in gross_income to the extent allocable to the investment on the contract sec_72 provides generally that a contract will not be treated as an annuity_contract for purposes of the code unless it provides that if any holder of such contract dies before the asd the entire_interest in such contract will be distributed within years after the death of such holderdollar_figure sec_72 provides an exception for certain amounts payable over the life of a designated_beneficiary specifically sec_72 provides that if a b any portion of the holder’s interest is payable to or for the benefit of a designated_beneficiary such portion will be distributed in accordance with regulations over the life of such designated_beneficiary or over a period not extending beyond the life expectancy of such beneficiary and c such distributions begin not later than year after the date of the holder’s death or such later date as the secretary may by regulations prescribe then for purposes of sec_72 the portion referred to in sec_72 shall be treated as distributed on the day on which such distributions begin sec_1_451-1 provides that gains profits and income are to be included in gross_income for the taxable_year in which they are actually or constructively received by the taxpayer unless includible for a different year in accordance with the taxpayer’s method_of_accounting sec_72 is not applicable to qualified annuity_contracts see sec_72 plr-126743-02 sec_1_451-2 provides that income although not actually reduced to a taxpayer’s possession is constructively received by the taxpayer in the taxable_year that it is credited to the taxpayer’s account set apart for the taxpayer or otherwise made available so that the taxpayer may draw upon it any time or so that the taxpayer could have drawn upon it during the taxable_year if notice of intention to withdraw had been given however the regulation provides that income is not constructively received if the taxpayer’s control of its receipt is subject_to substantial limitations or restrictions ruling requests at the outset we note that taxpayer’s ruling_request concerns situations where the owner dies before the acd the definition of the acd in the contract is not identical to the definition of the asd in sec_72 and sec_1_72-4 however all deaths occurring before the acd will necessarily also occur before the asddollar_figure ruling requests ask us to conclude that the taxpayer’s three proposed distribution methods satisfy sec_72 sec_72 and c are factual requirements that are satisfied by taxpayer’s representations sec_72 provides that the portion qualifying for the exception under sec_72 must be distributed in accordance with regulations over the life of such designated_beneficiary or over a period not extending beyond the life expectancy of such beneficiary we conclude that the taxpayer’s three proposed distribution methods the life expectancy fraction method the amortization_method and the annuity factor method satisfy sec_72 requested ruling under the taxpayer's proposed distribution methods a continuation beneficiary has the right under withdrawal_option to withdraw his her entire remaining share of the annuity account value at any time additionally as described above under withdrawal_option a continuation beneficiary has the right to receive additional payments from his her remaining share of the annuity account value examination of the text and purpose of sec_72 indicates an intent that tax- deferred balances held under nonqualified_annuity contracts be distributed within certain periods following the death of the holder or where the holder is not a natural the acd under the contract does not occur until an annuity benefit has been paid the asd is generally the first day of the first period for which an amount is received as an annuity if no amount is received as an annuity benefit then the asd will not have been reached plr-126743-02 person the death of the specified annuitant we see no indication that sec_72 prevents the designated_beneficiary of a nonqualified_annuity contract holder from receiving payments under the contract more rapidly than is required we conclude that as long as any excess payments result in the permanent acceleration of the payout stream such excess payments are permitted under sec_72 therefore rulings will not be affected by the fact that a continuation beneficiary has the right under withdrawal_option or withdrawal_option to receive additional payments from the annuity account value requested ruling an annuity_contract consists of an accumulation_phase and a phase subsequent to the asd commonly referred to as annuitization during the accumulation_phase all amounts received by the holder are amounts_not_received_as_an_annuity during the annuitization phase if the requirements of sec_1_72-2 and are met amounts received by the holder may be characterized as amounts received as an annuity during the annuitization phase amounts received by the holder may in certain circumstances be characterized as amounts_not_received_as_an_annuity see sec_72 and sec_1_72-2 regardless of the characterization of the payments made to a continuation beneficiary as amounts received as an annuity or amounts_not_received_as_an_annuity no amount should be considered constructively received by a continuation beneficiary before its actual payment under the proposed distribution methods for several reasons first sec_72 provides a comprehensive scheme for the taxation of life_insurance endowment and annuity_contracts sec_72 and b provide in general for the taxation of amounts received as an annuity sec_72 in general taxes amounts received under life endowment and annuity_contracts that are not received as annuities both sec_72 and e literally require that amounts be received by the holder before they are included in gross_income the statute is silent whether amounts that are only constructively received within the meaning of sec_1_451-2 are received under sec_72 and includible in gross_income in accordance with the provisions of sec_72 second prior to the enactment of the tax equity and fiscal responsibility act of tefra 1982_2_cb_462 amounts_not_received_as_an_annuity that were paid out before the asd were includible in the holder’s gross_income only after the holder recovered the holder’s investment_in_the_contract the conference committee report to tefra explained the law prior to the statutory changes as follows plr-126743-02 under present law taxation of interest or other current earnings on a policyholder’s investment in an annuity_contract generally is deferred until annuity payments are received or amounts characterized as income are withdrawn amounts paid out before the annuity_starting_date are first a return_of_capital and are taxable as ordinary_income only after the investment_in_the_contract is recovered h_r conf_rep no 97th cong 2d sess 1982_2_cb_600 the conference committee generally followed the senate amendment which it described in the following terms the senate amendment provides that amounts received before the annuity_starting_date will be treated first as withdrawals of income earned on investments to the extent of such income the remainder being treated as a return_of_capital likewise loans under the contract or amounts received upon assignment or pledging of the contract will be treated as amounts received under the contract these provisions apply as of date but do not apply to amounts allocable to investments made before date to endowment or life_insurance contracts except to the extent prescribed in regulations or to contracts purchased under qualified_plans h_r conf_rep no pincite c b pincite thus the tefra changes to sec_72 do not indicate that congress intended to change prior_law which did not apply the doctrine_of constructive receipt to annuity_contracts third sec_72 which provides generally that if an individual receives a loan under an annuity_contract or pledges a portion of the value of such contract the amount of the loan or the portion of the value pledged will be treated as an amount not received as an annuity is inconsistent with applying the doctrine_of constructive receipt to annuities if the doctrine_of constructive receipt applied the increase in the annuity’s cash_value would be taxed once and would in many cases be subject_to tax a second time as an amount not received as an annuity under sec_72 a result inconsistent with general income_tax principles fourth the provisions of sec_264 disallowing deductions on indebtedness to purchase or carry certain annuities further support our conclusion that the doctrine_of constructive receipt does not apply to annuities in fact sec_264 generally disallows a deduction for any amount_paid or accrued on indebtedness incurred or continued to purchase an annuity_contract pursuant to a plan of purchase contemplating the note that the conference committee changed the effective date for the new provisions to date footnote added plr-126743-02 systematic borrowing of part or all of the increases in cash_value of the contract if such increases in cash_value were taxable under the doctrine_of constructive receipt there would be no abuse for sec_264 to correct fifth neither does sec_72 operate to require the designated_beneficiary to include amounts in gross_income prior to actual receipt under the procedures set forth in requested ruling sec_1 and sec_72 only requires prior to actual receipt the recognition of the income_on_the_contract in certain cases in which the annuity_contract is held by certain nonnatural persons as defined in sec_72 for purposes of sec_72 the term designated_beneficiary means any individual designated a beneficiary by the holder of the contract thus we conclude that where payments are made to a continuation beneficiary under the distribution methods set forth in requested ruling sec_1 and no amount will be constructively received by such continuation beneficiary before its actual payment under the specified distribution method requested ruling we note first that this requested ruling only pertains to the case where a continuation beneficiary has irrevocably chosen withdrawal_option there are three tests that an amount received that is subject_to sec_72 must meet to be considered an amount_received_as_an_annuity in the case of a variable_annuity such as the one in this case these requirements are found in a sec_1 b i b sec_1_72-2 and c sec_1_72-2 by means of reference from sec_1_72-2 we look at satisfaction of the third requirement first the third requirement sec_1_72-2 requires that amounts be received for a definite or determinable time whether for a period certain or for a life or lives under all three proposed distribution methods the periodic_payments will be made over a period measured by the life expectancy of a continuation beneficiary or over a fixed number of years that does not extend beyond the life expectancy of a continuation beneficiary clearly if a continuation beneficiary does not have a withdrawal_option the periodic_payments will be received for a determinable time now consider withdrawal_option which allows the recipient to make a complete withdrawal of any remaining annuity account value this withdrawal_option should not change the fact that the recipient receives amounts for a definite or a determinable time since the code expressly contemplates the occurrence of this situation after the asd sec_72 deals with the complete surrender of an annuity specifically sec_72 provides that sec_72 under which amounts_not_received_as_an_annuity after the asd shall be included in gross_income does not plr-126743-02 apply if sec_72 applies the clear implication here is that there can be a complete surrender of an annuity_contract after the asd the remaining two requirements for amounts received by a continuation beneficiary to be received as an annuity will be met if a continuation beneficiary receives amounts in accordance with one of the three distribution methods under the contract the acd will be the date distributions begin under the method of distribution chosen by such continuation beneficiary under sec_1_72-4 the asd will generally be the first day of the period which ends on the date of the first annuity_payment this will always be no later than the acd thus sec_1_72-2 the first requirement for an amount subject_to sec_72 to be considered an amount_received_as_an_annuity is satisfied sec_1_72-2 is also satisfied taxpayer has represented that periodic_payments to a continuation beneficiary will be made over a period of more than one full year from the acd since the asd will never be later than the acd the second element of the definition of amount_received_as_an_annuity is satisfied in the case of a variable_annuity even though the requirements of sec_1_72-2 sec_1_72-2 and the definite or determinable time requirement of sec_1_72-2 are met the amount of the distribution that is considered received as an annuity is limited under sec_1_72-2 each periodic_payment made to a continuation beneficiary under one of the three distribution methods shall be considered as an amount_received_as_an_annuity only to the extent it does not exceed the amount computed by dividing the investment_in_the_contract as adjusted for any refund_feature by the number of periodic_payments selected by such continuation beneficiary which period cannot exceed the life expectancy of such continuation beneficiary if payments are to be made more frequently than annually the amount so computed shall be multiplied by the number of periodic_payments to be made during the taxable_year for the purpose of determining the total amount which may be considered received as an annuity during such year to this extent payments received shall be excludable from gross_income in the taxable_year in which received to the extent that the periodic_payments received under the contract during the taxable_year exceeds the amount thus considered to be received as an annuity during such year they shall be considered to be an amount not received as an annuity and shall be included in the gross_income of such continuation beneficiary requested ruling this requested ruling also only pertains to the case where a continuation beneficiary has irrevocably chosen withdrawal_option plr-126743-02 the exercise of withdrawal_option by a continuation beneficiary results in the complete surrender of the contract since amounts received upon the complete surrender of the contract are not periodic_payments they are not amounts received as an annuity see sec_1_72-2 amounts received upon the complete surrender of an annuity are subject_to sec_72 see sec_72 further upon the complete surrender of an annuity the rule_of sec_72 does not apply and the amount received is includible in gross_income to the extent it exceeds the remaining investment_in_the_contract see sec_72 e conclusion sec_1 the distribution of the annuity account value payable to a continuation beneficiary under a contract in accordance with the life expectancy fraction method satisfies the requirements of sec_72 the distribution of the annuity account value payable to a continuation beneficiary under a contract in accordance with the amortization_method satisfies the requirements of sec_72 the distribution of the annuity account value to a continuation beneficiary under a contract in accordance with the annuity factor method satisfies the requirements of sec_72 the answers under will not be affected by the fact that a continuation beneficiary has the right under withdrawal_option or withdrawal_option as applicable to receive additional payments from the annuity account value where such additional payments do not reduce any future payment except to the extent that the annuity account value under the contract is reduced and thus as a consequence there is a reduction in the future payments to the beneficiary where payments are made to a continuation beneficiary under the distribution methods described in above no amount will be constructively received by such continuation beneficiary before its actual payment under the specified distribution method where a continuation beneficiary has irrevocably elected withdrawal_option each periodic_payment made to such continuation beneficiary under the life expectancy fraction method the amortization_method and the annuity factor method shall be considered an amount_received_as_an_annuity to the extent that it does not exceed the amount computed by dividing the investment_in_the_contract at the date of death of the owner by the number of periodic_payments selected by such continuation beneficiary which period cannot exceed the life expectancy of such continuation plr-126743-02 beneficiary if payments are to be made more frequently than annually the amount so computed shall be multiplied by the number of periodic_payments to be made during the taxable_year for the purpose of determining the total amount which may be considered received as an annuity during such year to this extent the payments received shall be excludable from gross_income in the taxable_year in which received to the extent that the periodic_payments received under the contract during the taxable_year exceeds the amount thus considered to be received as an annuity during such year they shall be considered to be an amount not received as an annuity and shall be included in the gross_income of such continuation beneficiary where a continuation beneficiary has irrevocably elected withdrawal_option and subsequently exercises such option the complete surrender of the contract will be treated as an amount not received as an annuity the amount received shall be includible in the gross_income of such continuation beneficiary to the extent it exceeds the remaining investment_in_the_contract except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically if withdrawal_option is irrevocably chosen by a continuation beneficiary no opinion is expressed concerning the taxation of any periodic_payments received by such continuation beneficiary or concerning the taxation of amounts received by such continuation beneficiary upon the exercise of withdrawal_option specifically no opinion is expressed regarding the application of the investor_control rules set forth in 749_f2d_513 8th cir cert_denied 473_us_905 revrul_81_225 1981_2_cb_12 as modified by revproc_99_44 1999_2_cb_598 revrul_80_274 1980_2_cb_27 revrul_77_85 1977_1_cb_12 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer plr-126743-02 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely s mark s smith chief branch office of associate chief_counsel financial institutions products