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-162105-02 date april legend son trust date donor spouse daughter grandchild ------------------------------------------------------------------------------------ ------------------------- ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ----------------------- ---------------------- -------------------------------- --------------------------------- ---------------- ------------------------------------------------------------------------------------ ------------------------- a trustee date b date bank family trusts c partnership d partnership partnership corporation e date successor trustee ---------------------- --------- --------------------- ---------------------- --- ------------------- -------------------------------------------- ------------------- --------- ------------------------- --- -------------------------- ----------------------------------------- ------------------------- -------------------- plr-162105-02 date date family date date court ------- ---------------- ----------------- -------------- ---------------- ------------------------------------------------------------------------------------ -------------------- this is in response to your letter dated date and prior ---------------------- ------ ---------------- -------------------- the information submitted and representations made are summarized as follows date f family grandchild dear ------------ correspondence submitted on behalf of son as trustee of the trust requesting a ruling regarding the generation-skipping_transfer gst tax consequences of a settlement agreement modifying the terms of a_trust that is exempt from the application of the gst tax imposed under sec_2601 of the internal_revenue_code on date a date prior to date donor and spouse each established four virtually identical irrevocable inter_vivos trusts one for the benefit of each of their four then living grandchildren each of the trusts provides either son or daughter with a right to a percentage of the yearly net_income of the trust the trust the subject of the instant ruling_request is one of the eight trusts established on date and was established by donor for the primary benefit of grandchild and grandchild 1's issue on date donor transferred dollar_figurea to the trust it is represented that no additions have been made to the trust subsequent to the initial funding original trustees the trust provides generally that commencing on date the trustees shall pay to son b percent of the yearly trust income the balance of the net_income of the trust is to be paid to grandchild for her maintenance support education business needs and other trustee-approved requirements after grandchild reaches age sixteen for so long as both son and daughter are living and serving as original trustees the original trustees son and daughter shall not be required to account to either beneficiaries or representatives of beneficiaries at any time regarding the handling of trust properties or the withholding or distributing of trust income or corpus successor trustees shall pay the net_income to the beneficiary grandchild of this trust namely grandchild during her life for the purposes and in the amounts set forth the preamble of the trust provides that daughter son and trustee shall be the article third of the trust provides generally that the original trustees and the trust the three other trusts established by donor and the four trusts article fourth of the trust provides generally that the trust shall continue to be plr-162105-02 above upon the death of grandchild if the trust is still operative and in effect the trustees and successor trustees shall pay the net_income first to the issue of grandchild should grandchild leave no issue the trustees and successor trustees shall pay the net_income in equal shares to donor’s other grandchildren who may have survived grandchild or the issue of donor’s other grandchildren who may have predeceased grandchild provided however the shares of any deceased grandchildren shall be divided per capita among all the issue of said deceased grandchildren upon the death of all of donor’s grandchildren if such deaths take place during the operation of this trust the income to be paid to grandchild shall be paid should grandchild leave no issue per capita to the living issue of donor’s other grandchildren established by spouse each contain an equalization provision in order to ensure that any grandchild born after date would be provided for in a manner similar to that of donor and spouse’s four then living grandchildren pursuant to the equalization provision upon the birth of any grandchild after date each of the trusts established by donor shall contribute a portion of its income and corpus to a new trust to be held under the same conditions for the subsequently born grandchild operative so long as any of the trustees herein named are living the trust shall terminate only after all of the deaths of the trustees the particular time of termination after said deaths shall be either on a date twenty-one years after the death of the last trustee or date whichever is earlier as between the said two times following the deaths of the trustees upon termination of this trust the successor trustee shall pay over deliver and convey the trust estate with its accumulations and all undistributed_net_income to grandchild absolutely if grandchild is then living in the event that grandchild shall have died prior to the disposition of this trust the successor trustees shall distribute the trust estate to any living issue of grandchild should grandchild leave no issue the successor trustees shall distribute the trust estate in equal shares to donor’s other grandchildren who may have survived grandchild or the issue of donor’s grandchildren who have predeceased grandchild provided however the shares of any deceased grandchildren shall be divided per capita among all the living issue of said deceased grandchildren upon the death therefore of all donor’s grandchildren if such deaths take place prior to the termination of this trust the trust corpus herein provided to be paid to grandchild should she leave no issue shall be paid per capita to the living issue of donor’s other grandchildren three successor trustees at least one of which is a national bank with a_trust department the successor trustees shall be unanimously appointed by the original trustees son and daughter by means of a written instrument legally effecting such appointment after the death of either daughter or son if no such appointment has been made it shall be the obligation of the survivor of them within ten days after the article fifth of the trust provides generally that there shall not be more than after the execution of the trust on date four additional grandchildren were plr-162105-02 death of the other to appoint successor trustees any appointment of successor trustees may be revoked at any time by both daughter and son if the two of them are living or either of them if one is deceased and new successor trustees appointed in the place of the ones removed should the original trustees for any reason fail to appoint specific successor trustees the bank shall serve as successor trustee the appointment of successor trustees shall become effective on the deaths of both original trustees daughter and son should trustee survive both daughter and son the successor trustee shall serve together with trustee in administering this trust the appointment of successor trustees shall not become effective so long as either of the original trustees son and daughter are living son or daughter shall have the right to administer this trust alone born pursuant to the equalization provisions for after-born grandchildren contained in the trust and in the three similar trusts established by donor on date four additional trusts one for each after-born grandchild were established by donor pursuant to the equalization provisions for after-born grandchildren contained in the four similar trusts established by spouse four additional trusts one for each after-born grandchild were established by spouse thus a total of eight trusts were established by donor and eight trusts were established by spouse collectively the parties refer to these sixteen trusts as the family trusts each of the family trusts invests directly or indirectly in publicly held stock and securities real_estate interests in closely-held entities and other miscellaneous assets each of the family trusts owns a c percent limited_partnership_interest in partnership partnership owns a d percent general_partnership interest in partnership partnership is a class b limited_partner in partnership corporation owns a e percent general_partnership interest in partnership and a e percent general_partnership interest in partnership corporation is wholly owned by son appointed successor trustee successor trustee resigned in date since date son has served as the sole trustee family retained the services of an attorney because they were unsatisfied with son’s administration of various trusts offers and counteroffers of settlement were continually made however settlement negotiations broke down around the end of date things that son breached his fiduciary obligations relating to the investment administration management and use of the family trusts’ funds that various related_party transactions were improper and that trust accounts were incorrect before the time for filing an answer to these complaints expired a death in the family led the respective parties to attempt to resolve their disputes again after lengthy negotiations in date daughter and members of her family collectively referred to as on date daughter and trustee resigned as trustees successor trustee was on date family filed three complaints in the court alleging among other article second paragraph b of the trust will be modified to provide that the plr-162105-02 a basis for settlement was reached and finally reduced to writing on date the settlement agreement as a result of the settlement agreement the following modifications will be made to the trust article first of the trust will be modified in part to provide that reference to the term net_income shall not be deemed to include accumulated but undistributed_income of the trust article second paragraph a of the trust will be modified to provide generally that commencing on date the trustees shall pay to son at such times and in such amounts as son in his own discretion might require f percent of the yearly net_income of the trust upon the death of son and until the trust terminates the trustees shall pay f percent of the yearly net_income of the trust to son’s then living lineal_descendants per stirpes trustees shall pay the balance of the net_income including that which is not distributable and that which is not distributed to or taken by son or his lineal_descendants to the beneficiary or the beneficiaries hereinafter designated for so long as either daughter or son shall be living in such amounts and at such times after the beneficiary has reached the age of sixteen years as the trustees shall deem necessary and proper for the maintenance support education business needs and other trustee-approved requirements of the beneficiary or beneficiaries all net_income not distributed shall be accumulated and added to corpus in addition the provision in article second paragraph b that provides that the original trustees son and daughter shall not be required to account to beneficiaries at any time regarding the handling of trust properties or the withholding or distributing of trust income or corpus will be deleted order to ensure that any grandchildren born after the execution of this trust agreement an after-born grandchild shall be provided for in a manner equal to that of grandchild and donor’s other grandchildren who are living as of date for whom donor has established three other trusts donor specifically directs as follows upon the birth of any after-born grandchild there shall be allocated to such after-born grandchild as a separate trust a portion of the assets of this trust determined by multiplying the fair_market_value of the assets of this trust by a fraction the numerator being one and the denominator being the total number of donor’s grandchildren whether then living or deceased each trust so set_aside for an after-born grandchild shall be held administered and disposed of for such grandchild as otherwise provided in this trust subject_to the following such trust shall be subject_to further division upon the birth of additional after-born grandchildren each after-born grandchild for whom an additional trust is established pursuant to this paragraph shall be considered the beneficiary of such trust and after his or her death his or her issue shall be beneficiaries as provided herein separate trusts similarly established for a beneficiary may be combined into one trust by the trustees in such event if daughter article third of the trust will be modified in part to provide generally that in plr-162105-02 or son has any rights to receive a percentage of the income from a separate trust such rights shall continue as to a combined trust provided such percentage shall be recomputed for a combined trust based upon the percentage of the assets of the combined trust represented by assets from each separate trust at the time of combination multiplied by the percentage of income to which son or daughter was entitled from such separate trust and such products shall be added together to produce the recomputed percentage of income to which son or daughter is entitled from a combined trust whether or not the separate trusts for an after-born grandchild are combined the date of termination of each trust or portion of a combined trust shall be determined by the provisions of the trusts from which such trusts or portions were created article fourth of the trust will be modified in part to provide generally that the trust shall continue to be operative so long as any of the original trustees are living upon termination of the trust the successor trustee shall pay over deliver and convey the trust estate as then constituted to grandchild absolutely if grandchild is then living article fifth of the trust will be modified to provide generally that in the event of the death resignation or incapacity of son to serve as a trustee his successor shall be that person or persons whom son designates a through a separate written instrument delivered during his life to the other serving trustee or b in his last will and testament which is admitted to probate any written instrument under article fifth clause a shall be witnessed by two individuals and notarized the latest dated written instrument or last will and testament shall control if a successor trustee is not serving or is not nominated herein then a successor trustee the family trustee shall be nominated appointed and confirmed by a majority of the then living lineal_descendants of son family who are sui juris notwithstanding anything to the contrary or otherwise after the death of son the family beneficiaries who are sui juris may by majority vote remove the family trustee for any reason and appoint a new family trustee and if the then acting family trustee becomes incapacitated or incompetent shall replace such trustee grandchild and his successors the family trustee is the successor trustee to daughter in the event of the death resignation or incapacity of the family trustee then a successor trustee shall be nominated appointed and confirmed by a majority of daughter if she is then living and her then living lineal_descendants who are sui juris family notwithstanding anything to the contrary or otherwise the members_of_family who are sui juris may by majority vote remove the family trustee for any reason and appoint a new family trustee and if the then acting family trustee becomes incapacitated or incompetent shall replace such trustee there shall at all times be a one trustee who is son or who is selected by either son or family and b one trustee who is grandchild or is selected by family no trustee shall vote or participate in any manner on any discretionary distribution of income or principal to himself or herself or to a beneficiary to whom such trustee is related to or subordinate to within the meaning of sec_672 or to a person whom such trustee or beneficiary is legally obligated to support the trustee who is so the settlement agreement has been approved by the court conditioned upon a plr-162105-02 restricted in his or her participation in any trustee action under this section shall by written document delivered to the other then acting trustee designate a third party who is not related to or subordinate to within the meaning of sec_672 such restricted trustee or the beneficiary to act as a special trustee solely for the purpose of exercising such discretion and the special trustee shall exercise that discretion provided however that such special trustee shall be subject_to the same terms and limitations applicable to any other named trustee favorable ruling by the service on the effect the settlement agreement has on the trust’s exemption from the gst tax son as trustee of the trust has requested rulings that the following aspects of the settlement agreement will not adversely affect the gst exempt status of the trust the modifications and changes to the trust concerning the appointment and removal of a trustee and the method of appointing successor trustees the resolution of the issue of the proper construction and application of the equalization provisions of the trust the construction of the trust as to the right to income from the trust after the death of son by continuing son’s right to income upon his death for son’s lineal_descendants until the termination of the trust and otherwise continuing the right to discretionary distributions of income to the remainder beneficiaries the resolution of the issue of the proper construction of the trust with respect to accumulated but undistributed_net_income the elimination of language regarding trustee accountings and the resolution of various economic issues between the parties including but not limited to a equalization of the trust corpus between the family trusts so that the assets of each trust are identical as of the effective date of the settlement agreement b equalization of the right to income of the family trusts so that as of the effective date of the settlement and thereafter the family trusts remain equalized c the transfer of stock of corporation equally to each family_trust d the purchase and or redemption of the interests of the partnership in partnership and e the reimbursement of family 1’s legal fees and costs incurred in the dispute distribution a taxable_termination and a direct_skip under b a of the tax_reform_act_of_1986 and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the generation-skipping_transfer_tax provisions do not apply to any generation-skipping_transfer under a_trust as defined in sec_2652 that was irrevocable on date however this exemption does not apply if additions actual or constructive are made to the trust after date sec_2611 defines the term generation-skipping_transfer as a taxable sec_26_2601-1 provides that any trust in existence on sec_2601 imposes a tax on every generation-skipping_transfer sec_26_2601-1 provides rules for determining when a modification sec_26_2601-1 provides that a court-approved settlement of a bona plr-162105-02 date will be considered an irrevocable_trust except as provided in sec_26_2601-1 or c which relates to property includible in a grantor’s gross_estate under sec_2038 and sec_2042 in the present case the trust is considered to have been irrevocable on date because neither sec_2038 nor sec_2042 applies judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax under sec_26_2601-1 or hereinafter referred to as an exempt trust 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 generation-skipping_transfer_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 purposes of sec_1001 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 the provisions of 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 positions 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 and there have been no additions made to the trust after date accordingly the trust is exempt from the gst tax under sec_26_2601-1 agreement is a settlement of a bona_fide issue the product of arm’s length negotiations and is within the range of reasonable outcomes under the governing instrument and applicable state law therefore provided that the court approves the proposed agreement the modifications will not violate b a of the tax_reform_act_of_1986 and will not affect the exempt status of the trust representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party if there is a change in material fact or law local or federal before the transactions considered in this ruling take effect the ruling will have no force or effect 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 in the present case the trust was created and became irrevocable on date based on the facts presented and the representations made the settlement the rulings contained in this letter are based upon information and except as expressly provided herein no opinion is expressed or implied plr-162105-02 concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition no opinion is expressed or implied with respect to the income_tax consequences of any transaction the code provides that it may not be used or cited as precedent being sent to son as trustee of the trust this ruling is directed only to the taxpayer requesting it sec_6110 of pursuant to the power_of_attorney on file with this office a copy of this letter is sincerely melissa c liquerman branch chief branch office of associate chief_counsel passthroughs special industries enclosure copy for sec_6110 purposes


internal_revenue_service number release date index number -------------------- -------------------------- ---------------------------------------------- re --------------------- 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 plr-133840-14 date january ------------------ ------ -------------------- --------------------------------- ------------ ----------------- ------ ---------------------------------------- ------------------------- ------------ --------------------------- ----------------------------------------- ----------------------- ------------ ------ ------------------ legend date year taxpayer trust a date year trust date b date trust date c year accounting firm dear ---------- this letter responds to your authorized representative's letter dated date requesting an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-3 of the procedure and administration regulations to elect out of the generation-skipping_transfer gst_exemption automatic allocation rules with respect to certain transfers to three trusts plr-133840-14 the facts and representations submitted are summarized as follows on date in year a date after date taxpayer created trust an irrevocable_trust trust has generation-skipping_transfer gst tax potential on the same day taxpayer made a gift of dollar_figurea cash to trust on date in year taxpayer created trust an irrevocable_trust trust has gst tax potential on date taxpayer made a gift of dollar_figureb cash to trust on date in year taxpayer created trust an irrevocable_trust trust has gst tax potential on date taxpayer made a gift of dollar_figurec cash to trust taxpayer retained accounting firm to prepare taxpayer’s year year and year form sec_709 united_states gift and generation-skipping_transfer_tax return accounting firm acting without the advice of the law firm that drafted trust sec_1 through failed to elect under sec_2632 not to have the deemed_allocation rule_of sec_2632 apply to the transfers in year year and year taxpayer requests an extension of time under sec_301_9100-3 to elect under sec_2632 not to have the automatic allocation rules contained in sec_2632 apply to the transfers made in year year and year to trust trust and trust respectively law analysis sec_2601 provides that a tax is imposed on every generation-skipping_transfer gst sec_2611 provides that the term generation-skipping_transfer means a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of gst tax is the taxable_amount multiplied by the applicable_rate sec_2641 defines the applicable_rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under sec_2642 the inclusion_ratio with respect to any property transferred in a gst is the excess if any of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of the gst_exemption under sec_2631 allocated to the trust and the denominator of which is the value of the property transferred to the trust sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption amount which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once plr-133840-14 made shall be irrevocable sec_2632 provides in part that an election under subparagraph a i i shall be deemed to be timely if filed on a timely filed form_709 for the calendar_year in which the transfer was made or on such later date or dates as may be prescribed by the secretary an election under clause i ii or ii of subparagraph a may be made on a timely filed form_709 for the calendar_year for which the election is to become effective sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides in part that an indirect_skip is a transfer of property to a gst_trust as defined in sec_2632 provided that the transfer is subject_to gift_tax and does not qualify as a direct_skip in the case of an indirect_skip made after date the transferor's unused gst_exemption is automatically allocated to the property transferred but not in excess of the fair_market_value of the property on the date of the transfer the automatic allocation pursuant to this paragraph is effective whether or not a form_709 is filed reporting the transfer and is effective as of the date of the transfer to which it relates an automatic allocation is irrevocable after the due_date of the form_709 for the calendar_year in which the transfer is made the automatic allocation of exemption applies even if an allocation of exemption is made to the indirect_skip in accordance with sec_2632 sec_26_2632-1 provides in part that the transferor may prevent the automatic allocation of gst_exemption with regard to an indirect_skip by making an election as provided in paragraph b iii of this section sec_26_2632-1 provides in part that a transferor may prevent the automatic allocation of gst_exemption elect out with respect to any transfer or transfers constituting an indirect_skip made to a_trust or to one or more separate shares that are treated as separate trusts under sec_26_2654-1 collectively referred to hereinafter as a_trust in the case of a transfer treated under sec_2513 as made one-half by the transferor and one-half by the transferor's spouse each spouse shall be treated as a separate transferor who must satisfy separately the requirements of paragraph b iii b to elect out with respect to the transfer a transferor may elect out with respect to- one or more prior-year transfers subject_to sec_2642 regarding etips made by the transferor to a specified trust or trusts one or more or all current-year transfers made by the transferor to a specified trust or trusts one or more or all future transfers made by the transferor to a specified trust or trusts all future transfers made by the transferor to all trusts whether or not in existence at the time of the election out or any combination of paragraphs b iii a through of this section sec_26_2632-1 provides in part that to elect out the transferor must attach a statement election out statement to a form_709 filed within the time plr-133840-14 period provided in paragraph b iii c of this section whether or not any transfer was made in the calendar_year for which the form_709 was filed and whether or not a form_709 otherwise would be required to be filed for that year the election out statement must identify the trust and specifically must provide that the transferor is electing out of the automatic allocation of gst_exemption with respect to the described transfer or transfers further unless the election out is made for all transfers made to the trust in the current_year and or in all future years the current-year transfers and or future transfers to which the election out is to apply must be specifically described or otherwise identified in the election out statement sec_26_2632-1 provides in part that to elect out the form_709 with the attached election out statement must be filed on or before the due_date for timely filing within the meaning of paragraph b ii of this section of the form_709 for the calendar_year in which the first transfer to be covered by the election out was made sec_2642 provides generally that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an election described under sec_2632 sec_2642 provides that in determining whether to grant relief under sec_2642 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 the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating the gst_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 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 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides an automatic_extension of time for making certain elections sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose date is prescribed by a regulation and not expressly provided by statute in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in plr-133840-14 sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-3 provides in part that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides in part except as provided in sec_301 b i through iii that a taxpayer is deemed to have acted 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 advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly taxpayer is granted an extension of time of days from the date of this letter to make an election under sec_2632 that the automatic allocation rules do not apply to the transfers made in year year and year to trust trust and trust respectively the election out will be effective as of the date of the transfers the election should be made on supplemental form sec_709 for year year and year the form sec_709 should be filed with the cincinnati service_center at the following address internal_revenue_service cincinnati service_center - stop cincinnati oh you should attach a copy of this letter to the supplemental form sec_709 we have enclosed a copy for this purpose 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 plr-133840-14 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 leslie h finlow senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures


internal_revenue_service appeals_office department of the treasury person to contact kkk employee id number keek tel fax refer reply to eke in re ‘tax period s ended ein certified mail uil date jun number release date _ dear this is a final adverse determination as to your exempt status under sec_501 of the internal_revenue_code the code our favorable determination_letter to you dated is hereby revoked and you are no longer exempt under sec_501 a of the code effective our adverse determination was made for the following reasons your organization fails to meet the requirements for exemption under sec_501 sec_501 as amended by the tax reform act of provides for the exemptiot-of c ubs organized and operated for pleasure rés-eater a other -- non-profitable purposes substantially_all of the activities of which are for such purposes and no part of the net_earnings of which inures to the benefit of any private shareholder public law states that it is intended that social clubs should be permitted to receive up to percent of their gross_receipts including investment_income from sources outside of their membership without losing their exempt status it is also intended that within thi sec_35 percent amount not more than percent of the gross_receipts should be derived from the use of a social club’s facilities or services by the general_public as a result of a recent audit of your organization's activities and form_990 it was determined that your organization has exceeded the safe_harbor limitations on non- member income as outlined in public law further an analysis of all facts and circumstances surrounding your organization’s operations revealed that the extent of nonmember use of your facility established a nonexempt purpose you are required to file converted forms for any years which are still open under the statute_of_limitations beginning with the year ending you should file any returns due for these years with the internal_revenue_service tege eo commerce st mc dal mandatory review dallas tx forms for tax periods beginning on and after should be filed with the department of the treasury internal_revenue_service center as applicable for form you have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the nearest taxpayer_advocate office by calling or writing to local taxpayer_advocate taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours s appeals team manager cc kekk yo internal_revenue_service oct pae tax_year s ended org address department of the treasury manows road 2nd floor newark de taxpayer_identification_number form person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your organization's exempt status is necessary if you do not agree with our position you may appeal your case the enclosed publication the examination process explains how to appeal an intemal revenue service irs decision publication also includes information on your rights as a taxpayer and the irs collection process if you request a conference contact you for your convenience an envelope is enclosed we will forward your writen statement of protest to the appeals_office and they will if you and appeals do not agree on some or alll of the issues after your appeals_conference or if you do not request cn arneale conference you may file suit in united_states tax_court the inited states court of federal claims or united_states district_court after salting procedural and jursciconal requrements as descbed in pubioaton letter rev you may also request that we refer this matter organization appeal procedures advice no further administrative appeal is available to you within the irs on the issue that was the subject of the for unagreed issues fa determination_letter is issued to you based on technical as explained in publication exempt for technical_advice our findings please sign and retum the enclosed form_6018 consent to proposed adverse action we if you accept will then send you a final letter revoking your exempt status ifwe do not hear from you within days from the date of this letfer we will process your case on the basis of the recommendations shown in the report of examination and this letter will become final in that event you wil be required these retums with the ogden service_center within days from the date of this letter unless a request for an extension of time is granted file retums for later tax years with the appropriate service_center indicated in the instructions for those retums to file federal_income_tax retums for the tax period s shown above file _ you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call tolhree and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely enclosures publication publication form_6018 report of examination sunita lough director eo examinations letter rev form 886-a rev date schedule number or exhibit explanations of items name of taxpayer org tax identification_number ein year period ended 20xx12 issue legend org organization name xx date co-1 co-2 companies issue whether the org will continue to qualify as an exempt social_club under sec_501 c of the code facts the org org was granted exemption as a social_club exempt from federal_income_tax under intemal revenue code sec_501 c pursuant to a ruling issued in june 19xx its purposes as stated in its articles of incorporation are promote the social endeavors of its members org's by-laws stated purposes are the maintenance of a suitable club house and other buildings the ownership and maintenance of a golf course the promotion of the sport of golf and other sports generally and the social enjoyment of its members org's principal activity is providing facilities and services for the pleasure and recreation of its members and their guests they operate a restaurant and bar and maintain a golf club pool and tennis courts on the grounds org allows nonmembers to attend their dub's facilities and participate in club events ee income of gross_receipts year period ended december 20xx december 20xx december 20xx re investment_income nonmember income of gross_receipts from nonmember use __ from investment during the examination it was determined that org did not fully comply with the record-keeping requirements of revproc_71_17 1971_1_cb_683 however org receives income from outside its membership based on examination of org's form_990 retum for the period ending december 20xx 20xx and 20xx and review of their books_and_records the percent of gross_receipts from nonmember use of facilities exceeded for the 20xx12 year of the exam as well as for the prior and subsequent years while investment_income was less than for all years these receipts are noted in the following chart there was also evidence that the organization advertises org's banquet facilities on the intemet and in the yellow pages they advertise that they have banquet facilities for all special events such as weddings corporate meetings functions parties graduations reunions anniversaries bar bat mitzvahs with accommodations up to organizations exempt from federal taxes as described in sec_501 include clubs organized for pleasure recreation and other nonprofitable purposes substantially_all of the activities of which are for publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page law form 886-a rev date name of taxpayer org tax identification_number ein explanations of items year period ended 20xx12 issue schedule number or exhibit such purposes and no part of the net eamings of which inures to the benefit of any private shareholder sec_1 cx7 of the income_tax regulations relating to the requirements of exemption of such clubs under sec_501 reads in part as follows the exemption provided by sec_501 for organizations described in sec_501 c applies a only to clubs which are organized and operated exclusively for pleasure recreation and other nonprofitable purposes but does not apply to any club if its net eamings inures to the benefit of any private shareholder in general this exemption extends to social and recreation clubs which are supported solely by membership fees dues and assessments however a dub otherwise entitled to exemption will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities aclub which engages in business such as making its social and recreational facilities available to b the general_public or by selling real_estate timber or other products is not organized and operated exclusively for pleasure recreation and other nonprofitable purposes and is not exempt under sec_501 solicitation by advertisement or otherwise for public patronage of its facilities is prima fade evidence that org is engaging in business and is not being operated exclusively for pleasure recreation or social purposes however an incidental sale of property will not deprive a club of its exemption within thi sec_35 percent amount not more than percent of the gross_receipts should be derived thus a social_club may receive investment_income up to the full percent of its gross_receipts if b no income is received from non-members' use of club facilities a from the use of a social club's facilities or services by the general_public this means that an exempt social_club may receive up to percent of its gross_receipts from a combination of investment_income and receipts from non-members so long as the latter do not represent more than percent of total receipts these percentages supersede those provided in revrul_71_17 1971_1_cb_683 prior to its amendment in sec_501 c required that social clubs be operated exclusively for pleasure recreation and other non-profitable purposes public law amended the exclusive provision to read substantially’ in order to allow a sec_501 c organization to receive up to percent of its gross_receipts including investment_income from sources outside its membership without losing its tax exempt status the committee reports for public law further state d this standard it does not necessarily establish that there is a nonexempt purpose a conclusion that there is a nonexempt purpose will be based on all the facts and circumstances including but not limited to the gross_receipts factor c such as from the sale of its clubhouse or similar facilities that income is not to be included in the percent formula the senate report also indicates that even though gross_receipts from the general_public exceed in addition the committee reports state that where a club receives unusual amounts of income publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page form 886-a rev jamuary explanations of items name of taxpayer org tax identification_number ein year period ended - 20xx12 issue schedule number or exhibit revrul_58_589 sets forth the criteria for exemption under sec_501 of the code and provides that a club must have an established membership of individuals personal contacts and fellowship it also provides that while the regulations indicate that a club may lose its exemption if its facilities available to the general_public this does not mean that any dealings with nonmembers will automatically cause a club to lose its exemption a club may receive some income from the general_public that is persons other than members and their bona_fide guests or permit the general_public to participate in its affairs provided that such participation is incidental to and in furtherance of org's exempt purposes such dealings with the general_public and the receipt of income therefrom does not indicate the existence of a club purpose to make a profit and the income does not inure to club members it makes revrul_60_324 provides that a social_club that made its social facilities available to the general_public through its member-sponsorship arrangement can not be treated as being operated exclusively for pleasure recreation or other nonprofitable purposes and org no longer qualified for exemption under cx7 of the code revrul_66_149 provides that a social_club is not exempt from federal_income_tax as an a organization described in sec_501 c of the code if it regularly derives a substantial part of from non-member sources such as for example dividends and interest on investments its income sets forth guidelines for determining the effect of gross_receipts derived from revrul_68_119 provides that a club will not necessarily lose its exemption if it derives income from transactions with other than bona_fide members and their guests or if the general_public on occasion is permitted to participate in its affairs provided such participation is incidental to and in furtherance of its general club purposes and the income therefrom does not inure to members if a dub exceeds the test then it will maintain its exempt status only if it can show through facts and circumstances that substantially_all of its activities are for pleasure recreation and other nonprofitable purposes the following are important facts and circumstances to take into account to determine whether a club may maintain its exemption under sec_501 revproc_71_17 nonmember-use-of a social-club's facilities on exemption under intemal revenue code sec_501 c and recordkeeping requirements failure to maintain such records or make them available to the service for examination will preclude use of the minimum gross_receipts standard and audit assumptions set forth in this revenue_procedure frequency of use of org facilities or services by nonmembers an unusual or single event that is nonrecurring on a year to year basis that generates all the nonmember income is viewed more favorably than nonmember income arising from frequent use by nonmembers record of nonmember use over a period of years a high percentage in one year by the actual percentage of nonmember receipts and or investment_income publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page e form 886-a rev date explanations of items name of taxpayer org nonmembers with the other years being within permitted levels is viewed more favorably than a consistent pattern of exceeding the limits even by relatively small amounts see s rept 2d sass c b big_number tax identification_number ein year period ended 20xx12 issue schedule number or exhibit e purposes for which the dub's facilities were made available to nonmembers whether the nonmember income generates net profits for the organization profits derived e from nonmembers unless set_aside subsidize org's activities for members and result in inurement within the meaning of sec_501 taxpayer's position org does not agree to a proposed revocation of their tax exempt status as described in sec_501 org states that the past and current economic conditions resulting in a decline in membership is the mitigating factor that prompted the need for additional nonmember receipts to operate org during these periods government's position an organization exempt from federal income taxes as described in sec_501 c must meet the gross_receipts_test in order to maintain its exemption in order to meet the gross_receipts_test an organization can receive up to thirty-five percent of its gross_receipts including investment_income from sources outside its membership without losing its tax exempt status within thi sec_35 amount not more than fifteen percent of the gross_receipts should be derived from the use of a social club's facilities or services by non-members the org has exceeded the gross_receipts standard for nonmember income on a continuous basis for at least three years the nonmember receipts are earned throughout the year there was no one single or unusual event that caused org to exceed the threshold a based on the large percentages of gross nonmember income to total gross_receipts of the dub ie and as noted in the above table which exceeds the limitation of as set forth by sec_501 for each of these years and the fact that it advertises the use of its facilities to the public it is the government's position that org is no longer operated exclusively for the pleasure and recreation of its members and is not exempt under sec_501 the sec_501 tax exempt status of org should be revoked since the nonmember income received by org exceeded of org's total gross_receipts for the years under examination further it advertises the use of their facilities to the general_public reflecting evidence that org is engaged ina business and is not being operated exclusively for pleasure recreation or social purposes the org no longer meets the requirements to qualify as exempt from federal_income_tax under sec_501 as described in sec_501 c therefore your exempt status under c of the intemal revenue code will be revoked effective january 20xx publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page conclusion form 886-a rev date name of taxpayer org tax identification_number ein explanations of items year period ended 20xx12 issue schedule number or exhibit as a taxable entity the organization is required to file form_1120 u s_corporation income_tax retum for the periods open under statute under g these periods include the years ending december 20xx and subsequent tax years additionally the organization is reminded of the provisions of sec_277 concerning membership organizations which are not exempt_organizations alternative issue if the org continues to qual'fy as an exempt social_club under sec_501 of the code what is its unrelated_business_taxable_income facts as a result of the examination of form 990-t and the books_and_records for the period ended 20xx12 it was concluded that org's traditional nonmember income sources resulted in operating losses from bar restaurant greens and golf cart rentals activities forms 990-t for prior and subsequent years also showed operating losses for the same traditional nonmember activities law during the examination it was disclosed that org had non-traditional unrelated_business_income for the 20xx12 year of the exam as well as for prior and subsequent years the non-traditional unrelated_business_income was in the form of advertising and acknowledgement income received from local businesses and vendors for org's annual member-guest golf outing the non-traditional unrelated_business_income was less than for all years in examining expense records for 20xx it was disclosed that org made a contribution to the co-1 an apparent charitable 501_c_3_organization sales journal entries confirmed that account co-2 was funded by member dues billings the amount of the contribution for 20xx was shown on form 990-t schedule g as a set-aside deduction and expense to reduce org's reported investment_income a similar set-aside deduction was shown on forms 990-t for 20xx an 20xx the revenue_ruling holds that an exempt social_club in determining its unrelated_business_income may not deduct from its net_investment_income losses_incurred on sales of food and beverages to nonmembers under these facts the ruling's rationale is that org's policy of continually setting prices on sales to nonmembers at levels insufficient to cover costs demonstrates that its conduct of the bar and restaurant activity with nonmembers is not profit motivated the ruling concludes that absent such a profit_motive no trade_or_business exists so that such expenses in excess of gross_income are not trade or revrul_81_69 1981_1_cb_351 is a guide in determining proper unrelated_business_income_tax liability for exempt social clubs the ruling involved a social_club that had unrelated_business_income from investments it also sold food and beverages to nonmembers at prices insufficient to recover the costs of such sales such sales resulted in losses for several years and there was every indication that they would continue to result only in losses for org publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page form 886-a rev date explanations of items name of taxpayer org tax identification_number ein year period ended 20xx12 issue schedule number or exhibit business_expenses deductible under sec_162 and are not available to offset investment_income otherwise taxable under sec_512 all gross_income excluding exempt_function_income less deductions allowed by chapter of the code which are directly connected with the in general unrelated_business_taxable_income under sec_512 a is calculated in the following manner e e production of gross_income e e computed with the following modifications net operating losses-1rc b charitable contributions- sec_512 b 6x11 standard deduction- sec_512 b exempt_function_income includes amounts derived from dues fees charges or similar amounts of gross_income from members and set-aside income set-aside income is income which would otherwise be taxable under sec_512 a that is set_aside for religious charitable scientific literary or educational_purposes or for the prevention of cruelty to children or animals taxpayer's position set-aside income may be temporarily invested or accumulated as long as the amount and duration are not unreasonable provided that it is earmarked or placed in a separate_account sec_1_6664-4 of the regulations states in general to mean -no penalty may be imposed under sec_6662 with respect to any portion of an underpayment upon a showing by the taxpayer that there was reasonable_cause for and the taxpayer acted in good_faith with respect to such portion org agrees that the income from advertising at its annual member-guest golf outing is a source of non- traditional unrelated_business_income and subject_to unrelated_business_income_tax in addition org agrees that contributions to the co-2 is not income that would otherwise be taxable under sec_512 ax3 and is not qualified set_aside income lf org remains tax-exempt under c of the code it will be liable for unrelated_business_income_tax as shown in the attached report of examination form_4549 org's unrelated_business_income shall be limited to its net_investment_income and its net non-traditional nonmember income and there is no qualified set-side the net operating losses from the sales to nonmembers will be limited in accordance to revrul_81_69 org's food and beverage greens and carts activities applicable to nonmembers has failed publish no irs gov department of the treasury-internal revenue service government's position form 886-a catalog number 20810w page form 886-a rev date name of taxpayer org tax identification_number ein explanations of items year period ended 20xx12 issue schedule number or exhibit to show profits for the past two or three years accordingly it is concluded that the nonmember sales activity may or may not constitute a trade_or_business for which expenses would be deductible under sec_162 of the internal_revenue_code thus the net operational losses for the periods ending december 20xx and december 20xx have been thereby limited to the net receipts from these activities therefore the net losses sustained from org's nonmember sales may not be used to offset investment_income or other traditional net unrelated_trade_or_business sources for the purpose of computing org's unrelated_business_income_tax liability the accuracy related penalty imposed under sec_6662 will be assessed because there was no evidence of a reasonable_cause related to the non-reporting of taxable non-traditional advertising income for the computation of unrelated_business_income_tax under sec_511 of the code conclusion your organization is advised to monitor your level of non-member receipts to insure that you are in compliance with public law organizations exempt under sec_501 may lose their exempt status if they receive gross_receipts from non-member sources defined as income from passive sources and gross_receipts from non-member use of facilities or the sale_of_goods to non-members in excess of of total receipts also within thi sec_35 limit no more than of gross_receipts may be derived from non-member use of org facilities during our examination of your form_990 we noted that you did not comply with the record keeping requirements of revproc_71_17 1971_1_cb_683 this revenue_procedure provides that a social_club must maintain specific records as to the use of its facilities in order to substantiate a hostiguest relationship for determining member versus non-member usage failure to maintain such records may result in all income derived from the use of your facilities being presumed to be unrelated business _ income to avoid such a presumption you should take appropriate steps to insure that you comply with this revenue_procedure in the future sec_512 of the internal_revenue_code_of_1986 requires a social dub exempt under sec_501 to include all gross_income including reciprocal income other than exempt_function_income as unrelated_business_income exempt_function_income is defined as gross_income derived from members and includes such items as dues assessments fees or similar amounts paid_by members their dependents or bona_fide guests for the provision of goods facilities or services which are in furtherance of the exempt purposes of the dub please insure that for all future returns unrelated_business_income is properly reflected on form 990-t sec_512 of the internal_revenue_code_of_1986 provides that where an organization uses its facilities or personnel for both exempt and non-exempt purposes expenses must be allocated on a reasonable basis in addition an organization is required to maintain appropriate documentation to substantiate the reasonableness of the allocations made in the future please insure that appropriate documentation is maintained for any allocated expenses our examination of your nonmember income revealed that that there is doubt whether your banquet bar and restaurant activities greens activity and golf cart activity are engaged for a profit_motive we have publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page form 886-a rev date name of taxpayer org explanations of items tax identification_number ein year period ended 20xx12 issue schedule number or exhibit restricted excess expenses from such activities the net operational losses for the periods ending december 20xx and december 20xx have been thereby limited to the net receipts from these activities your club's food and beverage greens and carts activities applicable to nonmembers has failed to show profits for the past two or three years accordingly it is concluded that your nonmember sales activity may or may not constitute a trade_or_business for which expenses would be deductible under sec_162 of the internal_revenue_code ‘ thus in the future the net losses sustained from your nonmember sales may not be used to offset your investment_income or other traditional net unrelated_trade_or_business sources for the purpose of computing your unrelated_business_taxable_income tax_liability for future filings of form 990-t please file these returns in accordance to revrul_81_69 and within the guidelines of sec_1_183-2 of the income_tax regulations which determines when an activity is not profit motivated generally if an organization has incurred losses in at least out of previous years this is an indicator that the activity lacks a profit_motive publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page


t c summary opinion united_states tax_court lisa marie pierce petitioner v commissioner of internal revenue respondent docket no 8411-02s filed date lisa marie pierce pro_se michele a yates for respondent dean 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 unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year at issue the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority the petition in this case was filed in response to a notice_of_determination concerning collection action s under sec_6320 and or pursuant to sec_6330 petitioner seeks review of respondent's determination to proceed with collection of her tax_liability of dollar_figure for the issue for decision is whether respondent abused his discretion by denying petitioner's request for relief from joint_and_several_liability under sec_6015 the stipulated facts and exhibits received into evidence are incorporated herein by reference at the time the petition in this case was filed petitioner resided in vienna virginia background petitioner and her former spouse arnold pierce were married on date petitioner resided with mr pierce until their permanent separation in date in both petitioner and mr pierce worked at the department of defense dod at the time their federal_income_tax return wa sec_1 sec_6330 was enacted as part of the internal_revenue_service restructuring and reform act of rra publaw_105_206 112_stat_746 sec_6330 is effective with respect to collection actions initiated more than days after date ie after date see rra sec_3401 112_stat_750 sec_6015 was enacted as part of the rra sec_3201 112_stat_734 and is effective for any liability for tax arising after date and any liability for tax arising on or before date but remaining unpaid as of date filed petitioner and mr pierce were separated petitioner and mr pierce were divorced on date for most of their marriage petitioner had no knowledge of any of their financial affairs petitioner did not know how much money they had in any of their joint accounts except for a brief period mr pierce managed essentially all of the family finances until their separation including paying bills and making spending decisions mr pierce would tell petitioner how much she could spend before she would go shopping for food clothing for the children and most other items petitioner knew that if properly managed their combined income was sufficient to cover their monthly expenses she was aware however that mr pierce was a poor manager of money she was aware that mr pierce would pay their bills late every month with whatever money remained in their account as a result petitioner took control of the family finances for a period of to months in the early 1990s when mr pierce became short on spending money he decided to reacquire control of the family finances mr pierce was generally responsible for filing their federal_income_tax returns in most years petitioner would sign a blank return and mr pierce would take care of completing and filing the return petitioner and mr pierce filed joint federal_income_tax returns for through for the and tax years petitioner and mr pierce had unpaid tax_liabilities all of their unpaid tax_liabilities were paid in full on or before date until petitioner did not know that they had underpayments of tax for and during each tax filing season for the and tax years petitioner noticed that mr pierce had not brought her that year's return to sign cognizant of the time of year petitioner asked mr pierce what happened to the tax returns as a result of her questioning in both years mr pierce brought her a blank return to sign she signed the blank returns and he said he would file them mr pierce never filed either return until petitioner was unaware that mr pierce had not filed the and returns petitioner and mr pierce timely filed their federal_income_tax return line of the form_1040 u s individual_income_tax_return showed that petitioner and mr pierce owed dollar_figure at the time the return was filed they did not enclose a payment petitioner did not know until that they had an unpaid tax_liability for on date a notice_of_levy on wages salary and other income was sent to both petitioner and mr pierce at their marital address petitioner had moved from this address when she separated from mr pierce in date mr pierce continued to reside there until date on date petitioner's payroll office informed her of a notice of tax levy it received from respondent this was the first petitioner learned of the outstanding unpaid tax_liability for petitioner filed her tax_return and reported an overpayment of dollar_figure which the internal_revenue_service irs applied to the unpaid balance for the tax_year the irs also applied an overpayment of dollar_figure from mr pierce's tax_return to the unpaid balance from when petitioner's payroll office advised her of the levy notice she also became aware that mr pierce never filed their joint returns for and on date petitioner filed her federal_income_tax returns for and as married filing separate claiming overpayments of dollar_figure and dollar_figure respectively petitioner filed her tax_return claiming an overpayment of dollar_figure which the irs applied to the unpaid balance for on date a final notice - notice_of_intent_to_levy and notice of your right to a hearing letter was sent to both petitioner and mr pierce on date petitioner timely submitted a request for a hearing petitioner submitted with the request for the hearing a form_8857 request for innocent spouse relief and an attached explanatory letter on date the examination_division sent petitioner a letter requesting more information and documentation regarding her claim for relief from joint_and_several_liability on date petitioner sent additional information to the examination_division in support of her claim on date the appeals_office sent petitioner a letter indicating the suspension of her collection claim and outlining the findings of her claim for relief from joint_and_several_liability respondent therefore denied petitioner's collection claim because she was not entitled to relief from joint_and_several_liability as a result a notice_of_determination was issued sustaining the issuance of the levy on date respondent sent petitioner an application_for an offer_in_compromise as well as a request for petitioner to submit a detailed current financial statement petitioner only submitted a financial statement petitioner failed to respond to the offer_in_compromise and did not provide respondent with a current financial statement respondent sent petitioner a notice_of_determination nod on date which stated that respondent had followed all procedures in the issuance of the notice_of_intent_to_levy and that petitioner's collection appeal rights were not violated the nod also determined that petitioner did not qualify for relief from joint_and_several_liability under the provisions of sec_6015 on date petitioner timely filed with the court her petition for review of respondent's determination respondent's position is that petitioner is not entitled to relief from joint_and_several_liability because she failed to establish that she had a reasonable belief that the tax was paid or going to be paid at the time she signed the return respondent also argues that petitioner would not suffer from economic hardship as a result of being denied relief lastly there was no evidence of abuse to sustain any relief from joint_and_several_liability petitioner argues that she is entitled to relief from joint_and_several_liability because mr pierce did not take care of the finances properly forged her signature and subjected her to emotional abuse she also argues that she trusted her husband and had no reason to know or assume that he might not pay their tax_liability discussion pursuant to sec_6330 petitioner sought relief from respondent’s notice_of_determination sustaining the proposed levy action sec_6330 allows a taxpayer to raise appropriate spousal defenses under sec_6015 sec_6330 sec_301_6330-1 proced admin regs the court's jurisdiction in this case therefore is based on sec_6015 119_tc_191 sec_301_6330-1 q a-f2 proced admin regs the court must decide whether respondent abused his discretion in denying sec_6015 relief with respect to an amount of tax reported on petitioner's joint_return but not paid the court reviews respondent's determination for abuse_of_discretion 114_tc_276 and holds that respondent did not abuse his discretion and that his determination was not arbitrary as a general_rule spouses filing joint federal_income_tax returns are jointly and severally liable for all taxes due sec_6013 115_tc_183 affd 282_f3d_326 5th cir under sec_6015 however certain taxpayers are entitled to relief from joint_and_several_liability there are three avenues for relief from joint liability under sec_6015 sec_6015 provides relief with respect to understatements of tax attributable to certain erroneous items on the return sec_6015 provides relief for a portion of an understatement_of_tax for taxpayers who are separated or divorced sec_6015 confers upon the secretary discretion to grant equitable relief for taxpayers who otherwise do not qualify for relief under sec_6015 or c petitioner requested relief from joint liability under sec_6015 for the payment of the tax reported on the joint_return that was unpaid when the return was filed respondent treated petitioner's request for relief as an election under sec_6015 and determined that petitioner was not entitled to the requested relief sec_6015 allows a taxpayer whose request for relief is denied by respondent to petition this court for a review of such determination our jurisdiction in cases brought under sec_6015 encompasses a review of respondent's determination with respect to all relief afforded by sec_6015 118_tc_494 114_tc_324 butler v commissioner supra pincite this court treats petitioner's request as a request for equitable relief under sec_6015 that she be relieved of her obligation to pay any outstanding tax_liability reported on their joint_return to prevail petitioner must prove that respondent's denial of equitable relief from joint liability under sec_6015 was an abuse_of_discretion jonson v rra sec 112_stat_726 added sec_7491 which shifts the burden_of_proof to the secretary in certain circumstances sec_7491 however is applicable to court proceedings arising in connection with examinations commencing after the date of the enactment of this act rra sec c 112_stat_727 sec_7491 is inapplicable to this case see 118_tc_579 n sec_7491 is effective for court proceedings arising in connection with examinations commencing after date commissioner 118_tc_106 cheshire v commissioner t c pincite butler v commissioner supra on date respondent adopted regulations under sec_6015 these regulations are applicable for all elections or requests for relief filed on or after date sec_1_6015-9 income_tax regs these regulations are not applicable in the instant case because petitioner requested relief before date whether petitioner is entitled to equitable relief sec_6015 provides equitable relief --under procedures prescribed by the secretary if-- taking into account all the facts and circumstances it is inequitable to hold the individual liable for any unpaid tax or any deficiency or any portion of either and relief is not available to such individual under subsection b or c the secretary may relieve such individual of such liability because petitioner is not eligible for relief under either sec_6015 or c the only avenue for relief available to petitioner is sec_6015 as directed by sec_6015 the commissioner has prescribed guidelines in revproc_2000_15 2000_1_cb_447 that the commissioner will consider in determining whether an individual qualifies for relief under sec_6015 section dollar_figure of revproc_2000_15 c b pincite lists threshold conditions which must be satisfied before the commissioner will consider a request for relief under sec_6015 respondent agrees that in this case those threshold conditions are satisfied section dollar_figure of revproc_2000_15 c b pincite lists factors that the commissioner will consider in deciding whether to grant equitable relief under sec_6015 sec_4 of revproc_2000_15 c b pincite lists the following factors that the commissioner will consider as weighing in favor of granting relief for an unpaid liability the requesting spouse is separated or divorced from the nonrequesting spouse the requesting spouse would suffer economic hardship if relief is denied the requesting spouse was abused by the nonrequesting spouse the requesting spouse did not know or have reason to know that the reported liability would be unpaid at the time the return was signed the nonrequesting spouse has a legal_obligation pursuant to a divorce decree or agreement to pay the unpaid liability and the unpaid liability is attributable to the nonrequesting spouse sec_4 of revproc_2000_15 c b pincite lists the following factors that the secretary will consider as weighing against granting relief for an unpaid liability the unpaid liability is attributable to the requesting spouse the requesting spouse knew or had reason to know that the reported liability would be unpaid at the time the return was signed the requesting spouse significantly benefited beyond normal support from the unpaid liability the requesting spouse will not suffer economic hardship if relief is denied the requesting spouse has not made a good_faith effort to comply with federal_income_tax laws in the tax years following the tax_year to which the request for relief relates and the requesting spouse has a legal_obligation pursuant to a divorce decree or agreement to pay the unpaid liability in addition revproc_2000_15 sec_4 c b pincite states no single factor will be determinative of whether equitable relief will or will not be granted in any particular case rather all factors will be considered and weighed appropriately furthermore the list of aforementioned factors is not intended to be exhaustive in deciding whether respondent’s determination that petitioner is not entitled to relief under sec_6015 was an abuse_of_discretion we consider evidence relating to all the facts and circumstances the commissioner's exercise of discretion is entitled to due deference in order to prevail the taxpayer must demonstrate that in not granting relief the commissioner exercised his discretion arbitrarily capriciously or without sound basis in fact or law 112_tc_19 91_tc_1079 in the case of a liability that was reported but not paid the fact that the requesting spouse did not know and had no reason to know that the liability would not be paid is a factor weighing in favor of granting relief revproc_2000_15 sec_4 d c b pincite by contrast the fact that the requesting spouse knew or had reason to know that the reported liability would be unpaid is an extremely strong factor weighing against relief revproc_2000_15 sec_4 b c b pincite respondent contends that petitioner did not prove that she did not know or did not have reason to know that the unpaid tax_liability would not be paid at the time the return was filed the taxpayer has a duty_of inquiry to determine the amount of her tax_liabilities see 887_f2d_959 9th cir revg an oral opinion of this court 114_tc_276 a taxpayer is not relieved of her duty_of inquiry because she relied on her husband to take care of the returns see 992_f2d_1256 2d cir affg tcmemo_1992_228 a taxpayer can not obtain the benefits of relief from joint_and_several_liability simply because she turned a blind eye by signing a blank return and then failed to make further inquiry into the ultimate tax_liability shown on the joint_return price v commissioner supra levin v commissioner tcmemo_1987_ with the exception of and it was mr pierce's practice to have petitioner sign blank returns complete them and then mail them on april petitioner testified that she signed blank tax returns in early april for almost every tax_year from when they were married through she claims she never asked or questioned him about potential refunds or amounts they owed based on petitioner's testimony concerning the tax_return at issue we find that petitioner essentially turned a blind eye toward the filing of the federal_income_tax return and the failure to pay the taxes shown thereon a taxpayer who signs a return without reviewing it or who signs a blank return is charged with constructive knowledge of the tax due shown on that return castle v commissioner tcmemo_2002_142 thus despite the fact that petitioner signed a blank return she should have known of the liabilities shown thereon petitioner also knew that mr pierce had trouble managing the finances petitioner testified up to and before when i left i mean he handled all the finances i tried to take over the bills one time because i didn't like the way he took care of them because he would always pay everything like a month late and we made enough money together then that we could pay the bills it was almost like the you know the last thing if he has money left over then he'll pay the bills from whenever it was so i took over the bills for a few months but then he got mad because he never had enough money when he needed it so he took care of all the finances from the early 1990s when petitioner took care of their finances she knew that money was tight and there might not be enough money to pay a large tax_liability petitioner should have made further inquiry to determine the amount of taxes they owed and whether the full liability would be paid in addition to petitioner's knowledge of the financial difficulties faced by the family petitioner knew of other facts that should have forced further inquiry into her family's financial situation petitioner had learned through common acquaintances at dod that mr pierce had quit his job in date a reasonable person would at minimum question their spouse or ex-spouse whether enough money remained to pay any_tax liability reported on their joint_return secondly petitioner testified that the return was signed after she and mr pierce were separated it also seems reasonable to this court that their separation should maintain if not heighten her duty to examine any jointly filed returns she also argues that because she was unaware of mr pierce's noncompliance with federal tax law before during and after the year at issue she had no reason to doubt that the liability would be paid petitioner's lack of awareness however does not convince this court that she did not retain an affirmative duty to examine the return and verify that payment was sent with the return petitioner has not provided this court with credible_evidence to show that she reasonably believed that mr pierce would pay the tax_liability at the time she signed the return as a result the court finds that petitioner had constructive knowledge that the liability would not be paid for petitioner also has not shown that she will suffer economic hardship if relief is denied petitioner in fact concedes that she can afford to pay the unpaid tax_liability but argues that only her financial situation not her current one is relevant this rationale is apparently the reason that petitioner submitted a financial statement and not a current one thus this court holds that petitioner will not suffer economic hardship if relief is denied in her petition petitioner alleges that mr pierce throughout their marriage engaged in brainwashing as a form of spousal abuse her position is that the abusive behavior is a factor that ought to sway the court to grant her relief from joint_and_several_liability petitioner's allegation however is unsupported by any evidence the court therefore does not consider this factor finally petitioner's assertion that mr pierce was generally deceptive in connection with their finances is supported by evidence but in no way appears to have affected the reporting of items on the return and does not outweigh the fact that petitioner had an affirmative duty to evaluate and check the return although the return was sent without payment it correctly reported petitioner's and mr pierce's tax_liability taking into account all of the facts and circumstances it would not be inequitable to hold petitioner liable for the underpayment in question consequently respondent's denial of petitioner's request for equitable relief under sec_6015 is not an abuse_of_discretion based on the facts and circumstances in this case many of the factors in revproc_2000_15 sec_4 2001-c b pincite are neutral the negative factors discussed above outweigh any positive factors in favor of relief based on the record before this court we do not find respondent's denial of sec_6015 relief to be arbitrary capricious or without sound basis in fact or law the court has considered all of the other arguments made by petitioner and to the extent they remain unaddressed concludes they are without merit we hold that respondent correctly determined that collection by levy should proceed reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent


internal_revenue_service department of the treasury index number washington dc person to contact telephone number refer reply to cc dom corp - plr-119137-99 date date number release date parent sub sub company official x authorized representative state m date a date b date c date d date e month this responds to your authorized representative’s letter dated date requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election the extension is being requested for parent sub and sub to file a consolidated federal_income_tax return with parent as the common parent under sec_1_1502-75 of the income_tax regulations effective for their taxable_year ending on date c hereinafter referred to as the election the material information submitted is summarized below parent is an inactive holding_company incorporated in state m on date a on date b parent acquired the stock of sub and during the taxable_year ending on date c sub formed sub all are domestic corporations with a week taxable_year ending the sunday closest to the end of month after the formation of sub company official x was advised by authorized representative to file a consolidated tax_return which was filed for sub and sub on date e parent was left off the return on date d which is after the due_date for the election company official x discovered the omission of parent and subsequently this request under sec_301_9100-1 and sec_301_9100-3 was submitted to the service the statute_of_limitations on assessment under sec_6501 has not run for parent's sub 1's or sub 2's taxable_year for which they want to make the election or for any taxable_year that would be affected by the election sec_1501 provides that an affiliated_group_of_corporations has the privilege of making a consolidated_return with respect to the income_tax imposed by chapter of the code for the taxable_year in lieu of filing separate returns the making of a consolidated_return is subject_to the condition that all corporations which at any time during the taxable_year have been members of the affiliated_group consent to the consolidated_return_regulations prescribed under sec_1502 prior to the day prescribed by law for the filing of such return the making of a consolidated_return is considered such consent sec_1_1502-75 provides that a group which did not file a consolidated_return for the immediately preceding_taxable_year may file a consolidated_return in lieu of separate returns for the taxable_year provided that each corporation which has been a member of the group during any part of the taxable_year for which the consolidated_return is to be filed consents to the regulations under sec_1502 if a group wishes to exercise its privilege of filing a consolidated_return such consolidated_return must be filed not later than the last day prescribed by law including extensions of time for filing the common parent’s return sec_1_1502-75 provides that a corporation consents to filing a consolidated_return for the first consolidated_year by joining in the making of the consolidated_return for such year a corporation shall be deemed to have joined in the making of such return if it files a form_1122 sec_1_1502-75 provides that the consolidated_return shall be made on form_1120 for the group by the common parent_corporation sec_1_1502-75 provides that if a group wishes to exercise its privilege of filing a consolidated_return then a form_1122 must be executed by each subsidiary and must be attached to the consolidated_return for such year form_1122 is not required for a taxable_year if a consolidated_return was filed by the group for the immediately preceding_taxable_year sec_1_1502-77 provides that the common parent for all purposes other than for purposes not relevant here shall be duly authorized to act in its own name in all matters relating to the tax_liability for the consolidated_return_year under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time 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 subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_1502-75 sec_1_1502-75 and sec_1_1502-75 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for parent sub and sub to file the election provided that parent sub and sub can show good cause for not timely filing the election the other requirements of sec_301_9100-1 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent company official x and authorized representative explain the circumstances that resulted in the failure to timely file the election the information also establishes that tax professionals were responsible for the election and that parent sub and sub relied on them to timely make the election and that the government will not be prejudiced if relief is granted see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that parent sub and sub have shown they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-1 until days from the date_of_issuance of this letter for parent to file the election by filing a consolidated_return with parent as the common parent and attaching a form_1122 for each of sub and sub for their taxable_year ending on date c the above extension of time is conditioned on the taxpayers’ parent’s sub 1's and sub 2's tax_liability being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers’ tax_liability for the years involved a determination thereof will be made by the district director’s office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers’ liability is lower sec_301_9100-3 parent must file a consolidated_return for its taxable_year ending on date c and attach thereto the election a form_1122 executed on or after the date of this letter granting an extension for sub and sub pursuant to the instructions in sec_1 b a copy of this letter should also be attached we express no opinion with respect to whether in fact parent sub and sub qualify substantively to file a consolidated_return in addition we express no opinion as to the tax effects or consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or effects resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we have relied on certain statements and representations made by company official x and authorized representative however the district_director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest if any that would otherwise be applicable shall still apply this letter is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file in this office a copy of this letter has been sent to the authorized representative sincerely yours philip j levine assistant chief_counsel corporate