tcmemo_2014_163 united_states tax_court michael j mcelroy and ruth m mcelroy petitioners v commissioner of internal revenue respondent docket no filed date elissa f borges stuart m schabes and saul b abrams for petitioners william john gregg for respondent memorandum opinion nega judge this case is before the court for decision without trial see rule a respondent determined deficiencies of dollar_figure dollar_figure dollar_figure upon his request the court allowed mr abrams to withdraw from the case on date rule references are to the tax_court rules_of_practice and procedure continued and dollar_figure in petitioners’ federal_income_tax for and subject years respectively following the parties’ concessions we decide primarily whether the three-year period of limitations under sec_6501 bars assessment as petitioners argue we hold it does not we decide secondarily whether sec_165 and c lets petitioners deduct losses claimed for and we hold it does not background i preliminaries the facts in this background section are drawn from the undisputed allegations in the pleadings from the parties’ stipulations and from the exhibits submitted with the stipulations petitioners are a married couple who resided in virginia when their petition was filed they filed joint federal individual income_tax returns individual returns for and on or before date and respectively continued unless otherwise indicated section references are to the internal_revenue_code_of_1986 as amended and in effect for the subject years ii the partnerships a overview heritage memorial park associates hmpa heritage memorial park associates hmpa and heritage memorial park associates hmpa collectively partnerships are maryland general partnerships the partnerships were established to acquire cemetery sites to hold the sites for over one year and then to contribute the sites to qualified charitable organizations with the aim to provide individuals who invested in the partnerships with charitable_contribution deductions equal to the appraised values of the sites as of the times of the contributions glenn r johnston and his colleagues promoted the partnerships to wealthy individuals as a way for them to receive a return of tax benefits in the form of passthrough deductions or losses worth significantly more than the amounts invested each partnership attracted and always had fewer than partners the amount of the deduction for a charitable_contribution of property depends in relevant part on whether the contributed_property was held for over one year in which case the deduction is the property’s fair_market_value or for a lesser period in which case the deduction is the taxpayer’s basis in the property see sec_170 e a sec_1_170a-1 c income_tax regs see also sec_1222 providing that property may qualify for long-term_capital_gain treatment only if held for over one year hmpa hmpa and hmpa each operated for one year and respectively during or for the year of its operation each partnership acquired cemetery sites at the total costs of dollar_figure dollar_figure and dollar_figure respectively contributed the sites to qualified charitable organizations and reported that its partners investors could deduct charitable_contributions aggregating dollar_figure dollar_figure and dollar_figure respectively representing the appraised values of the contributed sites the partnerships did not hold the sites for over one year before contributing them to the charitable organizations and the charitable_contribution deductions were overstated in that they should have been measured by the partnerships’ bases in rather than the significantly higher appraised values of the sites michael j mcelroy petitioner invested dollar_figure in each partnership he made these investments to increase the amounts of his charitable_contributions for the subject years and more particularly to receive promoted tax benefits worth significantly more than his investments he expected that his investments would return him tax benefits worth dollar_figure for each subject year b hmpa hmpa timely filed a form_1065 u s partnership return of income for hmpa claimed the dollar_figure charitable_contribution_deduction on that return petitioner was allocated dollar_figure of that deduction and petitioners deducted the dollar_figure on their individual return as a charitable_contribution hmpa reported on its form_1065 that hmpa had no income or expenses for but for the charitable_contribution_deduction hmpa also reported on that return that one of its partners was mr johnston and that his address and profits interest were as stated therein c hmpa hmpa timely filed a form_1065 for hmpa claimed the dollar_figure charitable_contribution_deduction on that return petitioner was allocated dollar_figure of that deduction and petitioners after taking into account statutory limits on charitable_contributions deducted dollar_figure of the dollar_figure on their individual return as a charitable_contribution hmpa reported on its form_1065 that hmpa had no income or expense for but for the charitable_contribution_deduction hmpa also reported on that return that one of its partners was mr johnston and that his address and profits interest were as stated therein d hmpa hmpa timely filed a form_1065 for hmpa claimed the dollar_figure charitable_contribution_deduction on that return petitioner was allocated dollar_figure of that deduction and petitioners after taking into account statutory limits on charitable_contributions deducted dollar_figure of the dollar_figure on their individual return as a charitable_contribution hmpa reported on its form_1065 that hmpa had no income or expense for but for the charitable_contribution_deduction hmpa also reported on that return that one of its partners was mr johnston and that his address and profits interest were as stated therein iii petitioners’ individual return petitioners deducted a charitable_contribution_deduction carryover of dollar_figure on their individual return the parties stipulated that petitioners are not entitled to any of that carryover iv irs audit and criminal investigation the internal_revenue_service irs commenced an audit which led to the mailing of the notices of final_partnership_administrative_adjustment fpaas discussed infra later on or about date the criminal investigation division of the irs began a criminal investigation as to mr johnston and some or all of his colleagues on date while both the audit and the criminal investigation were underway respondent’s revenue_agent solicited from mr johnston as the tax_matters_partner tmp of hmpa-2 an extension of the period of limitations for assessment applicable to hmpa-2 for approximately two weeks later mr johnston through his counsel notified respondent’s revenue_agent that he was then under criminal investigation and would not extend that period of limitations v beginning of partnership-level proceedings in this court on date the commissioner mailed an fpaa for to the tmp of hmpa on date the commissioner mailed an fpaa for to the tmp of hmpa on date the commissioner mailed an fpaa for to the tmp of hmpa in care of mr johnston mr johnston in his stated capacity as the partnerships’ tmp petitioned the court as to the fpaas on date date and date respectively and the resulting cases partnership-level proceedings were hmpa 1995-4’s form_1065 designated mr johnston as the tmp for that year respectively placed on this court’s docket at nos and over the ensuing years through date respondent solicited and obtained mr johnston’s consent to the filing in this court of a series of joint motions to continue any trial in the partnership-level proceedings the court granted each motion vi criminal proceedings on date mr johnston was indicted on one count of conspiracy to defraud the united_states by selling claiming and causing others to sell and claim millions of dollars in false and fraudulent tax deductions for charitable_contributions and concealing from the irs income from the sales of the fraudulent deductions and multiple counts of aiding and assisting in the filing of false returns by investors in the partnerships so that the investors claimed charitable_contribution deductions in amounts substantially greater than allowable these charges involved the partnerships among one or more other entities mr johnston pleaded guilty to the first count on date as to the above-referenced motions for continuance many of them were filed before mr johnston’s indictment many of them were filed after mr johnston’s indictment and some of them were filed after mr johnston’s guilty plea vii actions concerning partnerships’ tmp on date respondent moved the court to remove mr johnston as the designated tmp in each of the partnership-level proceedings and to appoint a new tmp as of that time mr johnston was incarcerated pursuant to his guilty plea the court granted that motion on date and appointed petitioner as the partnerships’ tmp solely for purposes of the partnership-level proceedings petitioner thereinafter served in that capacity through date petitioner ceased being the tmp because of petitioners’ filing on date of a voluntary petition for bankruptcy under chapter of the bankruptcy code viii culmination of the partnership-level proceedings decisions were entered in the partnership-level proceedings on date afterwards petitioner’s allocations of the charitable_contribution deductions from the partnerships were revised to dollar_figure dollar_figure and dollar_figure respectively the parties agree that those allocated amounts apply in this case ix deficiency_notice on date respondent mailed to petitioners the deficiency_notice underlying this proceeding on date the bankruptcy court issued an order granting petitioners a discharge under sec of the bankruptcy code i overview discussion petitioners make two arguments in their opening brief as to the issues at hand we limit our analysis to those arguments see eg 121_tc_308 117_tc_117 n 91_tc_524 ndollar_figure we bear in mind that issues and arguments not advanced on brief are considered abandoned or otherwise waived see mendes v commissioner t c pincite- nicklaus v commissioner t c pincite n ii period of limitations petitioners argue primarily that the three-year period of limitations in sec_6501 bars assessment of any deficiency redetermined in this case respondent acknowledges that the deficiency_notice was mailed more than three years after petitioners’ individual returns were filed but argues that the assessment periods remain open under exceptions that apply to tax attributable to partnership items within the meaning of the tax equity and fiscal responsibility act of tefra pub_l_no sec_402 stat pincite and to partners filing for bankruptcy we agree with respondent sec_6501 generally requires that the commissioner assess tax as to a federal_income_tax return within three years of the later of the return’s due_date or its filing_date see also sec_6501 the three-year period may be extended however for tax attributable to partnership items under tefra see sec see also 133_tc_431 114_tc_533 the assessment_period may be extended as to a deficiency attributable to a partnership_item for example if an fpaa is mailed to a tmp and an action is begun under sec_6226 see sec d in that case the running of the in this context the term partnership items includes any item_of_income gain loss deduction or credit that the secretary has determined is more appropriately determined at the partnership level than at the partner level sec_6231 see also sec_301_6231_a_3_-1 proced admin regs the term partnership items also includes the applicability of the period of limitations to the mailing of an fpaa see 389_f3d_152 5th cir 177_f3d_119 2d cir aff’g tcmemo_1997_535 133_f3d_469 7th cir see also 491_f3d_732 8th cir sec_6226 lets the tmp file a petition as to an fpaa within days after its mailing where the tmp does not timely file such a petition sec_6226 lets any notice_partner or 5-percent group file a petition as to the fpaa within continued three-year period of limitations is suspended during the partnership-level proceeding until at least one year after the decision entered in that proceeding becomes final see sec a d see also 99_tc_109 the three-year period also may be extended if a partner is named as a debtor in a bankruptcy proceeding sec f h on this point the partnership items of that partner which may be subject_to the bankruptcy proceeding are recharacterized as nonpartnership_items as of the day the bankruptcy petition is filed and the commissioner has at least one year thereafter to assess any additional tax attributable to the converted items see secs f b d c e sec_301_6231_c_-7t a temporary proced admin regs fed reg date petitioners assert that the three-year limitations_period in sec_6501 has expired because a valid petition was never filed as to the fpaas so as to begin an action under sec_6226 they recognize that the partnerships each had a partnership-level proceeding docketed in this court but contend the proceedings continued days after the close of the tmp’s 90-day period see sec_6231 defining the term notice_partner see also sec_6231 defining the term 5-percent group sec_6226 provides that a notice partner’s or a 5-percent group’s petition within the 90-day tmp period is considered filed on the last day of the referenced 60-day period if no action which is not dismissed is otherwise brought as to the fpaa within that 60-day period were invalid because they state mr johnston could not properly commence those proceedings in that he was under criminal investigation when the fpaas were mailed and thus was disqualified from serving as the partnerships’ tmp they conclude that the petitions commencing those proceedings were invalid and that the deficiency_notice was therefore untimely because it was mailed approximately years after the fpaas were mailed they add that even if the petitions were valid the partnership-level proceedings should be deemed to have ended years before the day they actually did end because respondent knew that mr johnston could not be the tmp on this point petitioners state respondent should not have joined with mr johnston in repeatedly moving the court to continue a trial of the partnership-level proceedings or at least should have informed the court that mr johnston was not a proper tmp we are unpersuaded by petitioners’ primary argument a challenge to the validity of a petition filed as to an fpaa as well as a challenge to the conduct of the proceeding resulting therefrom is typically treated as an issue to be decided in that partnership-level proceeding see eg 140_tc_193 131_tc_206 93_tc_562 neither party has specifically addressed whether an exception to this treatment exists here where the partnership items of petitioner were recharacterized as nonpartnership_items during the pendency of the partnership-level proceedings while petitioner was a party to those proceedings at their start and in that capacity was then entitled to participate in the proceedings and to challenge whether the periods of limitations for the mailing of the fpaas remained open see sec_6226 he ceased to be such a party after petitioners filed for bankruptcy see sec_6226 see also sec_6231 c e sec_301_6231_c_-7t a temporary proced admin regs supra in addition after the bankruptcy filing petitioner’s partnership items arising during the subject years which would generally have been decided at the partnership-level proceeding were converted to nonpartnership_items subject_to this deficiency proceeding see sec_301_6231_c_-7t a temporary proced admin regs supra whether an exception to the usual treatment applies here given the recharacterization of petitioner’s partnership items however we need not and do not decide this is because as we now discuss petitioners would not prevail in either of the two scenarios under the first scenario we assume without deciding that petitioners’ challenge to the validity of the petitions filed in the partnership-level proceedings and petitioners’ challenge to the conduct of those proceedings were the proper subject of the partnership-level proceedings the court in those proceedings did not find that the petitions were invalid nor did we note any impropriety in the proceedings it follows in this scenario that for purposes of this case both the petitions and the conduct of the partnership-level proceedings are considered valid under the second scenario we assume without deciding that petitioners’ challenge to the validity of the petitions filed in the partnership-level proceedings and petitioners’ challenge to the conduct of those proceedings are proper subjects of this proceeding contrary to petitioners’ assertion mr johnston’s filing of the petitions as to the fpaas in his stated capacity as the partnerships’ tmp suspended the periods of limitations as to the partnership items underlying the fpaas until at least one year after our decisions in the partnership-level proceedings became final this is so regardless of the validity of the underlying petitions see sec d requiring only that a petition be filed under section we note in passing however that petitioners rely erroneously on 147_f3d_221 2d cir rev’g and remanding tcmemo_1994_26 to conclude that the single fact that the irs was criminally investigating mr johnston automatically disqualified him from serving as the partnerships’ tmp the court_of_appeals for the second circuit subsequently clarified its holding in transpac drilling venture to say completely the opposite of petitioners’ conclusion the court stated our decision in transpac was based on the presence of an actual conflict we did not continued in order to suspend the period of limitations with no mention to whether the petition must be valid h_r conf rept no pincite 1997_4_cb_1457 specifically stating that the period of limitations is suspended notwithstanding whether a petition filed under sec_6226 is valid or timely see also 44_f3d_803 9th cir not to mention that even if mr johnston failed to qualify to act as the partnerships’ tmp which we need not and do not decide he was at least a notice_partner in that his name address and status as a partner were included in each of continued hold that the existence of a criminal investigation by the irs automatically disqualifies a tmp or his representative from negotiating or entering into agreements with the irs 295_f3d_280 2d cir aff’g tcmemo_2001_85 see also 564_f3d_719 5th cir in 44_f3d_803 9th cir an individual who was the partnership’s tmp filed a timely petition in this court as to an fpaa mailed to the partnership and the case was eventually settled on the basis that the partnership was entitled to a lesser loss than it claimed on its return the court entered a decision reflecting the settlement but later learned that the individual had filed for bankruptcy before petitioning this court thus nullifying his status as tmp see id the court vacated the stipulated decision for lack of jurisdiction and some partners of the partnership then sought tax refunds asserting that vacating of the decision made any related assessment untimely see id the court_of_appeals for the ninth circuit disagreed the court held that sec d tolled the applicable limitations_period while the case was pending in this court and for one year thereafter notwithstanding that the individual’s filing of the petition as the tmp was defective see id pincite the subject form_1065 see sec_6223 b and c a providing with respect to partnerships with no more than partners that the term notice_partner generally includes any partner whose name and address appear on the relevant partnership returns see also 85_tc_900 holding that the term notice_partner generally includes any partner whose name and address appear on the relevant partnership returns mr johnston as a notice_partner could file the petitions to the extent he could not file the petitions as the tmp see 85_tc_900 we also decline to speculate as petitioners ask us to do that the partnership-level proceedings would have ended earlier than they actually did the date of the decisions in the partnership-level proceedings is derived from the code see sec_7459 and we lack the authority to change that date absent unusual circumstances none of which are present here see eg cinema ’84 v petitioners have not argued that mr johnston was no longer a notice_partner when the petitions were filed and we consider them to have waived any such argument if mr johnston qualified as a notice_partner petitions filed by him within the 90-day period described in sec_6226 would have been treated as filed on the last day of the 60-day period described in sec_6226 see sec_6226 commissioner 122_tc_264 aff’d 412_f3d_366 2d cir see also sec_7481 regarding dates on which tax_court decisions become final the long and short of this issue is that the through forms were timely filed the fpaas were timely mailed to the partnerships’ tmp within three years after the returns were filed and petitions were timely filed in this court as to the fpaas the assessment periods as to the partnership items therefore remained open at the commencement of and throughout the partnership-level proceedings as stated in section d then when petitioners filed their bankruptcy petition while the partnership-level proceedings were pending in this court petitioner’s partnership items were recharacterized as nonpartnership_items by operation of law and respondent had at least one year thereafter to mail the deficiency_notice to petitioners see secs f b d c e sec_301_6231_c_-7t a temporary proced admin regs supra respondent’s mailing of the deficiency_notice to petitioners met that one-year requirement the deficiency_notice was therefore timely and the applicable limitations periods remain open iii sec_165 loss petitioners argue secondarily that they may deduct a dollar_figure loss for each year as to petitioner’s investments in the partnerships to that end petitioners assert petitioner’s ownership interests in the partnerships were worthless as of the end of the corresponding years in which the partnerships operated and he knew that the interests were worthless as of those times and abandoned his interests as of those times petitioners add that petitioner invested in the partnerships to make a profit and in furtherance of a legislative intent to encourage charitable_contributions respondent argues that petitioners may not deduct their claimed losses because petitioner did not invest in the partnerships to make a profit we agree with respondent that petitioners may not deduct their claimed losses deductions are a matter of legislative grace and petitioners bear the burden of proving their entitlement to the deductions which they now claim see 503_us_79 while sec_7491 sometimes shifts the burden_of_proof to the commissioner with respect to disputed factual issues sec_7491 has no bearing on this case because as a threshold matter petitioners have not raised the applicability of that section in their opening brief see mendes v commissioner t c pincite nicklaus v commissioner t c pincite n rybak v commissioner t c pincite n see also dickerson v commissioner tcmemo_2012_60 103_tcm_1280 cameron v commissioner tcmemo_2007_ 94_tcm_245 n kansky v commissioner tcmemo_2007_40 93_tcm_921 cf 140_tc_86 noting that a taxpayer must raise the applicability of sec_7491 as an issue for the section to be applicable petitioners rely upon sec_165 to support their claim to the loss deductions that section lets a taxpayer deduct any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise sec_165 the applicability of sec_165 here hinges on whether petitioner incurred the claimed losses in a transaction entered into for profit see sec_165 petitioners’ meeting of that standard in turn requires that we find that petitioner’s primary reason for investing in the partnerships was to make an economic profit or in other words a profit without consideration to any_tax benefit flowing from the partnerships see 82_tc_1001 see also 869_f2d_785 4th cir aff’g 87_tc_1087 cf 81_tc_210 noting that an intent to make a profit for purposes of sec_162 requires an intent to make an economic profit independent of tax savings petitioner invested in the partnerships to increase the amounts of his charitable_contribution deductions for the subject years and more particularly to receive tax benefits greater than his cash investments this reason for petitioner’s investment fails to clear the requisite profit-motive hurdle that petitioners must jump over to deduct the claimed losses under sec_165 to be sure the partnerships were designed to generate tax benefits from the making of charitable_contributions and not to make any profit independent of tax benefits in fact the partnerships were established not to realize any income or economic profit at all therefore we naturally conclude that petitioner could not make a profit from his investments in the partnerships as that term is defined without regard to the promoted tax benefits see 41_tc_13 aff’d 332_f2d_428 3d cir see also mitchell v commissioner tcmemo_2001_269 82_tcm_732 semel v commissioner tcmemo_1965_232 24_tcm_1176 we also disagree with petitioners’ assertion that the profit_motive requirement is met because congress specifically prescribed a deduction for charitable_contributions the mere fact that congress prescribed a deduction for charitable_contributions does not necessarily mean that taxpayers such as petitioners are entitled to deduct any loss that they may incur incident to the making of a charitable_contribution see 92_tc_958 aff’d without published opinion 921_f2d_280 9th cir petitioners have received the benefit that congress prescribed for the partnerships’ making of the charitable_contributions and congress has not allowed them to deduct anything more neither do we we conclude that petitioner lacked the requisite profit_motive incident to his investment in the partnerships accordingly we conclude that petitioners are not entitled to deduct their losses claimed for and dollar_figure iv conclusion we hold that sec_6501 does not bar assessment of the deficiencies for the subject years we also hold that sec_165 and c does not let petitioners deduct their losses claimed for and petitioners make no argument that they may deduct theft losses in the amounts of petitioner’s unrecovered contributions to the partnerships we therefore do not consider that issue nor need we decide petitioners’ assertions that petitioner’s partnership interests were worthless as of the end of the years of their operation or that he abandoned those interests as of the end of those years those assertions which involve the timing but not the allowance of a loss deduction fall to the side given our holding that petitioner lacked the requisite profit_motive in investing in the partnerships we have considered all arguments that petitioners made unless otherwise indicated and have rejected those arguments not discussed herein as without merit to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ---------------------- ------- ---------------------------------------------------------- ---------------------------- ----------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ----------------- telephone number --------------------- refer reply to cc tege eb qp2 plr-141567-08 date date legend commission ---------------------------------------------------------------------- ein plan ---------------- ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ---------------------------------------- state x -------------------- dear -------------- this responds to your letter of --------------------------- requesting a ruling concerning the plan which the commission intends to be an eligible_deferred_compensation_plan under sec_457 of the internal_revenue_code_of_1986 the code the plan is a nonqualified_deferred_compensation_plan and related trust established by the commission and adopted by state x for the benefit of the employees of state x it is represented that state x is an eligible_employer within the meaning of sec_457 under the plan an eligible_employee becomes a participant by entering into an agreement to defer compensation into the plan the election must be made prior to the beginning of the month in which the employee’s compensation is paid or made available plr-141567-08 the plan provides for a maximum amount that may be deferred by a participant in any taxable_year it also provides for a catch-up contribution for amounts deferred for one or more of the participant's last three taxable years ending before he or she attains normal_retirement_age under the plan in addition the plan provides for age fifty-plus catch-up_contributions described in sec_457 the amounts that may be deferred under the annual maximum limitation and the catch-up provisions are within the limitations of sec_457 upon separation_from_service participant’s account will be paid in accordance with the payment option elected by the participant benefits under the plan will commence no later than the latter of days after the close of the plan_year in which the participant attains age ½ or days after the close of the plan_year in which the participant has a separation_from_service the plan provides that the manner and time of benefit payout must meet the distribution_requirements of sec_457 and sec_401 of the code the plan also provides for a distribution due to an unforeseeable_emergency that is a severe financial hardship resulting from extraordinary and unforeseeable circumstances beyond the control of the participant under sec_457 the plan also provides that a participant may apply for and receive a loan from the participant’s account balance the plan provides for acceptance of transfers of a participant's account balance from another eligible_deferred_compensation_plan the plan provides for permissive plan to plan transfers or rollovers of all or a portion of a participant's account to another eligible governmental_plan if the participant has terminated service and is a participant of the other eligible_plan the plan provides that amounts of compensation deferred under the plan are to be transferred to and invested in a_trust as described in sec_457 for the exclusive benefit of the participants and their beneficiaries all amounts deferred under the plan must be transferred to the trust within an administratively reasonable_time period that is not longer than fifteen business days following the end of the month in which the amount would otherwise have been paid to the participant each participant shall subject_to requirements of any applicable law and any procedures established by the committee direct the investment of his or her benefit amount benefits payable from the trust may not be subject_to anticipation alienation sale transfer assignment pledge encumbrance or charge sec_457 of the code provides rules for the deferral of compensation by an individual participating in an eligible_deferred_compensation_plan as defined in sec_457 plr-141567-08 sec_457 of the code provides that in the case of a participant in an eligible governmental deferred_compensation plan any amount of compensation deferred under the plan and any income attributable to the amounts so deferred shall be includible in gross_income only for the taxable_year in which such compensation or other income is paid to the participant or beneficiary sec_457 provides that the term eligible_deferred_compensation_plan means a plan established and maintained by an eligible_employer in which only individuals who perform service for the employer may be participants and which meet the deferral limitations described in sec_457 which meets the distribution_requirements described in sec_457 which provides for deferral elections described in sec_457 and in the case of a governmental_plan which requires the plan assets and income to be held in trust for the exclusive benefit of participants and beneficiaries as described in sec_457 sec_457 provides that the term eligible_employer means a state political_subdivision of a state and any agency_or_instrumentality of a state or political_subdivision of a state and any other organization other than a governmental_unit exempt from income_tax sec_457 of the code provides that compensation will be deferred for any calendar month only if an agreement providing for such deferral has been entered into before the beginning of such month an eligible_plan may provide that if a participant enters into an agreement providing for deferral by salary reduction under the plan the agreement will remain in effect until the participant revokes or alters the terms of the agreement sec_457 of the code provides the basic limits on the amount of eligible annual deferrals however a catch-up amount described in sec_457 may be added to this amount for participants that are within three years of the normal_retirement_age or for participants age or older a catch-up amount may be added as described in sec_457 a participant eligible for both catch-up provisions is entitled to use the higher limit of the two the total annual eligible deferral amount is limited by sec_457 coordination of the basic limits and the catch-up limits is described in sec_1_457-4 of the income_tax regulation regulations sec_1_457-4 of the regulations provides that a plan may define the normal_retirement_age for purposes of the last-three-years catch-up provision as any age that is on or after the earlier of age or the age at which participants have the right to retire and receive under the basic defined benefit pension_plan of the state or tax-exempt_entity or a money_purchase_pension_plan in which the participant also participates if the participant is not eligible to participate in a defined_benefit_plan immediate retirement benefits without actuarial or similar reduction because of retirement before some later specified age and that is not later than age seventy and a plr-141567-08 half alternatively a plan may provide that a participant is allowed to designate a normal_retirement_age within these ages for purposes of the three-year catch-up provision an entity sponsoring more than one eligible_plan may not permit a participant to have more than one normal_retirement_age under the eligible plans it sponsors sec_1_457-4 of the regulations provides a special exception for qualified police and firefighters to retire as early as age forty for purposes of the three-year catch- up provision sec_1_457-5 of the regulations provides that the sec_457 eligible- deferral amount limitation is applied to all eligible plans in which a participant participates in a tax_year and is determined on an aggregate basis if a participant has annual deferrals under more than one eligible_plan and the applicable catch-up amount is not the same for each such eligible_plan for the taxable_year sec_457 is applied using the catch-up amount under whichever plan has the largest catch-up amount applicable to the participant to the extent that the combined annual deferral amount exceeds the maximum deferral limitation the amount is treated as an excess_deferral under sec_1_457-4 of the regulations for purposes of determining whether there is an excess_deferral resulting from a failure of a plan to apply the deferral limitations all plans under which an individual participates by virtue of his or her relationship with a single employer are treated as a single_plan without regard to any differences in funding sec_457 of the code provides that amounts distributed under an eligible_plan will not be made available to participants or beneficiaries earlier than i the calendar_year in which the participant attains age ii when the participant has a severance_from_employment with the employer or iii when the participant is faced with an unforeseeable_emergency sec_1_457-6 of the regulations provides the requirements for a unforeseeable_emergency distribution an unforeseeable_emergency must be defined in the plan as a severe financial hardship of the participant or beneficiary resulting from an illness or accident of the participant or beneficiary the participant's or beneficiary's spouse or the participant's or beneficiary's dependent loss of the participant's or beneficiary's property due to casualty including the need to rebuild a home following damage to a home not otherwise covered by homeowner's insurance eg as a result of a natural disaster or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant or the beneficiary whether a participant or beneficiary is faced with an unforeseeable_emergency is determined based on the relevant facts and circumstances of each case however a distribution on account of unforeseeable_emergency may not be made to the extent that such emergency is or may be relieved through reimbursement or compensation from insurance or otherwise by liquidation of the participant's assets to the extent the liquidation of such assets would not itself cause severe financial hardship or by plr-141567-08 cessation of deferrals under the plan further distributions because of an unforeseeable_emergency must be limited to the amount reasonably necessary to satisfy the emergency need which may include any amounts necessary to pay any federal state or local_income_taxes or penalties reasonably anticipated to result from the distribution sec_457 of the code requires a plan to meet the minimum distribution_requirements of sec_401 these requirements are described in sec_1_401_a_9_-1 through a -9 of the regulations sec_457 of the code provides that a governmental_plan will not fail to meet the distribution_requirements if it provides for in-service distributions of a limited- dollar amount which meet the requirements of sec_457 and sec_1_457-6 of the regulations sec_1_457-6 of the regulations is satisfied if the participant's total amount deferred the participant's total account balance which is not attributable to rollover_contributions is not in excess of the dollar limit under sec_411 ie dollar_figure adjusted for inflation no amount has been deferred under the plan by or for the participant during the two-year period ending on the date of the distribution and there has been no prior distribution under the plan to the participant of this kind sec_457 of the code provides that a participant shall not be required to include in gross_income any portion of the entire amount payable to such participant solely by reason of the transfer of such portion from one eligible_deferred_compensation_plan to another eligible_deferred_compensation_plan sec_1_457-10 of the regulations provides that an eligible government_plan may transfer amounts to and receive amounts from an eligible government_plan if certain conditions are met with regard to transfers from an eligible governmental_plan to another eligible governmental_plan of the same employer sec_1_457-10 of the regulations provides that a transfer from an eligible governmental_plan to another eligible governmental_plan is permitted if the following conditions are met i the transfer is from an eligible governmental_plan to another eligible governmental_plan of the same employer ii the transferor plan provides for transfers iii the receiving plan provides for the receipt of transfers iv the participant or beneficiary whose amounts deferred are being transferred will have an amount deferred immediately_after_the_transfer at least equal to the amount deferred with respect to that participant or beneficiary immediately before the transfer and v the participant or beneficiary whose deferred amounts are being transferred is not eligible for additional annual deferrals in the receiving plan unless the participant or beneficiary is performing services for the entity maintaining the receiving plan sec_457 of the code provides that with regard to rollover distributions for an eligible_deferred_compensation_plan if i any portion of the balance_to_the_credit of plr-141567-08 an employee in such plan is paid to such employee in an eligible_rollover_distribution within the meaning of sec_402 ii the employee transfers any portion of the property such employee receives in such distribution to an eligible_retirement_plan described in sec_402 and iii in the case of a distribution_of_property other than money the amount so transferred consists of the property distributed then such distribution to the extent so transferred shall not be includible in gross_income for the taxable_year in which paid under sec_1_457-10 of the regulations an eligible governmental_plan that permits eligible rollover distributions made from another eligible_retirement_plan to be paid into the eligible governmental_plan is required to provide that it will separately account for any eligible rollover distributions it receives amounts contributed to an eligible governmental_plan as eligible rollover distributions are not taken into account for purposes of the annual_limit on annual deferrals by a participant but are otherwise treated in the same manner as amounts deferred under the plan sec_1_402_c_-2 of the regulations provides that a distributee other than the employee or the employee's surviving_spouse or a spouse or former spouse who is an alternate_payee under a qualified_domestic_relations_order is not permitted to roll over distributions consistent with sec_414 of the code sec_1 c of the regulations provides for distributions made pursuant to a qualified_domestic_relations_order if a distribution or payment is made from an eligible_plan to an alternate_payee pursuant to a qualified_domestic_relations_order rules similar to the rules of sec_402 apply to the distribution sec_414 provides that the term alternate_payee means any spouse former spouse child or other dependent of a participant who is recognized by a domestic_relations_order as having a right to receive all or a portion of the benefits payable under a plan with respect to such participant sec_457 of the code provides that no amount shall be includible in gross_income by reason of a direct trustee-to-trustee transfer to a defined benefit governmental_plan as defined in sec_414 if such transfer is for the purchase of permissive_service_credit as defined in sec_415 under such plan or a repayment to which sec_415 does not apply sec_457 of the code provides that a plan maintained by an eligible governmental employer shall not be treated as an eligible_deferred_compensation_plan unless all assets and rights purchased with such deferred_compensation amounts and all income attributable to such amounts property or rights of the plan are held in trust for the exclusive benefit of participants and their beneficiaries sec_457 provides that a_trust described in sec_457 shall be treated as an organization exempt from tax under sec_501 based upon the information submitted and the representations made we conclude as follows plr-141567-08 the plan is an eligible_deferred_compensation_plan as defined in sec_457 of the code and the regulations amounts of compensation deferred in accordance with the plan including any income attributable to the deferred_compensation will be includible under sec_457 of the code in the recipient’s gross_income for the taxable_year or years in which amounts are paid to a participant or beneficiary in accordance with the terms of the plan amounts distributed from the plan in an eligible_rollover_distribution within the meaning of sec_402 of the code shall not be includible in gross_income for the taxable_year in which paid as provided in sec_457 the trust established as part of the plan meets the requirements of sec_457 of the code and is an organization exempt from tax under sec_501 of the code except as expressly provided herein no opinion is expressed or implied concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter if the plan is significantly modified this ruling will not necessarily remain applicable no opinion is expressed concerning the timing of the inclusion in income of amounts deferred under any deferred_compensation plan other than the plan described above in addition this ruling applies only to deferrals made after the date of this ruling no ruling was requested and no opinion expressed concerning the amount included by a participant in gross_income as a result of the rollover of an eligible_rollover_distribution from the plan into a roth_ira as defined in sec_408a 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 plr-141567-08 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely john t ricotta john t ricotta branch chief qualified_plans branch employee_benefits tax exempt government entities enclosure copy for sec_6110 purposes


t c memo united_states tax_court ashley m walker et al petitioners v commissioner of internal revenue respondent docket nos filed date ashley m walker pro_se in docket nos and aaron s walker pro_se in docket nos and alex k walker pro_se in docket nos and 1cases of the following petitioners are consolidated herewith aaron s walker docket nos and alex k walker docket nos and donald r and jennie l walker docket no ashley m walker docket no and donald r walker llc donald r walker tax_matters_partner docket no donald r and jennie l walker pro sese in docket no donald r walker pro_se in docket no stewart todd hittinger for respondent memorandum findings_of_fact and opinion cohen judge respondent determined deficiencies penalties and additions to tax in the individual petitioners’ federal income taxes as follows ashley m walker docket no penalty addition_to_tax year deficiency sec_6662 sec_6651 dollar_figure dollar_figure dollar_figure aaron s walker docket no penalty addition_to_tax year deficiency sec_6662 sec_6651 dollar_figure dollar_figure dollar_figure alex k walker docket no penalty addition_to_tax year deficiency sec_6662 sec_6651 dollar_figure dollar_figure dollar_figure donald r and jennie l walker docket no penalty addition_to_tax year deficiency sec_6662 sec_6651 dollar_figure dollar_figure dollar_figure big_number big_number dollar_figure dollar_figure --- --- alex k walker docket no penalty addition_to_tax year deficiency sec_6662 sec_6651 dollar_figure dollar_figure big_number dollar_figure --- --- ashley m walker docket no penalty addition_to_tax year deficiency sec_6662 sec_6651 dollar_figure dollar_figure big_number dollar_figure --- --- aaron s walker docket no penalty addition_to_tax year deficiency sec_6662 sec_6651 dollar_figure dollar_figure big_number dollar_figure --- --- in a notice of final_partnership_administrative_adjustment fpaa sent to donald r walker llc walker llc respondent determined that income of the walker llc should be increased by dollar_figure dollar_figure and dollar_figure for and respectively after concessions the primary issue for decision is whether l r investments llc l r is an entity with a valid business_purpose with income taxable to the respective petitioners in the percentages claimed on their tax returns or is part of a scheme lacking economic_substance created for the purpose of avoiding federal income taxes and disregarded for tax purposes if l r is disregarded the dental practice income of the llc shall be taxed to donald r walker and jennie l walker senior walkers and not to the other individual petitioners in that event we must decide whether the senior walkers are liable for the sec_6662 penalties respondent determined petitioners failed to appear for trial and were declared in default respondent presented evidence in relation to the penalty issues as a result and after petitioners failed to respond to an order to show cause giving them an opportunity to object the cases were submitted on the stipulation of facts that had been filed on an earlier occasion and on the testimony respondent presented the stipulation executed by the parties includes computations of the deficiencies in the individual petitioners’ tax_liabilities in the event that the court finds that l r is disregarded for tax purposes any issues not addressed by the stipulation or in this opinion are decided against petitioners by reason of their defaults see rule sec_123 sec_149 all rule references are to the tax_court rules_of_practice and procedure all section references are to the internal_revenue_code findings_of_fact some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference alex k walker resided in florida and the other individual petitioners resided in indiana when their petitions were filed the principal_place_of_business of the walker llc was in indiana when its petition was filed the senior walkers were married to each other at all material times they are the parents of four children only three of whom ashley m walker aaron s walker and alex k walker walker children are petitioners during the walker children ranged in age from to years old petitioner donald r walker is a licensed and practicing dentist and oral surgeon he has practiced dentistry and oral surgery since about before the formation of the walker llc donald r walker operated his dental and oral surgery practice in the name of donald r walker dds inc of which he was the only shareholder donald r walker dds inc filed its federal_income_tax returns on forms 1120s u s income_tax return for an s_corporation the income from the donald r walker dds inc forms 1120s was reported on schedules k-1 shareholder’s share of income deductions credits etc and flowed through to the joint individual income_tax returns the senior walkers filed the walker llc was created with the assistance of an attorney scott c cole who explained the purported advantages of using multiple limited_liability companies to own and operate the dental and oral surgery practice the entities petitioners created were patterned after entities utilized by scott c cole and his brother darren t cole to avoid income and employment_taxes on their law practice as described in detail in cole v commissioner tcmemo_2010_31 affd 637_f3d_767 7th cir beginning with the taxable_year through and including the year all of the income from donald r walker’s dental and oral surgery practice was reported on partnership returns of the walker llc during the years in issue the dental and oral surgery services performed and billed by the walker llc were done pursuant to professional licenses and certificates obtained by donald r walker the returns of the walker llc for through reported that the llc was owned percent by donald r walker and percent by l r the ordinary business income of the dental practice as reflected on the partnership returns of the walker llc for through was allocated percent to donald r walker and percent to l r l r was organized in the state of indiana on date scott c cole was the organizer of l r donald r walker was the only individual that contributed any property to l r when it was organized no other individuals ever contributed anything to the entity in exchange for interests in l r l r conducted no business in its own name it had no employees it was not involved in the practice of dentistry other than by its alleged ownership of percent of the walker llc and did not have any licenses or permits to practice dentistry or any other business l r filed forms u s return of partnership income for through prepared by scott c cole all of the gross_receipts l r reported during the years in issue were attributed to the walker llc schedules k-1 partner’s share of income credits deductions etc attached to l r’s partnership returns reported that the entity was owned as follows percent by the oldest daughter of the senior walkers percent by ashley m walker percent by aaron s walker percent by alex k walker percent by jennie l walker and percent by donald r walker the walker children reported the income shown on the schedules k-1 on personal income_tax returns prepared by scott c cole from information provided by donald r walker the individual petitioners’ returns for were due pursuant to filing extensions obtained by date but they were not filed until date reporting of l r’s income on the individual income_tax returns of the walker children resulted in significant income_tax liabilities being reported on those returns for each of the years and however total taxes reported on the income earned from donald r walker’s dentistry and oral surgery practice were reduced as a result of reporting that income as distributable among the owners of l r donald r walker paid the tax_liabilities reported on each of the walker children’s federal_income_tax returns for the years and the walker children did not receive distributions of funds either by cash or check from l r however they did not suffer adverse financial impact from the reporting of l r’s income on their tax returns because their father paid the resulting tax obligations petitioner’s oldest daughter was married to a lawyer and did not want any income or loss from l r reported as income or loss to her although she was not opposed to having certificates of ownership issued in her name consequently no income from l r was reported as attributable to her ownership_interest in the entity and she is not a party to these proceedings the notices of deficiency issued to the walker children take a whipsaw_position with respect to the portions of income reported from l r and the inclusion of all the income of l r as attributable to donald r walker respondent moved for consolidation of these cases and acknowledges that the income of the walker llc that flows through to l r should be taxed only once thus to the extent the income is taxable to donald r walker it should not be taxed to the walker children pursuant to the stipulation of the parties deductions are disallowed for contributions to retirement plans of dollar_figure claimed on the form_1065 filed on behalf of l r and for automobile and truck expenses of dollar_figure and telephone expenses of dollar_figure claimed on the form_1065 filed on behalf of l r the underpayments resulting from disregarding l r and disallowing the deductions specified in the preceding paragraph are in excess of dollar_figure and more than percent of the tax required to be shown on the tax returns of the senior walkers for each of the years in issue and thus are substantial understatements of income_tax for purposes of sec_6662 the senior walkers have not argued or shown reasonable_cause for the underpayments of tax their persistence in underreporting their tax_liabilities after the notices of deficiency were sent and the petitions were filed negates good_faith within the meaning of sec_6664 opinion preliminary matters the procedural history of these cases is set out here to explain why the facts found are summary the petitions in these cases were filed by then counsel of record for petitioners during the first months of in date different counsel appeared for petitioners substituting for counsel who had filed the petitions by notice served date the cases were set for trial in indianapolis indiana on date when the cases were called for trial the parties reported that they had reached a basis of settlement they were ordered to submit their proposed decisions or to file reports by date on date scott c cole was substituted as counsel for petitioners on date respondent reported that petitioners no longer wished to settle the cases by notice served date the cases were set for trial in indianapolis on date the court’s standing_pretrial_order was attached to the notices setting the cases for trial and contained express directions about pretrial preparation and deadlines for pretrial memoranda and other matters the notices and orders warned of the consequences of failing to appear for trial and incorporated reference to rule which provides in relevant part a motion for continuance filed days or less prior to the date to which it is directed ordinarily will be deemed dilatory and will be denied unless the ground therefor arose during that period or there was good reason for not making the motion sooner the standing pretrial orders also required that all documents filed after the notice of trial be served on all other parties with a certificate of service as required by rule b on date respondent moved for consolidation of the cases for trial briefing and opinion although ordered to respond petitioners did not do so the motion to consolidate was granted rule a sets forth rules applicable to filing documents in consolidated cases in a conference call before the date of trial and on the record on date the court discussed with the parties the apparent applicability of rule g with regard to scott c cole’s representation of the senior walkers on the one hand and the walker children on the other thereafter scott c cole was withdrawn as counsel for the walker children but continued to represent the senior walkers the cases were continued but the parties were directed to file a stipulation of facts the stipulation was filed date and was signed by the walker children and the senior walkers as well as by scott c cole among other things the stipulation disclosed that scott c cole had prepared the tax returns reflecting the allocation of income disputed in these cases by notice served date the cases were set for trial on date and the standing_pretrial_order was again served on the parties on april and the court received from scott c cole documents seeking a continuance but the documents could not be filed because they did not comply with the standing_pretrial_order or rule b or a and because scott c cole purported to act on behalf of the walker children despite his prior withdrawal from representing them the documents were returned unfiled as was a late pretrial memorandum that was similarly defective the cases were called for trial on date scott c cole and donald r walker appeared darren t cole purported to appear on behalf of the walker children but he failed to provide properly executed entries of appearance as required by rule a no motion for continuance was made or mentioned with the acquiescence of all present the trial was set for the following afternoon for testimony of donald r walker with respect to the penalties at issue in the cases the cases were called for trial on the afternoon of date donald r walker was not present scott c cole moved to withdraw as counsel for the senior walkers darren t cole was present and purported to speak on behalf of the walker children but still failed to execute proper entries of appearance both scott c cole and darren t cole represented that their clients wished to have the cases submitted on the stipulation scott c cole was withdrawn as counsel for the senior walkers both scott c cole and darren t cole left the courtroom when respondent’s counsel commenced an opening statement respondent presented evidence that erroneous tax reporting by petitioners continued for and showing a continuing pattern of improper tax reporting by order served date petitioners were ordered to show cause in writing if any they have why these cases should not be decided on the stipulation of facts filed date and the authorities and arguments set forth in respondent’s pretrial memorandum the order also stated that such showing shall include any motions memoranda of law or briefs that petitioners wish for the court to consider in deciding these cases the deadline for response was extended to date on the motion of donald r walker who represented that he wished to obtain counsel to help him file a response to the order to show cause new counsel the fourth in these cases entered an appearance for the senior walkers on date but no response to the order to show cause was received from any petitioner on date new counsel moved to withdraw as a result of the foregoing events the court concludes that petitioners have failed properly to prosecute these cases see rule sec_123 sec_149 it also appears that petitioners have maintained these cases primarily for delay see sec_6673 however because the record contains the stipulation of facts and the testimony respondent presented the issues addressed in the stipulation will be discussed in this opinion deficiencies approximately month before submission of these cases in cole v commissioner f 3d pincite cole cases the court_of_appeals for the seventh circuit described the basic legal principles applicable here as follows under the assignment_of_income_doctrine taxpayers may not shift their tax_liability by merely assigning income that the taxpayer earned to someone else 259_f3d_881 7th cir citing 281_us_111 239_f3d_917 7th cir in lucas the supreme court held that a taxpayer’s salary may not escape tax by anticipatory arrangements and contracts however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earned it u s pincite tax law makes no distinction according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew id pincite in griffiths v helvering the court refused to allow the refinements of title to determine a taxation issue and focused instead on the actual command over the property taxed 308_us_355 quoting 281_us_376 the court held that a lawyer’s ingenuity devised a technically elegant arrangement that created an intricate outward appearance to the simple sale and the passage of money griffiths u s pincite parallel citations omitted many more cases illustrating the applicable legal principles could be cited but in the absence of any other authorities cited or arguments made by petitioners it is unnecessary to belabor the obvious the stipulated facts in these cases compel the conclusion that the income of l r which resulted solely from services performed by donald r walker in his dentistry and oral surgery practice should have been reported by and is taxable to the senior walkers on their joint tax returns for the years in issue the attempt to reduce total income taxes and avoid employment_taxes by creating a limited_liability_company with the walker children whose tax returns were prepared by scott c cole and whose reported taxes were paid_by their father must fail petitioners suggest that these cases are distinguishable from the cole cases the most obvious distinction is that scott c cole and his brother and law partner darren t cole were penalized under sec_6663 for fraud in their cases whereas only the accuracy-related_penalty of sec_6662 is disputed in these cases see cole v commissioner tcmemo_2010_31 only scott c cole and his wife appealed our decision so the court_of_appeals opinion relates only to their case other factual distinctions may be found in the detailed findings in the cole cases because they were decided after a trial with testimony from the taxpayers but the essential patterns are indistinguishable and the factual distinctions do not make a difference in these cases as in the cole cases the use of multiple entities and erroneous tax reporting based on fictitious distribution of taxable_income did not reflect any change in the professional practices of the taxpayers the only apparent purpose of l r was tax_avoidance thus l r lacked economic_substance l r is therefore disregarded for tax purposes the stipulation setting forth the liabilities of petitioners in the event that we find that l r is not an entity with a valid purpose and is part of a scheme lacking economic_substance will be given effect penalties respondent has the burden of production with respect to penalties see sec_7491 the sec_6651 additions to tax for late filing of the returns have not been contested although petitioners failed to raise any arguments concerning the sec_6662 accuracy-related_penalties we address those briefly the stipulation establishes that the underpayments of tax by the senior walkers on their returns for the years in issue are substantial understatements of income_tax within the meaning of sec_6662 respondent has also argued that the senior walkers were negligent in failing to report the income earned by donald r walker in claiming unsubstantiated deductions and in failing to make a reasonable attempt to comply with the provisions of the internal_revenue_code see sec_6662 once the commissioner has met the burden of production as respondent has in these cases the burden_of_proof that the penalties are not appropriate remains with the taxpayer 116_tc_438 to avoid the penalties petitioners would have to show that they had reasonable_cause and that they acted in good_faith see sec_6664 they have not even attempted to show either the penalties will be sustained to reflect the foregoing decisions will be entered consistent with the stipulation and pursuant to rule


internal_revenue_service department of the treasury number release date index number 2056a washington dc person to contact telephone number refer reply to cc psi plr-108901-02 date july re legend spouse decedent child state country revocable_trust marital trust residuary_trust trustee trustee trustee trustee date - - - - - - - - - - - - - dear this is in response to your date letter requesting a ruling concerning the application of sec_2056a of the internal_revenue_code facts decedent died on date survived by spouse and child at the time of death decedent was a resident_alien domiciled in state in the united_states and a citizen of country decedent was married to spouse also a resident_alien domiciled in the united_states and a citizen of country prior to death decedent had established revocable_trust which is governed under the laws of state revocable_trust provides for the creation of two trusts marital trust and residuary_trust upon decedent’s death marital trust has four co-trustees trustee a corporate trustee that is plr-108901-02 organized and operating under the laws of state and trustees and individual trustees who are related to decedent and citizens of the united_states under the terms of revocable_trust the marital trust is to be funded with an amount equal to the maximum marital_deduction allowable reduced by the aggregate value of any interest in property which has passed to spouse under other provisions of the trust or by operation of law for which a marital_deduction is allowable and further reduced by the largest amount which taking into account certain specified_credits will result in no federal estate_tax under the terms of marital trust the trustee must pay all the net_income at least quarterly to spouse for spouse’s life the trustee may also pay principal to spouse for spouse’s reasonable health support and maintenance article provides that unless spouse consents unproductive property shall not be held as an asset of the marital trust for more than a reasonable_time article f contains provisions that are specifically applicable to retirement benefits article f states that it is decedent’s intent that retirement benefits payable under any qualified_retirement_plan individual_retirement_account or other retirement arrangement subject_to minimum_distribution_rules of sec_401 or other comparable provisions be distributed to or held for only individual beneficiaries within the meaning of sec_401 article f provides that if marital trust becomes the beneficiary of death_benefits under any qualified_retirement_plan defined in sec_401 any qualified retirement annuity defined in sec_403 or sec_403 and or any individual_retirement_account defined in sec_408 the trustee must withdraw from such marital trust’s share of the plan in each calendar_year and deposit in the marital trust the greater of a the net_income of the marital trust’s share of the plan for such year or b the minimum distribution amount which is required to be withdrawn from such share under sec_401 or other comparable provision article f requires that the trustee treat distributions from any qualified_retirement_plan defined in sec_401 any qualified retirement annuity defined in sec_403 or sec_403 and or any individual_retirement_account defined in sec_408 as income of the marital trust to the extent that the distribution represents income generated or deemed to be generated by such plan annuity or individual_retirement_account in addition the trustee has the right to withdraw any part or all of the remaining qualified_plan benefit annuity or individual_retirement_account or to direct that the plan benefit annuity or individual_retirement_account be paid directly to the beneficiary of the marital trust who is entitled to the income of the marital trust further article f provides that spouse shall have the right to direct the trustee to make any unproductive property productive or convert any non-income or low-income producing assets into income-producing assets or assets producing adequate income within a reasonable_time upon spouse’s death the trustee shall pay to the personal representative of spouse’s estate an amount from the marital trust assets that is equal to federal and state estate or inheritance taxes payable by reason of inclusion of the value of marital plr-108901-02 trust in spouse’s gross_estate all remaining marital trust property will be distributed to residuary_trust under the terms of the residuary_trust the trustee may pay trust income or if income is not sufficient principal to or for the benefit of the spouse for the spouse’s health support and maintenance taking into account income from all other sources any excess income is to be added to trust corpus upon spouse’s death the assets of the residuary_trust will be distributed to child or if child has predeceased spouse to child’s issue per stirpes article of the revocable_trust provides that if spouse is not a citizen_of_the_united_states at decedent’s death the provisions of article apply to the marital trust so that the marital trust will qualify as a qualified_domestic_trust qdot as described in sec_2056a and that the decedent’s personal representative will make the necessary election for qdot treatment further article provides that the trust is intended to be a qualified_domestic_trust under sec_2056a and that any ambiguity in its terms shall be resolved in accordance with that intention the pertinent terms of article are as follows article provides that at least one of the trustees of the marital trust must be a u s trustee meaning a corporation created or organized under the laws of the united_states a u s state or the district of columbia as defined in section 2056a- c article provides that the trustee shall comply with the requirements for security arrangements for qualified domestic trusts as set forth in sec_20_2056a-2 with respect to qdots in excess of dollar_figure million on the date of the decedent's death determined without reduction for any indebtedness and sec_20_2056a-2 or ii with respect to qdots having a fair_market_value at the date of the decedent's death of dollar_figure million or less determined without reduction for any indebtedness under article for purposes of determining whether the fair_market_value of the trust assets exceeds the trustee is authorized to make the election under sec_20_2056a-2 with respect to real_property used as a personal_residence of spouse article provides that for purposes of determining the amount of the bond or letter_of_credit the trustee is authorized to make the election under 2056a- d iv b with respect to real_property used as the personal_residence of the spouse article provides that the trustee is directed to file any annual statements required under sec_20_2056a-2 article provides that notwithstanding anything contained herein to the contrary the u s trustee is authorized to enter into alternative plans or arrangements with the internal_revenue_service pursuant to sec_20_2056a-2 to assure collection of the deferred estate_tax in lieu of the provisions contained herein plr-108901-02 article provides that if the trustee pays or distributes principal of the marital trust the u s trustee shall withhold and pay the federal estate_tax imposed under sec_2056a from the property to be paid or distributed article requires that upon the death of spouse the trustee shall pay from the principal of the marital trust its proportionate share of the federal estate_tax assessed under sec_2056a by reason of her death under article the trustee is required to comply with the requirements prescribed by the regulations for qualified domestic trusts and may amend the terms of marital trust to comply with the requirements to be a qualified_domestic_trust if spouse becomes a united_states citizen after decedent’s death and the requirements of sec_2056 or 2056a b have been satisfied article dollar_figure provides that the provisions of article will no longer apply to the marital trust you have requested the following rulings the marital trust will qualify as a qdot defined in sec_2056a provided a timely election is made under sec_2056a property passing to the marital trust will qualify as qualified_terminable_interest_property under sec_2056 because the marital trust qualifies as a qdot and meets the requirements of sec_2056 and assuming the elections under sec_2056a and sec_2056 are made the property passing to the marital trust will be eligible for the marital_deduction for federal estate_tax purposes in decedent’s gross_estate law and analysis sec_2001 of the internal_revenue_code imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states under sec_2056 for purposes of the tax imposed by sec_2001 the value of the taxable_estate is determined except as limited by sec_2056 by deducting from the value of the gross_estate an amount equal to the value of any interest in property which passes or has passed_from_the_decedent_to_his_surviving_spouse but only to the extent that such interest is included in determining the value of the gross_estate sec_2056 provides in pertinent part that no deduction shall be allowed under sec_2056 where on the lapse of time on the occurrence of an event or contingency or on the failure of an event or contingency to occur an interest passing to the surviving_spouse will terminate or fail sec_2056 provides an exception to the rule_of sec_2056 in the case plr-108901-02 of qualified_terminable_interest_property under sec_2056 qualified_terminable_interest_property shall be treated as passing to the surviving_spouse for purposes of sec_2056 and no part of the property shall be treated as passing to any person other than the surviving_spouse sec_2056 defines qualified_terminable_interest_property as property which passed_from_the_decedent in which the surviving_spouse has a qualifying_income_interest_for_life and to which an election under sec_2056 applies under sec_2056 a surviving_spouse has a qualifying_income_interest_for_life if the surviving_spouse is entitled to all the income from the property payable annually or at more frequent intervals or has a usufruct interest for life in the property and no person has a power to appoint any part of the property to any person other than the surviving_spouse sec_2056 provides that an election under sec_2056 with respect to any property shall be made by the executor on the return of tax imposed by sec_2001 such an election once made shall be irrevocable sec_2044 provides that the value of the gross_estate shall include the value of any property in which the decedent had a qualifying_income_interest_for_life with respect to which a deduction was allowed under sec_2056 likewise for gift_tax purposes sec_2519 provides that any disposition of all or part of a qualifying_income_interest_for_life in property in which the decedent had a qualifying_income_interest_for_life with respect to which a deduction was allowed under sec_2056 is treated as a transfer of all the interests in the property other than the qualifying_income interest sec_20_2056_b_-7 of the estate_tax regulations states that the principals of sec_20_2056_b_-5 apply for purposes of determining whether the surviving_spouse is entitled to all the income_for_life from the entire_interest or a specific_portion of the entire_interest sec_20_2056_b_-5 provides that if an interest is transferred in trust the surviving_spouse is entitled_for_life to all of the income from the entire_interest or a specific_portion of the entire_interest if the effect of the trust is to give her substantially that degree of beneficial_enjoyment of the trust property during her life which the principles of the law of trusts accord to a person who is unqualifiedly designated as the life_beneficiary of the trust sec_20_2056_b_-5 states that an interest passing in trust will not satisfy this requirement if the primary purpose of the trust is to safeguard property without providing the spouse with the required beneficial_enjoyment if the corpus of a_trust consists substantially of property which is not likely to be income producing during the life of the surviving_spouse and the spouse cannot compel the trustee to convert or otherwise deal with the property as described in sec_20_2056_b_-5 an interest passing to such a_trust will not qualify unless the applicable rules for trust plr-108901-02 administration require or permit the spouse to require that the trustee provide the required beneficial_enjoyment such as by payments to the spouse out of other assets of the trust sec_20_2056_b_-5 provides that the terms entitled_for_life and payable annually or at more frequent intervals require that under the terms of the trust the income referred to must be currently at least annually distributable to the spouse or that the spouse must have such command over the income so that it is virtually the spouse’s under sec_2056 and d a if the surviving_spouse of a decedent is not a united_states citizen the marital_deduction is disallowed unless property passes to the surviving_spouse in a qualified_domestic_trust qdot under sec_2056a a_trust qualifies as a qdot if the trust instrument requires that at least one trustee of the trust be an individual citizen_of_the_united_states or a domestic_corporation and provides that no distribution other than a distribution of income may be made from the trust unless a trustee who is an individual citizen_of_the_united_states or domestic_corporation has the right to withhold from such distribution the tax imposed under sec_2056a on the distribution further the trust must meet such requirements as the secretary may by regulations prescribe to ensure the collection of any_tax imposed by sec_2056a and an election under sec_2056a must be made with respect to the trust sec_2056a in general imposes an additional estate_tax on distributions of corpus from a qdot during the spouse’s lifetime and on the value of the qdot on the date of death of the surviving_spouse under sec_20_2056a-2 of the estate_tax regulations if property passes from a decedent to a qdot then in order to qualify for the estate_tax_marital_deduction the trust must also satisfy the requirements for a marital_deduction contained in either sec_2056 or sec_2056 or sec_2056 in addition under sec_20_2056a-2 in order to qualify as a qdot the trust must contain certain provisions intended to ensure collection of the additional estate_tax imposed under sec_2056a revproc_96_54 1996_2_cb_386 contains sample paragraphs that may be utilized in a_trust instrument to satisfy these requirements ruling the marital trust requires that at least one trustee be an individual citizen_of_the_united_states whose tax_home is in the united_states or a domestic_corporation in this case it is represented that all the individual co-trustees are citizens of the united_states whose tax homes are in the united_states and the corporate co-trustee is a domestic_corporation organized and operating under the laws of state the marital trust also provides that the trustee shall withhold the federal estate_tax due under plr-108901-02 sec_2056a on any distributions from the trust further the marital trust incorporates the sample paragraphs provided in revproc_96_54 that may be used to satisfy the governing instrument requirements of 2056a- d i and d ii of the estate_tax regulations for a qualified_domestic_trust accordingly we conclude that marital trust will qualify as a qdot defined in sec_2056a provided a timely election is made under sec_2056a rulings and the terms of marital trust direct the trustee to pay all the income to spouse in convenient installments at least as often as quarter-annually during spouse’s life no person other than spouse has a right to marital trust income or corpus during spouse’s life in addition spouse has the right to direct the trustee to make any unproductive property productive and to convert any non-income or low income producing property accordingly spouse’s income_interest in the marital trust qualifies as a qualified income_interest for life under sec_2056 further in the event that marital trust is designated as the beneficiary of qualified_retirement_plans defined in sec_401 qualified retirement annuities defined in sec_403 or sec_403 and or individual_retirement_accounts defined in sec_408 the trustee is required to withdraw from each plan each year and deposit in the marital trust the greater of the net_income from that plan or the minimum distribution amount as described in sec_401 each of these distributions from the plans to the marital trust must be allocated to income of the marital trust and distributed to spouse the trustee also has the right to withdraw part or all of each qualified_plan benefit annuity or individual_retirement_account and direct that it be paid directly to spouse the marital trust specifically requires that unless spouse consents unproductive property including benefits from qualified_retirement_plans defined in sec_401 qualified retirement annuities defined in sec_403 or sec_403 and individual_retirement_accounts defined in sec_408 shall not be held in trust for more than a reasonable_time accordingly to the extent the marital trust is designated as the beneficiary of retirement benefits spouse will receive a qualifying_income_interest_for_life in these benefits see revrul_89_89 1989_2_cb_231 see also revrul_2000_2 2000_1_cb_305 we conclude that if the election is made under sec_2056 with respect to the marital trust and any retirement benefits for which the marital trust is the designated_beneficiary then the marital trust and the retirement benefits will satisfy the requirements as qualified_terminable_interest_property under sec_2056 plr-108901-02 therefore assuming that the elections described in sec_2056 and sec_2056a are timely made by the executor on the return of tax imposed by sec_2001 we conclude that the property passing to the marital trust will qualify for the estate_tax_marital_deduction under sec_2056 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant 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 george l masnik chief branch office of associate chief_counsel passthroughs and special industries enclosure copy for purposes cc


internal_revenue_service number release date index number ----------------------------- -------------------------------------------- --------------------------------------------- ------------------------ re ------------------------- -------------------- - legend department of the treasury washington dc person to contact --------------- id no ------------- telephone number --------------------- refer reply to cc psi - plr-142127-04 date may ----------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ ------------------- ------------------ ------------------------------------------------------------------------------------------ a b_trust ---------------------------------------------------------------------------------------------------------------- trust ---------------------------------------------------------------------------------------------------------------- trust ------------------------------------------------------------------------------------------------------- ----------------------------------------------------------- trust ------------------------------------------------------------------------------------------------------- ----------------------------------------------------------- trust ------------------------------------------------------------------------------------------------------- ----------------------------------------------------------- trust ----------------------------------------------------------- trust ----------------------------------------------------------- trust ------------------------------------------------------------------------------------------------------------------ ----------------------------------------------------------- trust 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----------------------------------------------------------------------------------------- plr-142127-04 ----------------------------------------------------------- trust ------------------------------------------------------------------------------------------------------- ----------------------------------------------------------- ------------------------------------------------------------------------------------------ trust -------------------------------------------------------------------------------------------------------------------- trust ------------------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------- trust ----------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- ----------------------------------------------------------- trust -------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------- trust -------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------- year year year date date company dear --------------- this is in response to your letter dated date concerning the generation-skipping_transfer gst status of trusts collectively trusts was formed in year by brothers a and b the shareholders of company are all descendants or their spouses of a and b or trusts created for their benefit the descendants and surviving spouses of the six children of a and b constitute six family groups and are not subject_to the gst tax pursuant to section b a of the tax_reform_act_of_1986 the act it is represented that there have been no additions constructive or otherwise to any trust after date or a qualified_subchapter_s_trust qsst and owns shares in company ------- ------- ------- ---------------------- ---------------------- ------------------------------------------------------------------- trusts were created between year and year prior to september it is represented that each trust is either an electing_small_business_trust esbt the facts and representations submitted are summarized as follows company company and its shareholders filed an election to be taxed under subchapter_s sec_2 of the shareholder agreement prohibits the shareholders from making plr-142127-04 of the code effective date as part of the decision to make the s election the shareholders agreed in principle to negotiate and execute a shareholder agreement that addresses changes in the number of beneficial shareholders and prevents the ownership of stock by an ineligible shareholder for purposes of the s election the trustees of trusts executed and entered into the shareholder agreement on behalf of trusts the shareholder agreement is not effective however until a letter_ruling is issued by the internal_revenue_service as specified in section of the shareholder agreement and the company from recognizing a transfer that would cause the s election to terminate such attempted transfers are void each shareholder agrees to provide notice to the board if the shareholder contemplates taking any_action that may jeopardize the s election the shareholder agrees to follow any reasonable direction provided by the board_of directors board_of company to avoid termination of the s election however certain mandatory transfers under the terms of an irrevocable_trust that is a shareholder are not generally subject_to the restrictions in sec_2 of the shareholder agreement representative must provide notice to the board if the transfer of the deceased shareholder’s company stock causes or will cause the termination of the s election causes a change in the number or the identity of persons deemed to be shareholders for purposes of subchapter_s to provide notice to the board if the board determines that this change will cause a termination of the s election then the board must provide notice to the shareholder of its determination will cause the termination of the s election the procedure in section commences notice of an action or anticipated action that will cause the termination of the s election first the affected_shareholder has a 45-day period to make alternative arrangements that do not otherwise violate the shareholder agreement or the certificate of incorporation but which will alleviate the pending termination of the s election if the shareholder makes such arrangements then the procedure in section stops if the shareholder does not make such arrangements then the company and the other shareholders will have the option to purchase the shares that are the source of the threatened or potential termination of the s election the shares are offered to the sec_3 specifies that upon the death of an individual shareholder the personal sec_5 provides that upon the occurrence of any other event that causes or section details the procedure to be followed in the event the company has sec_4 requires a shareholder whose shares are subject_to an event that several sections of the shareholder agreement detail the right to exercise an plr-142127-04 following groups in order until one or more qualified shareholders and or the company purchase all of the affected shares i the affected shareholder’s family group ii the company iii the affected shareholder’s family group for a second time iv the shareholders outside of the affected shareholder’s family group and v the company for a second time together these options are referred to as the purchase options option with each step other mechanical features of exercise purchase_price and terms of effectiveness of the shareholder agreement section provides that the shareholder agreement is not effective or binding upon any shareholder until the later to occur of the following events i agreement is executed by shareholders owning at least two-thirds of all outstanding shares and ii the company and or the holders of at least two-thirds of all outstanding shares shall have received one or more letter rulings from the internal_revenue_service acceptable to the applicants to the effect that the effectiveness of the shareholder agreement would not constitute a modification of the shareholder’s governing trust instrument that would adversely affect the status of the shareholding trust as exempt from the gst tax under chapter of the code and the associated regulations shareholders owning not less than two-thirds of the outstanding shares dissolution or bankruptcy of the company the shareholder agreement is subject_to four consecutive four-year extension terms on an affirmative vote of the holders of not less than two- thirds of the outstanding shares the shareholder agreement will expire upon the earlier of date consent of you have requested a ruling that neither the execution and effectiveness of the shareholder agreement nor the exercise of any purchase option will constitute an addition to any of trusts or cause a change in the substance of any of trusts that will cause any of trusts to lose its gst exempt status under sec_26 b i so that future distributions from such trust will not be subject_to the gst tax under sec_2601 provided that no additions actual or constructive are made to the trust skipping transfer which is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip skipping transfer_tax regulations the gst tax is generally applicable to generation- skipping transfers made after date however under section b a of the act and sec_26_2601-1 the tax does not apply to a transfer from a under section a the act and sec_26_2601-1 of the generation- sec_2601 of the internal_revenue_code imposes a tax on every generation- sec_26_2601-1 provides that a modification of the governing sec_26_2601-1 provides rules for determining when a modification plr-142127-04 trust if the trust was irrevocable on date the rule does not apply to the extent additions actual or constructive were made to the trust after that date judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 or 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 except as otherwise noted applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes the rules do not generally 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 instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy sec_26_2601-1 b or c by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in a beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a generation-skipping_transfer or the creation of a new generation-skipping_transfer a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust represented that no additions have been made to trusts after that date the proposed actions of the trustees of trust in executing the shareholder agreement on behalf of trusts are administrative actions accordingly based on the facts submitted and the representations made we conclude that neither the execution and effectiveness of the shareholder agreement nor the exercise of any purchase option will constitute an addition to any of trusts or cause a change in the substance of any of trusts that will cause any of trusts to lose its exempt status under sec_26_2601-1 so that future distributions from trusts will not be subject_to the gst tax under sec_2601 provided that no additions actual or constructive are made to trusts in this case trusts were irrevocable on date it is except as expressly provided herein no opinion is expressed or implied this ruling is directed only to the taxpayers requesting it sec_6110 plr-142127-04 concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter further we express no opinion as to whether company was or is an s_corporation additionally we express no opinion as to whether the trusts are qualified shareholders provides that it may not be used or cited as precedent representations submitted by the taxpayers 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 letter is being sent to the taxpayers in accordance with the power_of_attorney on file with this office a copy of this the rulings contained in this letter are based upon information and enclosures sincerely lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs special industries copy for sec_6110 purposes copy of this letter cc