internal_revenue_service number release date index number ----------------- ------------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------------ --------------------------------------------------- telephone number -------------------- refer reply to cc psi b04 plr-126752-18 date date in re --------------------------------- legend date settlor trust -------------------------------------------------------------------------------------------------------------- ----------------------- ------------------------- --------------------------------------------------------------------------------- bank son child child child child grandchild grandchild grandchild grandchild date agreement date court state statute ------------------------------------------------------- --------------------------------------- ----------------------------------------------------- ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- -------------------------------------------- ------------------------------------------------------------- --------------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- ---------------- --------------------------------------------------------------------------------- -------------------------------- ------------------ ------------------------------------------------ ------------------------------------------------------------ plr-126752-18 dear --------------- this letter responds to your personal representative’s letter of date and subsequent correspondence in which rulings are requested on the income gift and generation-skipping_transfer gst tax consequences of a court-approved termination of trust the facts and representations submitted are as follows on date a date prior to date settlor created an irrevocable_trust trust for the benefit of son the material purpose of trust was to ensure that son receive an income stream for his support under the terms of the trust agreement the trustees are required to distribute all of the net_income of trust to son and upon his death distribute the remainder to his issue per stirpes the trust agreement does not authorize any distributions of principal during son’s life son has four living adult children current remaindermen and eight living grandchildren four of whom are adults successor remaindermen none of son’s descendants has a predeceased child with living issue son and bank are currently serving as co-trustees of trust state statute provides in relevant part that matters that may be resolved by a nonjudicial settlement include termination of the trust provided that court approval of such termination is obtained in accordance with this section and the court must conclude that continuance of the trust is not necessary to achieve any material purpose of the trust state statute further provides that upon such termination the court may order the trust property distributed as agreed by the parties to the agreement or otherwise as the court determines is equitably consistent with the purposes of the trust on date son the current remaindermen and the successor remaindermen entered into agreement agreement states that the continuance of trust is no longer necessary to achieve any clear material purpose of such trust because son ’s net_worth has grown significantly such that he does not need income from trust for his support agreement further provides for the termination of trust and the distribution of trust’s assets among son the current remaindermen and the successor remaindermen in accordance with the actuarial value of each beneficiary’s share proposed distribution specifically agreement provides that after the date of termination the trustees shall as expeditiously as possible value trust’s assets determine the appropriate distributions to be made upon trust’s termination pursuant to this agreement and terminate trust upon such termination the trustees shall distribute on a pro_rata or in-kind basis as the trustees shall in their sole discretion determine all of the trust’s assets to son current remaindermen and successor remaindermen plr-126752-18 in accordance with their actuarial interests calculated as of the termination_date the termination and proposed distribution is contingent upon court approval and a favorable private_letter_ruling from the internal_revenue_service on date court approved agreement it is represented that trust was irrevocable prior to date and that no additions actual or constructive have been made to trust the trustees request the following rulings the termination of trust and the proposed distribution will not cause trust or any distributions from trust to become subject_to gst tax under chapter of the code the termination of trust and the proposed distribution will not cause any of the beneficiaries of trust to be treated as making a taxable gift the termination of trust and the proposed distribution will cause son and the successor remaindermen to recognize long-term_capital_gain and will cause the current remaindermen to recognize capital_gain on the unrealized_appreciation of the assets received by son and the successor remaindermen upon termination ruling sec_2601 imposes a tax on every gst which is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip under a of the tax_reform_act_of_1986 act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 of the regulations the tax does not apply to a transfer under a_trust that was irrevocable on date but only to the extent that such transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax will not cause the trust to lose its exempt status in general unless specifically provided otherwise the rules contained in this paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes thus unless specifically noted the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or plr-126752-18 may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy 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 beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst or the creation of a new gst in the present case trust was irrevocable on date it is represented that no additions actual or constructive have been made to trust after that date based on the facts submitted and the representations made we conclude that the termination of trust and the proposed distribution will neither cause a beneficial_interest to be shifted to a beneficiary who occupies a generation lower than the beneficiaries who held the interests prior to the termination nor extend the time for vesting of any beneficial_interest in trust beyond the period provided for in the original trust as long as the actuarial values of the trust accurately represent the actuarial value of each beneficiary’s interest accordingly we rule that the court-approved termination and proposed distribution will not cause trust or any terminating distributions from trust to become subject_to gst tax under chapter of the code ruling sec_2501 imposes a tax for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident sec_2511 provides that subject_to certain limitations the gift_tax applies whether the transfer is in trust or otherwise direct or indirect and whether the property transferred is real or personal tangible or intangible sec_2512 provides that if the gift is made in property the value thereof at the date of the gift is considered the amount_of_the_gift sec_2512 provides that where property is transferred for less than an adequate_and_full_consideration in money or money’s worth then the amount by which plr-126752-18 the value of the property exceeded the value of the consideration is deemed a gift that is included in computing the amount of gifts made during the calendar_year in the present case the beneficial interests rights and expectancies of the beneficiaries will be substantially the same both before and after the termination and proposed distribution as long as the actuarial values of the trust accurately represent the actuarial value of each beneficiary’s interest thus we conclude that no transfer of property will be deemed to occur as a result of the termination and proposed distribution accordingly based on the facts submitted and representations made we conclude that the termination and proposed distribution will not result in a transfer by any beneficiary of trust that is subject_to the gift_tax under sec_2501 ruling sec_1015 provides that if property is acquired by a transfer in trust other than by a transfer in trust by a gift bequest or devise the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on the transfer sec_1_1015-2 of the income_tax regulations provides that the principles stated in sec_1_1015-1 apply in determining the basis_of_property where more than one person acquires an interest in property by transfer in trust sec_1_1015-1 provides that property acquired by gift has a uniform basis and that the proportionate parts of that basis represented by the interests of the life_tenant and remainder_interest holder are determined under rules provided in sec_1_1014-5 sec_1001 however provides that in determining gain_or_loss from the sale or disposition of a term_interest_in_property that portion of the adjusted_basis of the interest which is determined pursuant to sec_1015 to the extent that the adjusted_basis is a portion of the entire adjusted_basis of the property shall be disregarded under sec_1001 the term term_interest_in_property includes an income_interest in a_trust but does not include a remainder_interest sec_1001 provides that sec_1001 does not apply to a sale_or_other_disposition which is a part of a transaction in which the entire_interest in property is transferred to any person or persons see sec_1_1001-1 sec_1222 provides that the term long-term_capital_gain means gain from the sale_or_exchange of a capital_asset held for more than one year sec_1221 defines the term capital_asset as property held by the taxpayer with certain listed exceptions not applicable here plr-126752-18 sec_1223 provides that in determining the period for which a taxpayer has held property however acquired there shall be included the period for which the property was held by any other person if the property has the same basis in the taxpayer’s hands as it would have in the hands of that other person revrul_72_243 1972_1_cb_233 provides that the proceeds received by the life_tenant of a_trust in consideration for the transfer of the life tenant’s entire_interest in the trust to the holder of the remainder_interest are treated as an amount_realized from the sale_or_exchange of a capital_asset under sec_1222 the right to income_for_life from a_trust estate is a right in the estate itself see 157_f2d_235 2d cir cert_denied 330_us_826 in revrul_69_486 1969_2_cb_159 a non-pro rata distribution of trust property was made in_kind by the trustee although the trust instrument and local law did not convey authority to the trustee to a make a non-pro rata distribution_of_property in_kind the distribution was effected as a result of a mutual agreement between the trustee and the beneficiaries because neither the trust instrument nor local law conveyed authority to the trustee to make a non-pro rata distribution revrul_69_486 held that the transaction was equivalent to a pro_rata distribution followed by an exchange between the beneficiaries an exchange that required recognition of gain under sec_1001 although the proposed transaction takes the form of a distribution of the present values of the respective interests of son the current remaindermen and the successor remaindermen in substance it is a sale of son’s and the successor remaindermen’s interests to the current remaindermen revrul_69_486 the amounts received by son as a result of the termination of trust are amounts received from the sale_or_exchange of a capital_asset to the current remaindermen revrul_72_243 because son’s basis in the income_interest of trust is a portion of the entire basis of the property under sec_1015 and because the disposition of son’s term interests is not part of a transaction in which the entire_interest in trust is transferred to a third party son’s adjusted_basis in son’s interest in trust is disregarded under sec_1001 son’s holding_period in the life interests in trust exceeds one year accordingly based on the facts submitted and representations made the entire amount_realized by son as a result of the early termination of trust will be long-term_capital_gain under sec_1222 similarly the amounts received by the successor remaindermen as a result of the termination of trust are amounts received from the sale_or_exchange of a capital_asset to the current remaindermen cf 313_us_11 1941_1_cb_364 the phrase property held by the taxpayer under a prior_law holding_period rule relating to capital_gains_and_losses includes not only full ownership but also any interest owned whether vested contingent or conditional the successor remaindermen’s holding_period in their interests in trust also exceeds one year plr-126752-18 accordingly under sec_1222 the gain determined under sec_1001 by the successor remaindermen as a result of the early termination of trust will be long-term_capital_gain in addition to the extent that a current remainderman exchanges property including property deemed received from trust for the interests of son and the successor remaindermen the current remainderman will recognize gain_or_loss on the property exchanged accordingly based on the facts submitted and representations made for purposes of determining gain_or_loss the amount_realized by each current remainderman on the exchange of property for trust interests held by son and the successor remaindermen will be equal to amount of cash and fair_market_value of the trust interests received in exchange for the transferred assets sec_1_1001-1 and revrul_69_486 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 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 this ruling is directed only to the taxpayer requesting it sec_6110 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 representatives sincerely leslie h finlow leslie h finlow senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter


internal_revenue_service department of the treasury index no 00-odashington dc contact person q felepnone wurnver in heterence to cg 20m prt g og br-125845-97 p i trust u i foundation dear this is in response to your letter dated date and prior correspondence submitted on behalf of x rulings are requested on the income and estate_tax consequences of qualified_retirement_plan to an inter_vivos charitable_remainder_unitrust a testamentary gift of an interest ina in which the information submitted states that on dl x executed trust trust is a charitable_remainder_unitrust crut the unitrust an irrevocable declaration of trust intended to qualify as under sec_664 of the internal_revenue_code will be funded upon x’s death income beneficiaries of the a percent unitrust_amount will terminate upon the earlier of the following dates the date of death of the last income_beneficiary or date which is exactly twenty years after the date of death of x will be distributed to foundation foundation is sec_501 c upon the termination of trust all of its remaining assets a tax-exempt_organization described in x's two children will be the x represents that a the trust b x is a participant in a qualified_retirement_plan described in sec_401 beneficiary of x's interest in the retirement_plan thus upon x’s death the proceeds of this plan will be paid ina lump sum to trust xx has designated trust as the -2- sec_61 provides that gross_income includes income_in_respect_of_a_decedent ird sec_691 provides that the items of gross_income in respect of a decedent that are not properly includible in respect of the taxable_period in which the decedent’s death occurs or a prior period shall be included in the gross_income for the taxable_year when received of the person who by reason of the death of the decedent acquires the right to receive the amount if the right to receive the amount is not acquired by the decedent's_estate from the decedent sec_7701 provides that the term person shall be construed to mean and include a_trust sec_1 a -1 b of the income_tax regulations provides that the term income_in_respect_of_a_decedent refers to those amounts to which a decedent was entitled as gross_income but that were not properly includible in computing the decedent’s taxable_income for the taxable_year ending with the date of death or for a previous taxable_year under the method_of_accounting employed by the decedent sec_402 provides that generally all distributions from a qualified_retirement_plan are fully taxable as ordinary_income to the recipient sec_691 provides that the right to receive an amount of income_in_respect_of_a_decedent shall be treated in the hands of the person who acquired such right by reason of the death of the decedent as person in the transaction in which the right to receive the income was originally derived includible in gross_income shall be considered in the hands of such person to have the character which it would have had in the hands of the decedent if the decedent had lived and received such amount it had been acquired by such in addition the amount if the information submitted indicates that the distributions from the qualified_plan to x would be ordinary_income to x if x received the payments directly therefore the distributions from the qualified_plan to trust will be ird the proceeds from x's qualified_retirement_plan because the ird is properly included in trust's gross_income it under sec_691 b_trust must include in gross_income is not included in the gross_income of x‘s estate therefore sec_691 a provides that a person who includes ird in gross_income is entitled to a deduction in that year of an amount equal to that portion of the federal estate_tax on the decedent’s estate that is attributable to the inclusion of the ird items in the estate sec_1_691_c_-1l a provides that the deduction described in sec_691 a is determined as follows ascertain the net value in the decedent's_estate of the items which are included under sec_691 in computing gross_income gross_estate on account of the items of gross_income in respect of the decedent over the deduction from the gross_estate for claims which represent the deductions and credit in respect of this is the excess of the value included in the a decedent ascertain the portion of the estate_tax attributable this to the inclusion in the gross_estate of such net value is the excess of the estate_tax over the estate_tax computed without including such net value in the gross_estate computing the estate_tax without including in the gross_estate the net value of the ird items any estate_tax deduction such as the marital_deduction that may be based upon the gross_estate shall be recomputed so as exclusion of such net value from the gross_estate to take into account the in the computation of the estate_tax on x’s estate includes sec_1 c -1 a provides that estate_tax a charitable deduction for the proceeds of the qualified_retirement_plan distributed to trust estate_tax_deductions shall also be recomputed based on the exclusion of the net value of ird items from the gross_estate therefore because the ird is excluded from the gross_estate the charitable deduction for the ird contributed to trust must also be excluded when recomputing the estate_tax when recomputing the sec_664 provides that notwithstanding any other provision of subchapter_j accordance with regulations prescribed by the secretary apply in the case of a charitable_remainder_annuity_trust anda charitable_remainder_unitrust the provisions of sec_664 in sec_664 provides that amounts distributed by a charitable_remainder_unitrust shall be considered as having the following characteristics in the hands of the beneficiary to whom is paid the unitrust_amount described in subsection d a first as amounts of income other than gains and amounts treated as gains from the sale_or_other_disposition of capital assets includible in gross_income to the extent of such income of the trust for the year and such undistributed_income of the trust for prior years second as a capital_gain to the extent of the capital_gain of the trust for the year and the undistributed_capital_gain of the trust for prior years third as other income to the extent of such income of the trust for the year and such undistributed_income of the trust for prior years and fourth as a distribution of trust corpus sec_1_664-1 i a provides that the order of unitrust distributions in the hands of the beneficiary is first ordinary_income to the extent of the sum of the trust’s ordinary_income for the taxable_year of the trust and its undistributed ordinary_income for prior years in the hands of trust and for purposes of sec_664 the proceeds from x‘s qualified_retirement_plan will be ird and will have the same character that it would have had in the hands of x had x lived and received such amounts sec_402 the qualified_retirement_plan proceeds would have been ordinary_income to x therefore provided that trust is a qualified charitable_remainder_unitrust the proceeds from the qualified_retirement_plan will be ird to trust and will be first tier ordinary_income as provided by sec_664 under sec_664 provides that a charitable_remainder_unitrust is exempt from tax unless it has unrelated_business_taxable_income within the meaning of sec_512 sec_691 b provides that ird is included in the by reason of the death of the gross_income of the person who decedent acquires the right to receive the amount c a provides that the person required to include ird in that person’s gross_income is entitled to a deduction for the amount of estate_tax attributable to that ird a provides that the term person includes a_trust section section x has asked how the deduction under sec_691 a is taken into consideration by trust and whether the deduction is made available to the income beneficiaries of trust as part of the first tier distributions under sec_664 upon receiving the proceeds from the qualified retirement sec_691 b requires trust to include the ird in its plan gross_income whether or not the trust is exempt from tax under sec_664 character of the ird is retained constitute ordinary_income for purposes of under sec_691 a_trust is entitled to a deduction for the estate further these amounts the ordinary_income under sec_691 sec_664 tax attributable to the ird therefore the ird that constitutes ordinary_income described in sec_664 amount of the ird net of the deduction provided in sec_691 a deduction on line of form_5227 the sec_691 a deduction is not directly made available to the income beneficiaries under sec_664 this deduction is reported as an other is the based on the information submitted and the representations made we conclude as follows pursuant to sec_4 of revproc_98_3 the internal_revenue_service has 1998_1_irb_100 generally discontinued issuing rulings concerning whether a charitable_remainder_trust that provides for unitrust payments for one or two measuring lives satisfies the requirements described in sec_664 pursuant to sec_4 of revproc_98_3 the internal_revenue_service has i r b generally discontinued issuing rulings concerning whether a transfer to a charitable_remainder_trust described in sec_664 that provides for annuity or unitrust payments fer one or two measuring lives qualifies for a charitable deduction under a sec_2055 when the proceeds from the qualified_retirement_plan are distributed to trust the proceeds will be included in the gross_income of trust under sec_691 b and will not be includible in the gross_income of x’s estate because the proceeds of the qualified retirement they will be includible in the gross_income of plan are ird trust for the taxable_year the distribution is received by trust as the designated_beneficiary of x's qualified_retirement_plan unitrust within the meaning of taxable on its income for that year unless for that year has unrelated_business_taxable_income within the meaning of sec_512 sec_664 trust will not be it provided trust is a charitable_remainder in computing the hypothetical estate_tax that is excluding the ird items described in sec_691 c estate must also exclude the charitable deduction resulting from the contribution of the qualified_retirement_plan amounts to trust the provided that trust is a charitable_remainder_unitrust within the meaning of the qualified_retirement_plan that are ird will be first tier income described in sec_664 sec_664 the amounts from the deduction provided by sec_691 a reduces the amount of ird that trust includes in its first tier ordinary_income therefore the amount of first tier ordinary_income from the ird is the net of the ird under sec_691 b less the deduction under sec_691 a the sec_691 a deduction is not directly made available to the income beneficiaries under sec_664 except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer who requested it used or cited as precedent sec_6110 provides that it may not be pursuant to the power_of_attorney on file in this office a copy of this letter will be sent to xx sincerely yours j wtateeces kfgsvr- j thomas hines senior technician reviewer branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc psi b09 plr-130010-01 date date legend decedent spouse son trust marital exempt trust marital non- exempt trust residuary_trust date date date date date firm c p a plr-130010-01 dollar_figurez dollar_figurex dollar_figurey dear this letter responds to your request dated date requesting rulings under sec_301_9100-1 of the procedure and administration regulations as well as rulings under sec_2632 and sec_2642 of the internal_revenue_code the facts and representations submitted are summarized as follows decedent created trust on date with himself as trustee the trust was amended on date the decedent died on date survived by spouse and son section third paragraph a of the trust provides that upon decedent’s death the trust assets are to be divided into a marital trust and a residuary_trust the marital trust is to be funded generally with the smallest amount of assets that will result in the least possible federal estate_tax and the balance of the assets are to pass to the residuary_trust the marital trust is to be further divided into two separate trusts the marital exempt trust and the marital non-exempt trust if the executor makes the election under sec_2652 the form_706 united_states estate and generation-skipping_transfer_tax return was timely filed on date on schedule m of form_706 elections were made under sec_2056 with respect to the marital exempt trust and marital non- exempt trust a schedule r was not attached to the return thus no reverse qualified terminal interest property qtip_election was made with respect to the marital exempt trust and no allocation of generation-skipping_transfer gst_exemption was made the internal_revenue_service issued a closing letter on date son who acted as executor represents that he retained firm and relied exclusively upon firm to advise him regarding all federal estate and generation-skipping tax matters including the preparation of decedent’s form_706 son further represents that he had no knowledge that he was required to make a reverse_qtip_election in order to receive certain tax benefits subsequent to filing the form_706 c p a a certified_public_accountant discovered that the schedule r had not been attached to the return and notified son it is represented that dollar_figurez of decedent’s gst_exemption was available for allocation at decedent’s death and that the values for federal estate_tax purposes of the marital exempt trust and the residuary_trust were dollar_figurey and dollar_figurex respectively you have requested the following rulings an extension of time under plr-130010-01 sec_301_9100-1 of the procedure and administration regulations to make a reverse_qtip_election under sec_2652 with respect to the marital exempt trust a ruling that the automatic allocation rules of sec_2632 operate to allocate decedent’s gst_exemption under sec_2631 pro_rata between the residuary_trust and the marital exempt trust based on the value of these trusts as of the date of death and a ruling that the residuary_trust and the marital exempt trust created under the trust will each have an inclusion_ratio of zero under sec_2642 and each trust is exempt from the federal generation-skipping_transfer_tax sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2056 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate is to be determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property that passes or has passed_from_the_decedent to the surviving_spouse sec_2056 provides the general_rule that no deduction shall be allowed for an interest passing to the surviving_spouse if on the lapse of time on the occurrence of an event or contingency or on the failure of an event or contingency to occur the interest will terminate or fail sec_2056 provides that in the case of qualified_terminable_interest_property the entire 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 qtip as property which passes from the decedent in which the surviving_spouse has a qualifying_income_interest_for_life and to which an election under sec_2056 applies sec_2601 imposes a tax on every generation-skipping_transfer gst sec_2631 provides that every individual shall be allowed a gst_exemption of dollar_figure which may be allocated by such individual or by his or her executor to any property with respect to which such individual is the transferor sec_2631 provides that once an allocation of gst_exemption is made it is irrevocable under sec_2632 the allocation of the gst_exemption may be made at any time on or before the date prescribed for filing the individual’s estate_tax_return including extensions sec_2632 provides that any portion of an individual’s gst_exemption which has not been allocated within the time prescribed by sec_2632 shall be deemed to be allocated as follows- a first to property which is the subject of a direct plr-130010-01 skip occurring at the individual’s death and b second to trusts with respect to which such individual is the transferor and from which a taxable_distribution or a taxable_termination might occur at or after the individual’s death sec_26_2632-1 of the generation-skipping_transfer_tax regulations supplies the method for the automatic allocation of any unused gst_exemption first the exemption is allocated pro_rata to direct skips on the basis of their value for estate_tax purposes the balance is then allocated pro_rata on the basis of estate_tax values to trusts with respect to which a taxable_termination may occur or from which a taxable_distribution may be made no automatic allocation is made to a_trust that will have a new transferor with respect to the entire trust prior to the occurrence of any gst with respect to the trust the automatic allocation is irrevocable sec_2652 provides that in the case of any trust with respect to which a deduction is allowed to the decedent’s estate under sec_2056 the estate of the decedent may elect to treat all of the property in the trust for purposes of the generation-skipping_transfer_tax as if the election to be treated as qualified_terminable_interest_property had not been made this election is referred to as the reverse_qtip_election the consequence of a reverse_qtip_election is that the decedent remains for gst tax purposes the transferor of the qtip_trust for which the election is made as a result the decedent’s gst_exemption may be allocated to the qtip_trust sec_26_2652-2 provides that the reverse_qtip_election is to be made on the return on which the qtip_election is made under sec_301_9100-1 of the procedure and administration regulations the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-2 provides an automatic_extension of time for making certain elections sec_301_9100-3 provides that in general requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election plr-130010-01 based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore an extension of time is granted until days from the date of this letter for making a reverse_qtip_election under sec_2652 with respect to the marital exempt trust the election should be made on a supplemental form_706 filed with the service office where the original form_706 was filed a copy of this letter should be attached to the supplemental form_706 a copy is enclosed for that purpose an extension of time to make the reverse_qtip_election under sec_2652 does not extend the time to make an allocation of any remaining gst_exemption in the instant case no allocation of decedent’s available gst_exemption was made on the form_706 filed on date therefore the automatic allocation rules of sec_2632 and sec_26_2632-1 operate to allocate decedent’s available exemption based on the information submitted and the representations made and provided the reverse_qtip_election is made for the marital exempt trust as authorized by this letter we conclude that dollar_figurex of decedent’s gst_exemption automatically is allocated to the residuary_trust and dollar_figurey automatically is allocated to the marital exempt trust because the amount of gst_exemption allocated to each trust equals the estate_tax_value of each trust the residuary_trust and the marital exempt trust will each have an inclusion_ratio of zero under sec_2642 and therefore will not be subject_to gst tax except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely paul f kugler associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter


t c summary opinion united_states tax_court barry mamoudou petitioner v commissioner of internal revenue respondent docket no 28939-08s filed date christopher duling for petitioner jack t anagnostis for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax the issue for decision is whether petitioner is entitled to dependency_exemption deductions for the two children claimed on his federal_income_tax return background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by reference when petitioner filed his petition he resided in pennsylvania petitioner timely filed his federal_income_tax return for as a head_of_household on his return he claimed two dependency_exemption deductions the earned_income_tax_credit and a child_tax_credit and an additional_child_tax_credit respondent issued to petitioner a notice_of_deficiency changing petitioner’s filing_status to single and disallowing the claimed deductions and credits in petitioner lived with the mother of the two children he claimed as dependents on his federal_income_tax return 1at trial petitioner conceded that he is not entitled to head_of_household filing_status the earned_income_tax_credit or the child_tax_credit and additional_child_tax_credit he was not the biological father of the children nor was he married to their mother i burden_of_proof discussion generally the commissioner’s determinations are presumed correct and the taxpayer bears the burden of proving that those determinations are erroneous rule a see 503_us_79 290_us_111 deductions and credits are a matter of legislative grace and the taxpayer bears the burden of proving that he or she is entitled to any deduction or credit claimed rule a 308_us_488 292_us_435 ii dependency_exemption deduction sec_151 allows a taxpayer to deduct an annual exemption_amount for each individual who is a dependent as defined in sec_152 of the taxpayer for the taxable_year sec_152 defines dependent as a qualifying_child or a qualifying_relative petitioner is not related to the children and they are not his qualifying children however he contend sec_2petitioner has not claimed or shown that he meets the requirements under sec_7491 to shift the burden_of_proof to respondent as to any factual issue relating to his liability for tax that the children are his qualifying relatives under sec_152 in pertinent part sec_152 provides that an individual is a qualifying_relative of the taxpayer if that individual has the same principal_place_of_abode as the taxpayer and is a member of the taxpayer’s household the taxpayer provides over one-half of the individual’s support for that year and that individual is not the qualifying_child of the taxpayer or of any other taxpayer for that year sec_152 and h respondent stipulates that the children lived with petitioner during the year and that the children did not earn income in petitioner’s girlfriend who is the mother of the children and with whom petitioner lived in was entitled to claim the children as her qualifying children in see sec_152 accordingly these children are not petitioner’s qualifying relatives for and respondent’s determination is sustained see sec_152 to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc corp plr-113181-01 date date legend purchaser sub sub sub sub sub target a b c d company official date a date b date c date d date e a this letter responds to a letter dated date submitted on behalf of purchaser and sellers defined below by their authorized representatives requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election purchaser and sellers are requesting an extension to file a sec_338 election under sec_338 and sec_338 of the internal_revenue_code and sec_1_338_h_10_-1t c of the income_tax regulations with respect to purchaser’s date a acquisition of the stock of target sometimes hereinafter referred to as the election all citations in this letter to regulations under sec_338 are to regulations in effect on date a additional information was received in letters dated april and date the material information is summarized below purchaser is a domestic_corporation and common parent of an affiliated_group that includes sub sub sub sub and since date b sub collectively the purchasing group all of these subsidiaries except for sub which was acquired after the year end were listed on the form_851 affiliations schedule of the purchasing group’s consolidated tax_return for its tax_year ended date c on date d target was a domestic s_corporation that was owned by a b c and d collectively the sellers pursuant to a stock purchase agreement purchaser on date a acquired all the target stock from sellers in exchange for a it is represented that purchaser’s acquisition of the target stock qualified as a qualified_stock_purchase as defined in sec_338 purchaser and sellers intended to file the election the election was due on date e but for various reasons a valid election was not filed after the due_date for the election it was discovered that the election had not been filed subsequently this request was submitted under sec_301_9100-1 for an extension of time to file the election the period of limitations on assessment under sec_6501 has not expired for the purchasing group’s target’s or sellers’ taxable years in which the acquisition occurred the taxable years in which the election should have been filed or any taxable years that would have been affected by the election had it been timely filed sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election or a sec_338 election and the acquisition is a qualified_stock_purchase sec_338 permits the purchasing and selling corporations to elect jointly to treat the target_corporation as deemed to sell all of its assets and distribute the proceeds in complete_liquidation a sec_338 election may be made for the target_corporation only if it is a member of a selling_consolidated_group a member of a selling affiliated_group filing separate returns or an s_corporation sec_1 h - 1t c under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner uses to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted only when the taxpayer provides evidence establishing that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_338_h_10_-1t c therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for purchaser and sellers to file the election provided purchaser and sellers demonstrate they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by purchaser target sellers and company official explain the circumstances that resulted in the failure to timely file a valid election the information establishes that the request for relief was initiated before the failure to make the election was discovered by the internal_revenue_service and that the interests of the government will not be prejudiced if relief is granted see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that purchaser and sellers have demonstrated they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-1 until days from the date_of_issuance of this letter for purchaser and sellers to file the election with respect to the acquisition of target stock described above this extension of time is conditioned on the filing within days of the issuance of this letter of all returns and amended returns if any necessary to report the acquisition in accordance with the election and the taxpayers' the purchasing group’s sellers’ and target’s tax_liability if any not being lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers’ tax_liability for the years involved a determination thereof will be made by the applicable director’s office upon audit of the federal_income_tax returns involved furthermore no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers’ tax_liability is lower sec_301_9100-3 purchaser and sellers must file the election in accordance with sec_1_338_h_10_-1t c that is a new election on form_8023 must be executed on or after the date of this letter which grants the extension and filed in accordance with the instructions to the form a copy of this letter must be attached to the election form purchaser and sellers must file or amend as applicable their federal tax returns to report the transaction as a sec_338 transaction for the taxable_year in which the transaction was consummated and for any other affected_taxable_year and attach to these returns a copy of this letter and the election we express no opinion on whether purchaser’s acquisition of the target stock qualified as a qualified_stock_purchase under sec_338 whether purchaser’s acquisition of the target stock qualified for sec_338 treatment and any other tax consequences arising from the election in addition we express no opinion as to the federal tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by the taxpayer however the director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any continue to apply purchaser must provide the sellers with a copy of this letter this letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours associate chief_counsel corporate by senior technician reviewer branch


tcmemo_2011_239 united_states tax_court louis greenwald petitioner v commissioner of internal revenue respondent docket no filed date r’s disallowance of a short-term_capital_loss and the capitalization of certain improvements made to p’s home before its sale caused deficiencies in federal_income_tax for p’s tax_year r also determined that p was liable for an addition_to_tax pursuant to sec_6651 i r c and an accuracy-related_penalty pursuant to sec_6662 i r c for his tax_year held p is liable for a portion of the deficiency consistent with the findings herein held further p is liable for the sec_6651 i r c addition_to_tax but is not liable for the sec_6662 i r c penalty b paul husband for petitioner linette b angelastro for respondent memorandum findings_of_fact and opinion wherry judge this case is before the court on a petition for redetermination of petitioner’s liability for income_tax a failure_to_file addition_to_tax and an accuracy-related_penalty for the tax_year after concessions the issues for decision are whether petitioner is entitled to a short-term_capital_loss of dollar_figure whether petitioner had dollar_figure of additional capital_gain whether petitioner is liable for the sec_6651 failure_to_file addition_to_tax and whether petitioner is liable for the sec_6662 accuracy-related_penalty findings_of_fact some of the facts have been stipulated the stipulated facts and the accompanying exhibits are incorporated by thi sec_1respondent concedes that petitioner is entitled to exclude dollar_figure of residential capital_gain and petitioner concedes that he is not entitled to a net_operating_loss_deduction of dollar_figure 2unless otherwise indicated section references are to the internal_revenue_code_of_1986 as amended and in effect for the tax_year at issue all rule references are to the tax_court rules_of_practice and procedure reference petitioner resided in california at the time he filed his petition on date petitioner along with daniel lewis kupper and george h manuras entered into a fixed rate installment note installment_agreement in the amount of dollar_figure with jav inc jav to purchase a skateboarding accessories business known as skaters paradise under the installment_agreement petitioner and the two other individuals were jointly and severally liable and were required to make installment payments with interest to jav on or about date petitioner purchased a residence pincite olive road in santa barbara california olive road property for dollar_figure petitioner also owned a second santa barbara residence pincite santa rosa lane santa rosa property which he leased out petitioner refinanced the olive road property on date petitioner again refinanced the olive road property in july of and in march or early april of petitioner used the olive road property as collateral for a loan with a private lender on date jav sued petitioner daniel lewis kupper and george h manuras for nonpayment of the installment_agreement jav obtained a judgment for dollar_figure against petitioner on date which was recorded on date petitioner satisfied the judgment by again refinancing the olive road property on date after petitioner paid the judgment he tried to keep the business going and sought repayment from daniel lewis kupper and george h manuras he abandoned the venture in beginning in petitioner began making improvements on the olive road property his bookkeeper neala robbins recorded each expense petitioner typically used his wholly owned corporation blsh inc to pay the expenses for the improvements however the contractors and other persons petitioner hired understood that they were doing business with petitioner personally and not his corporation by petitioner’s wholly owned corporation was no longer actively in business petitioner explained that he used the corporation’s credit card and accounts because it was convenient and because there was a credit card attached to it and i had no income or no job so i couldn’t get a credit card you know and this one had a louis greenwald credit card and i just assumed that it was okay to use it and i did petitioner claimed that the money in the corporation’s account represented proceeds from refinancing the olive road property and the rental income from the santa rosa property petitioner sold the olive road property on or about date for dollar_figure on his tax_return petitioner reported the adjusted_basis of the residence as dollar_figure including selling_expenses he then subtracted this amount from the sale price to compute his taxable gain of dollar_figure from the dollar_figure he took the maximum principal_residence exclusion of dollar_figure and reported a capital_gain from the sale of dollar_figure the accounting firm fineman west co llp fineman west prepared petitioner’s tax_return fineman west had prepared petitioner’s personal returns in the past and when he was in business they had prepared his business returns as well petitioner believed that fineman west was a well-respected certified public accounting firm and trusted them implicitly petitioner believed that he provided all of the required information to fineman west and that his return was prepared correctly petitioner also explained that he was under the impression fineman west automatically requested extensions of time to file for all of the returns they processed jeffery dunn c p a a senior tax manager at fineman west explained that it was the custom and practice of the firm for an accountant to prepare the return a senior manager to review it and then a tax partner to do a second and final review and sign off on it he also explained that it was fineman west’s practice to request extensions for its clients even if not requested by the client the filing_date for petitioner’s tax_return was not extended petitioner did not know why the firm did not automatically request an extension of time to file his return petitioner claims that as soon as he found out he got it fixed_right away and immediately had the firm file the return petitioner’s and tax returns were filed on date petitioner did not file a tax_return for or respondent issued petitioner a notice_of_deficiency on date determining a deficiency in income_tax of dollar_figure a sec_6651 addition_to_tax of dollar_figure and a sec_6662 accuracy-related_penalty of dollar_figure for the tax_year for that tax_year respondent disallowed a claimed net_operating_loss nol carryforward of dollar_figure increased capital_gains by dollar_figure disallowed itemized_deductions of dollar_figure and determined alternative_minimum_tax of dollar_figure petitioner filed a timely petition with this court on date denying that he owed the deficiency addition_to_tax and penalty a trial was held on date in los angeles california 3although petitioner contested the disallowed itemized_deductions and the alternative_minimum_tax in his petition they were not mentioned at trial or on brief therefore to the extent these adjustments are not a mathematical correlative_adjustment we deem them conceded see 87_tc_698 citing rule a for the proposition that because petitioners have made no argument with respect to deductions claimed they are deemed to have conceded their nondeductibility affd 832_f2d_403 7th cir opinion i short-term_capital_loss of dollar_figure petitioner claimed a dollar_figure short-term_capital_loss on schedule d capital_gains_and_losses for investment jav-kgm on his tax_return sec_165 generally allows a deduction for losses sustained within the taxable_year sec_165 limits losses that can be deducted by individual taxpayers permitting a deduction only for losses_incurred in a trade_or_business in a profit-making activity though not connected with a trade_or_business or from a casualty or theft a loss is deductible only for the taxable_year in which it is sustained sec_1_165-1 income_tax regs in order to be sustained the loss must be evidenced by closed and completed transactions and as fixed by identifiable events occurring in such taxable_year id at trial petitioner explained that a judgment was obtained against him because of a business installment_agreement for which he was personally liable petitioner explained that he claimed the capital_loss after he was unable to collect from his business partners their shares of the judgment the record contains both the installment_agreement and the judgment against petitioner it also contains the paperwork for 4we note that the judgment entered against petitioner in relation to jav was in the amount of dollar_figure the disparity is not explained by the record the refinancing petitioner used to pay off the judgment in we find credible petitioner’s testimony that he continued to seek repayment from his partners during and part of after paying the judgment and then abandoned the venture in respondent has not satisfactorily rebutted this evidence therefore petitioner is entitled to deduct the dollar_figure capital_loss ii capital_gain of dollar_figure respondent increased capital_gain on the sale of the olive road property by dollar_figure after respondent’s concession that petitioner was entitled to the sec_121 exclusion of dollar_figure capital_gain of dollar_figure remains at issue petitioner claimed that he made total capital improvements of dollar_figure to the olive road property most of the expenditures were paid through petitioner’s defunct wholly owned corporation and petitioner submitted receipts for improvements totaling only dollar_figure a petitioner’s corporation respondent asserts that because petitioner’s personal_service_corporation made the payments petitioner is not entitled to add the amounts to the basis of the olive road property we find this argument without merit petitioner credibly testified that because of credit card problems he merely used the corporation’s accounts as his personal piggy bank clearing house agent depositing his income from the rental and refinancing and then using the accounts to pay for the capital improvements in reality and in substance petitioner paid for the capital improvements to the olive road property not his corporation b substantiation petitioner included receipts for only dollar_figure of the dollar_figure of claimed expenses petitioner claims that he included only invoices that exceeded dollar_figure because of an agreement with the examining agent petitioner urges the court to apply the cohan doctrine under which the court may allow a claimed expense even where the taxpayer is unable to fully substantiate it provided the court has an evidentiary basis for doing so 245_f2d_559 5th cir 39_f2d_540 2d cir 85_tc_731 but see sec_1_274-5t temporary 5we note that petitioner or his counsel should have been aware that this court is not constrained by an alleged but unproven agreement made between a taxpayer and the examining agent further the commissioner as sovereign is generally not bound by unauthorized acts of his revenue agents even where a taxpayer may have relied to his detriment on that mistake 104_tc_13 affd 140_f3d_240 4th cir see also auto club of mich v commissioner 353_us_180 hendrick v commissioner 63_tc_395 nor has petitioner established that respondent should be estopped here see 120_tc_109 439_f2d_1365 2d cir the consideration of only items larger than dollar_figure is also not a statistically valid sample of all expenses since items of less than dollar_figure had no chance of being included see generally revproc_2011_42 2011_37_irb_318 income_tax regs fed reg date in these instances the court is permitted to approximate the allowable expense bearing heavily against the taxpayer whose inexactitude is of his or her own making cohan v commissioner supra pincite however the record must contain sufficient evidence to provide a basis upon which the estimate may be made and to permit us to conclude that those expenses were allowable rather than personal expenses williams v united_states supra pincite vanicek v commissioner supra pincite generally we agree with petitioner that the application of the cohan doctrine is appropriate in this instance although petitioner did not submit receipts for any expense of less than dollar_figure he did submit a complete list of the expenses including the date incurred the payee and the number of the check used to pay each expense this factual background allows the court to estimate the expenses before the amounts disallowed by this opinion below the court estimates that petitioner had expenses of dollar_figure however certain of the items on the list were checks written to cash with a description of the purpose for which the cash was supposedly used petitioner did not discuss why he used checks written to cash without receipts to substantiate the expenses we are unconvinced that petitioner used the entire amount of cash extracted from the account for those expenses therefore he is not entitled to add to basis unsubstantiated expenses paid with checks made out to cash totaling dollar_figure c expenses eligible to increase basis respondent argues that not all of the expenses listed in petitioner’s exhibit are eligible to be added to the basis of the property as capital improvements and that certain expenses are noncapitalizable personal expenses capital expenditures include any amount_paid out for permanent improvements or betterments made to increase the value of any property or estate sec_263 in contrast personal expenses include those expenses which are personal living or family_expenses sec_262 while we agree that most of the expenses that petitioner included in the amount he capitalized for the house were properly capitalizable certain expenses cannot be included these are on petitioner’s list of expenses under miscellaneous beginning on date and continuing to date with the exception of two charges for storage and one for a pest report petitioner did not attempt to explain these expenses at trial 6however only dollar_figure is at issue and petitioner’s list includes capital improvements which total dollar_figure therefore this finding may not have a practical effect on this case therefore he is not entitled to include expenses totaling dollar_figure iii sec_6651 failure_to_file addition_to_tax respondent bears the burden of production with regard to the sec_6651 addition_to_tax see sec_7491 116_tc_438 to meet his burden respondent must produce sufficient evidence that it is appropriate to impose the determined addition_to_tax see higbee v commissioner supra pincite however respondent does not have to produce evidence of lack of reasonable_cause substantial_authority or lack of willful neglect see id sec_6651 in the case of a failure_to_file on time any return required under sec_6011 imposes an addition_to_tax of percent of the tax required to be shown on the return for each month or fraction thereof for which there is a failure_to_file not to exceed percent in the aggregate generally any person made liable for any_tax shall make a return or statement according to the forms and regulations prescribed by the secretary sec_6011 the addition_to_tax will not 7again only dollar_figure is at issue therefore this finding may not affect the outcome of this case respondent also argued that petitioner was not entitled to add to his basis the dollar_figure of expenses related to staging the house for resale even if we disallow those expenses the amount of capital improvements allowed still exceeds the amount at issue apply if it is shown that such failure is due to reasonable_cause and not due to willful neglect petitioner’s return was filed on date petitioner argues that october is an appropriate date from which to calculate the late filing penalty because he believed that the accounting firm automatically requested an extension for him petitioner’s argument is essentially that he had reasonable_cause for filing his return late until date but not anytime thereafter the failure to timely file a tax_return is considered due to reasonable_cause where a taxpayer is unable to file the return within the prescribed time despite exercising ‘ordinary business care and prudence ’ 86_tc_492 quoting sec_301_6651-1 proced admin regs affd 864_f2d_1521 10th cir generally circumstances considered to constitute reasonable_cause arise as a result of factors beyond a taxpayer’s control and include situations such as unavoidable postal delays timely filing of a return with the wrong office death or serious illness of the taxpayer or a member of his immediate_family the taxpayer’s unavoidable absence from the united_states destruction by casualty of the taxpayer’s records or place of business and reliance on the erroneous advice of an irs office or employee 114_f3d_366 2d cir affg tcmemo_1995_547 see also gagliardi v commissioner tcmemo_2008_10 good_faith reliance on professional advice may also provide a basis for reasonable_cause however it is not absolute 89_tc_849 affd 904_f2d_1011 5th cir affd 501_us_868 laplante v commissioner tcmemo_2009_226 there is insufficient evidence in the record for the court to determine that petitioner had reasonable_cause for filing his return late his supposed reliance on the accounting firm to request an extension for him does not constitute reasonable_cause since he knew that if he needed extra time an extension request was due that duty to file may not be delegated to an attorney or accountant 469_us_241 petitioner did not testify as to when he gave his information to the accounting firm to prepare his return and the witness from the accounting firm could not recall what was in petitioner’s file further petitioner’s return was filed within a matter of days of his return it does not appear 8we have held that for a taxpayer to rely reasonably upon advice the taxpayer must prove that the taxpayer meets each requirement of the following three-prong test the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment 115_tc_43 affd 299_f3d_221 3d cir that petitioner had reasonable_cause for late filing and thus he is liable for the sec_6651 addition_to_tax iv sec_6662 accuracy-related_penalty respondent also determined that petitioner is liable for a sec_6662 accuracy-related_penalty for his tax_year pursuant to sec_7491 the commissioner also has the burden of production with respect to this penalty subsection a of sec_6662 imposes an accuracy-related_penalty of percent of any underpayment attributable to causes specified in subsection b respondent asserts two causes justifying the penalty a substantial_understatement_of_income_tax subsec b and negligence subsec b there is a substantial_understatement_of_income_tax for an individual in any_tax year where the amount of the understatement exceeds the greater of percent of the tax required to be shown on the return for the tax_year or dollar_figure sec_6662 n egligence is any failure to make a reasonable attempt to comply with the provisions of this title ie the internal_revenue_code sec_6662 under caselaw ‘negligence is a lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances ’ freytag v commissioner supra pincite quoting marcello v commissioner 380_f2d_499 5th cir affg on this issue 43_tc_168 and t c memo there is an exception to the sec_6662 penalty when a taxpayer can demonstrate reasonable_cause for the underpayment and that the taxpayer acted in good_faith with respect to the underpayment sec_6664 regulations promulgated under sec_6664 provide that the determination of reasonable_cause and good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances sec_1_6664-4 income_tax regs reliance on the advice of a tax professional may but does not necessarily establish reasonable_cause and good_faith for the purpose of avoiding a sec_6662 penalty see united_states v boyle supra pincite such reliance does not serve as an absolute defense it is merely a factor to be considered freytag v commissioner supra pincite the caselaw sets forth three requirements for a taxpayer seeking to use reliance on a tax professional to avoid liability for a sec_6662 penalty see 115_tc_43 affd 299_f3d_221 3d cir see also eg 425_f3d_1203 n 9th cir quoting with approval the above three-prong test affg 121_tc_89 9see supra note we find that with respect to this penalty petitioner has met the three requirements for a finding of reasonable_cause under neonatology associates therefore petitioner is not liable for the sec_6662 accuracy-related_penalty v conclusion petitioner is entitled to deduct the dollar_figure capital_loss petitioner is entitled to increase his basis with respect to the capital expenditures on the olive road property consistent with the findings of this opinion finally petitioner is liable for the sec_6651 addition_to_tax but on account of reasonable_cause he is not liable for the sec_6662 accuracy-related_penalty the court has considered all of petitioner’s and respondent’s contentions arguments requests and statements to the extent not discussed herein we conclude that they are meritless moot or irrelevant 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 corp plr-139756-06 date date -------------------------------------------------------------------------------- legend distributing ----------------------------- ------------------------------------------------------------------- ----------------------------------------------------------- controlled --------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------- ------------------------------------------------------------------- ----------------------------------------------------------- sub -------------------------------------------------------------------- ----------------------------------------------------------- sub ------------------------------------------------------------------- ----------------------------------------------------------- sub -------------------------------------------------------------------- ----------------------------------------------------------- sub ------------------------------------------------------------------- ----------------------------------------------------------- --------------------------------------------------------------- -------------------------------------- -------------------------------------- ------------------------------------ ------------------------------------------------------------- ------------------- -------------------------- -------------------------- --------------------------- --------------------------------------- plr-139756-06 sub ------------------------------------------------------------------- ----------------------------------------------------------- llc ------------------------------------------------------------------------------------ ----------------------------------------------------------- llc ------------------------------------------------------------------------------------ ----------------------------------------------------------- llc ------------------------------------------------------------------------------------ ----------------------------------------------------------- date date date date date date a b c business a business b business c series x series y --------------------------- ------------------------- ----------------------- ---------------------- --------------------- ----------------- --------------- ------------ ------------ ------ ---- ----------------------------------------------------------- plr-139756-06 dear ----------------- this letter responds to your date letter requesting rulings on certain federal_income_tax consequences of a proposed transaction the information provided in that letter and in later correspondence is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process in particular this office has not reviewed any information pertaining to and has made no determination regarding whether the proposed transaction i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 a b of the internal_revenue_code and sec_1 d and iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 summary of facts distributing is a publicly traded holding_company that is the common parent of an affiliated_group_of_corporations filing a consolidated federal_income_tax return as of date distributing had outstanding a shares of common_stock distributing is indirectly engaged in business a and business b collectively the distributing businesses and business c business a is primarily conducted by sub and business b is primarily conducted by sub sub and sub are wholly owned subsidiaries of distributing distributing formed controlled on date and contributed all of the stock of sub to controlled on date in return for a single share of controlled common_stock which represented all of the issued and outstanding shares of controlled sub was directly engaged in business c immediately following the contribution sub converted to a limited_liability_company llc which is a disregarded_entity for federal_income_tax purposes the controlled restructuring the controlled restructuring was treated as a reorganization pursuant to sec_368 plr-139756-06 on date controlled purchased all of the outstanding_stock of sub from unrelated parties controlled then caused sub to convert to a limited_liability_company llc which was a disregarded_entity for federal_income_tax purposes llc then caused its wholly owned subsidiary sub to convert to a limited_liability_company llc which is a disregarded_entity for federal_income_tax purposes following the conversions of sub and sub to llc and llc respectively controlled contributed all of its membership interests in llc to llc which in turn contributed all of the membership interests in llc to llc on date llc merged into controlled in a transaction that was disregarded for federal_income_tax purposes immediately prior to date controlled executed a recapitalization issuing new controlled series y voting shares in exchange for of its existing issued and outstanding share the recapitalization on date controlled issued a new class of series x voting shares ipo shares in an initial_public_offering ipo based on the voting rights of the series x shares the ipo shares represent approximately b percent of the voting power of all outstanding_stock of controlled distributing has retained approximately c percent of the voting power of all outstanding_stock of controlled the ipo was consummated in contemplation of the proposed transaction the taxpayer has submitted financial information indicating that each of distributing business a and business b and controlled business c each have had gross_receipts and operating_expenses representative of the active_conduct_of_a_trade_or_business for each of the past five years distributing has determined for valid business reasons to separate business a and business b on the one hand from business c on the other specifically the separation is intended to improve both distributing’s and controlled’s financing structure including their ability to effectively and efficiently raise substantial amounts of capital by i facilitating the ipo that closed on date and ii optimizing distributing’s and controlled's independent capital structures the separation will also enhance the success of distributing’s and controlled’s business by enabling distributing and controlled to resolve management systemic and other problems arising from distributing’s ownership of the different business segments within its affiliated_group proposed transaction in order to accomplish the above stated business purposes distributing proposes to distribute of the controlled series y common_stock pro_rata to distributing shareholders the distribution distributing will distribute cash in lieu of issuing a fractional share to any shareholder that would otherwise be entitled to receive a fractional share of controlled series y common_stock plr-139756-06 representations the following representations have been made in connection with the distribution a the distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation b the indebtedness owed by controlled to distributing after the distribution if any will not constitute stock_or_securities c no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of the corporation d sub and sub will constitute members of the separate_affiliated_group of distributing within the meaning of sec_355 at the time of the distribution e the five years of financial information submitted on behalf of sub and sub is representative of each corporation’s present operations and with regard to each there have been no substantial operational changes since the date of the last financial statements submitted f following the distribution distributing and controlled each will continue the active_conduct of its business independently and with its separate employees g the five years of financial information submitted on behalf of llc or its predecessor is representative of llc 2’s present operation and with regard to llc there have been no substantial operational changes since the date of the last financial statements submitted h the distribution of the stock of controlled is primarily carried out for the corporate business_purpose of improving distributing's and controlled’s capital structure including their ability to effectively and efficiently raise a significant amount of capital on more favorable terms by i facilitating controlled's stock offering that closed on date and ii optimizing distributing's and controlled's independent capital structures the distribution will also enhance the success of distributing's and controlled’s business by enabling distributing and controlled to resolve management systemic and other problems arising from distributing’s ownership of the different business segments within its affiliated_group the distribution of the stock of controlled is motivated in whole or substantial part by the primary corporate business purposes plr-139756-06 i for purposes of sec_355 immediately after the distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing 50-percent or more of the total combined voting power of all classes of distributing stock entitled to vote or 50-percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution j for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing 50-percent or more of the total combined voting power of all classes of controlled stock entitled to vote or 50-percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five- year period determined after applying sec_355 ending on the date of the distribution or ii attributable to distributions on distributing stock_or_securities that were acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution k subsequent to the distribution it is anticipated that distributing and controlled will share a number of administrative services for a transitional period not to exceed months other than i trade account indebtedness created in the ordinary course of business through continuing transactions at terms comparable to those which could be obtained in an arm’s length transaction ii any liabilities that may arise from the tax_sharing_agreement and iii payables created for all transitional services negotiated at arm’s length no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution l immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_32_irb_6 and as currently in effect sec_1_1502-13 as published by t d further distributing's excess_loss_account with respect to the stock of controlled if any will be included in income before the distribution see sec_1_1502-19 m payments made in connection with all continuing transactions after the distribution if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length n neither distributing nor controlled is an investment_company as defined in sec_368 and iv o distributing controlled and the shareholders of distributing will each pay their own expenses if any incurred in connection with the distribution plr-139756-06 p the payment of cash in lieu of a fractional share of controlled series y common_stock is solely for the purpose of avoiding the expense and inconvenience to controlled of issuing fractional shares and does not represent separately bargained-for consideration the total cash consideration that will be paid in the distribution to the distributing shareholders instead of issuing fractional shares of controlled series y common_stock will not exceed one percent of the total consideration that will be issued in the distribution the fractional share interests of each shareholder will be aggregated and no shareholder will receive cash in an amount equal to or greater than the value of one full share of controlled series y common_stock q the transaction is not used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both r there is no plan or intention by distributing or controlled to convert shares of controlled series y common_stock to shares of controlled series x common_stock s the controlled restructuring qualified as a tax-free reorganization pursuant to sec_368 t the recapitalization qualified as a tax-free reorganization pursuant to sec_368 rulings based solely on the information submitted and the representations made we rule as follows on the distribution no gain_or_loss will be recognized by distributing upon the pro_rata distribution of the controlled series y common_stock to the distributing shareholders sec_355 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of distributing shareholders upon their receipt of the controlled series y common_stock pursuant to the distribution sec_355 the aggregate basis of the distributing common_stock and the controlled series y common_stock in the hands of distributing shareholders including a fractional share interest will be the same as the basis in the distributing common_stock held by the distributing shareholders immediately prior to the distribution allocated in proportion to the fair market values of the distributing and the controlled series y common_stock in accordance with sec_1_358-2 and sec_358 and b plr-139756-06 the holding_period of the controlled series y common_stock received by the distributing shareholders including a fractional share interest will in each instance include the holding_period of the distributing common_stock with respect to which the distribution of the controlled series y common_stock is made provided that the distributing common_stock is held as a capital_asset on the date of the distribution sec_1223 a shareholder who receives cash in lieu of fractional shares of controlled series y common_stock will recognize gain_or_loss measured by the difference between the basis of the fractional share received as determined in ruling above and the amount of cash received sec_1001 any gain_or_loss will be treated as capital_gain or loss provided that such fractional shares of stock are held as capital assets on the date of the distribution as provided in sec_312 the earnings_and_profits of distributing and controlled will be adjusted in accordance with sec_1_312-10 caveats no opinion is expressed about the tax treatment of the proposed transaction described above under other provisions of the code and regulations or the tax treatment of any condition existing at the time of or effects resulting from the proposed transaction that is not specifically covered by the above rulings in particular no opinion is expressed regarding i whether the proposed transaction satisfies the business_purpose requirement of sec_1_355-2 ii whether the proposed transaction is used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both iii whether the proposed transaction is part of a plan or series of related transactions under sec_355 and iv the tax consequences of the controlled restructuring and the recapitalization procedural statements this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling plr-139756-06 in accordance with the power_of_attorney on file in this office a copy of this ruling letter will be sent to your authorized representatives sincerely ____________________________________ richard k passales senior counsel branch office of associate chief_counsel corporate cc --------------------- ---------------------------------- ------------------------- ---------------- ------------------------------- ----------------------- ---------------------------------- --------------------- -------------- ------------------------- ---------------------------------- ------------------------------------------------------------------------------------ -------------- --------------------------------------------- ---------------------------------- ----------------------