internal_revenue_service number release date index no department of the treasury washington dc person to contact telephone number refer reply to cc intl b1 plr-111794-00 date date a date b date c country d country e dear this is in response to your representative’s letter dated date requesting a ruling under sec_877 of the internal_revenue_code_of_1986 code that a’s loss of long-term_resident status did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by penalty of perjury statements 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 a is a long-term_resident of the united_states within the meaning of sec_877 who intends to relinquish her u s lawful permanent resident status expatriate shortly after issuance of this private_letter_ruling a has been a citizen of country d during all of her life by reason of her birth on date b in country d a became a permanent resident_of_the_united_states and obtained her green card on date c a plans to expatriate to country e the country in which a’s husband was born on the date of a’s expatriation her net_worth will exceed the net_worth required under sec_877 sec_877 generally provides that a citizen who loses u s citizenship or a u s long-term_resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the taxable_year will be taxed under sec_877 and the special rules of sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the plr-111794-00 page avoidance of u s taxes sec_2107 and sec_2501 provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former citizen or former long term-resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 if the individual’s average income_tax_liability or the individual’s net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 a former u s citizen or former long term-resident whose net_worth or average tax_liability exceeds these thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary’s determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 under notice_98_34 1998_2_cb_29 modifying notice_97_19 1997_1_cb_394 a former long-term_resident whose net_worth or average tax_liability exceeds the applicable thresholds will not be presumed to have a principal purpose of tax_avoidance if that former resident is described within certain categories and submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes notice_98_34 requires that certain information be submitted with a request for a ruling that an individual’s expatriation did not have for one of its principal purposes the avoidance of u s taxes a is eligible to request a ruling pursuant to notice_98_34 because a will become not later than the close of a reasonable period after her expatriation a resident fully liable to income_tax in country e the country where a’s husband was born a submitted all the information required by notice_98_34 including any additional information requested by the service after review of the submission accordingly based on the facts submitted and the representations made we conclude that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 we further conclude that a will not be treated under sec_877 as having as one of her principal purposes of expatriating the avoidance of u s taxes because the information submitted clearly established the lack of a principal purpose to avoid taxes under subtitle a or b of the code 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 plr-111794-00 page referenced in this letter in addition no opinion is expressed as to a’s u s tax_liability for taxable periods prior to her loss of permanent residence status or for taxable periods after her loss of permanent residence status under sections of the code other than sec_877 sec_2107 and sec_2501 a copy of this letter must be attached to a’s u s income_tax return for the year in which a obtained the ruling whether or not a is otherwise required to file a return 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 a’s representative sincerely yours ____________________ w edward williams senior technical reviewer branch office of the associate chief_counsel international cc director international international district operations op in d chief examination_division


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 b07 plr-137634-06 date date grantors trust trust trust trust ----------------------------------- -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- ----------------------- ----------------------- ----------------------- ----------------------- -------------------------------------------------------------------------------------------- ------------------ date grandchild ------------------------------------------- grandchild ------------------------------------------------ grandchild -------------------------------------------- grandchild ----------------------------- trust date date date date trustee trustee state trustee ----------------------- -------------------------- ------------------ ------------------------- ----------------------- ------------------------------------ -------------------------- ------------- -------------------- dear -------------------- plr-137634-06 this letter responds to your letter dated date requesting that the proposed modifications to trust will not cause certain trusts to lose their status as exempt from the generation-skipping_transfer gst tax grantors created trust trust trust and trust collectively the grandchildren’s trusts on date the grandchildren’s trusts have identical trust terms except for the identity of the primary beneficiary trust is for the benefit of grandchild and her lineal_descendants trust is for the benefit of grandchild and her lineal_descendants trust is for the benefit of grandchild and her lineal_descendants trust is for the benefit of grandchild and her lineal_descendants grantors created trust on date for the benefit of their great-grandchildren the provisions of the trusts governing trustee succession were modified by court order on date on date trust was reformed to conform with the grantors’ intentions regarding accumulation and distribution of income for the benefit of the trust beneficiaries on date the service ruled that the reformation of trust would not cause trust to lose its status as exempt from the gst tax the service further ruled that the reformation would not cause any party to be subject_to income or gift_tax date date and date are before date date and date are after date trustee and trustee currently serve as trustees of trust trust trust trust and trust the taxpayer represents that trust trust trust trust and trust were irrevocable on date and no additions actual or constructive have been made to any of the trusts after date the trustees propose to modify various administration provisions of the trusts paragraph of the each trust agreement as amended on date provides that there shall be at least two co-trustees either individual or corporate trustee and any co-trustee who is a lineal descendant of the grantors shall have the right to appoint his or her successor after reaching thirty-five years of age each grandchild has the right to become a co-trustee or appoint a co-trustee and successors if there are more than three co-trustees serving a majority may remove any co-trustee who is not a lineal descendant of the grantors trustee may remove any co-trustee other than a grandchild of the grantors or a co-trustee appointed by a grandchild of the grantors if there are not at least two co-trustees a successor co-trustee shall be named by a co- trustee who is a lineal descendant of the grantors if there is none a successor shall be named by the co-trustee and a majority of the then adult income beneficiaries and the guardians of any other income beneficiaries paragraph of each trust will be replaced with a new paragraph the new paragraph a will provide that the current co-trustees shall be trustee and trustee collectively current co-trustees if either current co-trustee becomes unwilling or plr-137634-06 unable to serve the remaining current co-trustee and the independent_trustee shall serve as co-trustees and thereafter there shall be an independent_trustee serving at all times if neither current co-trustee is willing and able to serve the successor co- trustees shall be the independent_trustee and those of the grantors’ grandchildren who are willing and able to serve and thereafter there shall be at least three co-trustees serving at all times one of whom shall be the independent_trustee and the rest of whom shall be referred to as other trustees the new paragraph b shall provide that at any time both current co-trustees are serving the eligible voters by a vote of at least of the eligible votes shall have the power to remove either acting current co-trustee at any time that only one current co-trustee is serving the eligible voters shall have the power to remove that acting current co-trustee with a vote of at least of the eligible votes the new paragraph c shall provide that each other trustee shall have the power to designate his or her immediate successor unless that other trustee is removed by the eligible voters pursuant to paragraph d except as otherwise provided in paragraph d if an other trustee becomes unwilling or unable to serve and no successor designated by that other trustee is willing and able to serve the remaining co-trustees may but are not required to appoint a successor other trustee to fill that vacancy if at least two other trustees are then serving or shall be required to appoint a successor other trustee if the vacancy would result in fewer than two other trustees serving in the event that fewer than two other trustees are serving and the vacancy is not filled as provided in the preceding provisions of paragraph c that vacancy may be filled by a successor other trustee appointed by the eligible voters by a vote of at least of the eligible votes in the event that fewer than two other trustees are serving and the vacancy is not filled as provided in the preceding provisions of paragraph c a successor other trustee shall be selected by a court of competent jurisdiction all trusts created under the trust agreements that hold interests in the same family business shall have the same other trustees the new paragraph d shall provide that the eligible voters by a vote of at least shall have the power to remove any acting other trustee if the removal would reduce the number of other trustees below two the eligible voters may not remove the other trustee unless they appoint a successor other trustee by a vote of at least of the eligible voters at any time that two or more other trustees are serving the eligible voters by a vote of at least may appoint one or more additional other trustees to serve with the co-trustees the new paragraph e shall provide that the original independent_trustee will be trustee if trustee or any successor independent_trustee is or becomes unwilling or unable to serve and if the remaining current co-trustee is serving the remaining current co-trustee shall select a successor independent_trustee except as otherwise provided each independent_trustee shall have the power to designate his or her immediate plr-137634-06 successor if an independent_trustee fails to name a successor the other trustees who are then serving shall appoint a successor independent_trustee if the other trustees fail to appoint a successor the eligible voters by a vote of at least may appoint a successor independent_trustee if the eligible voters fail to appoint a successor a court of competent jurisdiction shall appoint a successor independent_trustee no person who is a_related_or_subordinate_party as defined in sec_672 of the code with respect to any income_beneficiary of trust trust trust trust or trust shall be eligible to serve as an independent_trustee the new paragraph f shall provide that at any time that an independent_trustee other than trustee is serving with the remaining current co-trustee the remaining current co-trustee shall have the power to remove that independent_trustee and to appoint a successor independent_trustee at any time that trustee is serving as the independent_trustee with the remaining current co-trustee or at any time that neither current co-trustee is serving the eligible voters by a vote of at least shall have the power to remove the independent_trustee and to appoint a successor the new paragraph g shall provide that the eligible votes shall be determined in the following manner trustee and trustee shall each be entitled to three votes each living grandchild of the grantors shall be entitled to one vote the descendants of each grantors’ grandchild who is then deceased and survived by descendants collectively shall be entitled to one vote which shall be allocated among those descendants who shall be permitted to cast their votes independently and shall not be required to vote as a block by right of representation for purposes of the preceding provisions of this paragraph any person who has resigned as an eligible voter is incapacitated or is a minor shall be treated as if he or she were deceased the new paragraph n shall provide that except as otherwise provided if there are two co-trustees serving all decisions shall be unanimous and if more than two co- trustees are serving the decision of the majority shall control if a trustee is prohibited under the terms of the trust agreement from exercising any power authority or discretion that power authority or discretion shall be exercisable by any co-trustees who are not so prohibited or if there are none shall not be exercisable the new paragraph t shall provide that no trustee shall exercise any power authority or discretion otherwise granted to the trustees in the trust agreement if that power authority or discretion would cause that trustee to be treated as having a general_power_of_appointment under sec_2041 of the code any power authority or discretion that a trustee is prohibited from exercising pursuant to the provisions of this paragraph shall be exercisable by any acting trustees who are not so prohibited or if there are none shall not be exercisable the trusts’ assets consist of bank accounts and ownership_interest in a limited_liability_company that manages farming enterprises commercial real_estate and stock plr-137634-06 portfolios the trustees also propose to modify certain trust provisions relating to the trustees’ powers and duties in connection with managing the limited_liability_company the provisions allow trustees to serve in management positions in the limited_liability_company and protect against liability for management decisions except in the case of gross negligence bad faith or reckless indifference the proposed modifications further permit amendments to the trust agreements with respect to the provisions relating to the management of the limited_liability_company and the exculpation of the trustees by a vote of of the eligible voters the eligible voters are not authorized to change any other terms of the trusts or to retroactively increase a trustee’s liability sec_2601 imposes a tax on every generation-skipping_transfer sec_2611 defines the term generation-skipping_transfer as a taxable_distribution a taxable_termination and a direct_skip under b a of the tax_reform_act_of_1986 and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the generation-skipping_transfer_tax provisions do not apply to any generation-skipping_transfer under a_trust as defined in sec_2652 that was irrevocable on date however this exemption does not apply if additions actual or constructive are made to the trust after date sec_26_2601-1 of the generation-skipping_transfer_tax regulations provides that any trust in existence on date will be considered an irrevocable_trust except as provided in sec_26_2601-1 or c which relate to property includible in a grantor’s gross_estate under sec_2038 and sec_2042 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 generation-skipping_transfer_tax under sec_26_2601-1 or hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status in general unless specifically provided otherwise the rules contained in sec_26_2601-1 are applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes unless specifically noted the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of 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 plr-137634-06 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 sec_26_2601-1 provides that for purposes of this section 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 transfer or the creation of a new gst transfer to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification 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 in addition administration of a_trust in conformance with applicable local law that defines the term income as a unitrust_amount or permits a right to income to be satisfied by such an amount or that permits the trustee to adjust between principal and income to fulfill the trustee’s duty_of impartiality between income and principal beneficiaries will not be considered to shift a beneficial_interest in the trust if applicable local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust and meets the requirements of sec_1_643_b_-1 of the income_tax regulations in the present case trust trust trust trust and trust are considered irrevocable because neither sec_2038 nor sec_2042 apply and each trust was irrevocable as of date in addition there have been no actual or constructive additions made to either trust since date accordingly trust trust trust trust and trust are exempt from gst tax the proposed modifications to trust trust trust trust and trust are administrative in nature and do not shift a beneficial_interest in any trust to any beneficiary who occupies a lower generation than the person or persons who hold the beneficial_interest prior to the modifications in addition the proposed modifications do not extend the time for vesting of any beneficial_interest beyond the period provided for in the original trust agreements thus the proposed modifications of trust trust trust trust and trust will not constitute an addition to any of the trusts will not cause any of the trusts to lose their exempt status under b a of the tax_reform_act_of_1986 and sec_26_2601-1 and will not subject distributions from any of the trusts to the gst tax plr-137634-06 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 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 s requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer’s representatives sincerely melissa c liquerman melissa c liquerman senior technician reviewer branch passthroughs special industries cc


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 intl b02 plr-141337-12 date date internal_revenue_service number release date index number --------------------------- -------------------- ------------------------------ ------------------------------------ ty ------- legend taxpayer -------------------- ein ----------------- domestic subsidiary ------------------------------------- fsub-1 -------------------------------- fsub-2 ----------------------------------------------------- fsub-3 -------------------------------- foreign_partnership -------------------------- state delaware country s ---------------- country t --------- country u --------------- country v ----------------- country w ------------ country x -------- country y ------------ country z ---------------------------- products ---------------------------- additional products --------------------------------------------------------------------------------------- ------------------------------------------------------------------- plr-141337-12 dear ------------------- this is in response to a letter dated date submitted by your authorized representative that requested a ruling on behalf of taxpayer with respect to payments received by a branch of foreign_partnership from the sale of products in country t the ruling contained in this letter is based upon information and representations submitted on behalf of taxpayer by its authorized representative 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 this request_for_ruling such material is subject_to verification on examination the information submitted in the request is substantially as set forth below facts taxpayer a company organized under the laws of state and its subsidiaries form a u s based multinational company headquartered in the united_states with manufacturing sales and services operations around the world taxpayer as the u s parent company owns several entities located throughout the world that facilitate the group’s worldwide manufacturing sales and service operations taxpayer wholly owns domestic subsidiary a company organized under the laws of state and treated as a corporation for u s federal_income_tax purposes taxpayer and domestic subsidiary jointly own fsub-1 a company organized under the laws of country s and treated as a corporation for u s federal_income_tax purposes fsub-1 wholly owns fsub-2 a company organized under the laws of country t and treated as a corporation for u s federal_income_tax purposes fsub-2 in turn wholly owns fsub- a company organized under the laws of country t and treated as a corporation for u s federal_income_tax purposes in addition taxpayer directly and indirectly wholly owns several other foreign entities that are treated as corporations for u s federal_income_tax purposes collectively partners all of the partners are organized in jurisdictions other than country t and country u the partners either directly or through other foreign entities that are treated as disregarded entities for u s federal_income_tax purposes collectively wholly own foreign_partnership an entity organized under the laws of country v that elected to be treated as a partnership for u s federal_income_tax purposes foreign_partnership operates a legal branch in country u which is treated as a branch for u s federal_income_tax purposes branch foreign_partnership is the global principal for property manufactured in country w country x country y and country z taxpayer through its subsidiaries manufactures products as well as other products including additional products in country t with respect to products sold in country t plr-141337-12 the following entities perform the following functions i branch operates as a country u-based principal that provides overall support to the manufacture marketing and sale of products ii fsub-3 operates as a cost-plus limited risk manufacturer of products and iii fsub-2 operates as a country t-based principal and distributor of products purchased from fsub-3 generally with respect to products sold in country t fsub-3 purchases raw materials from both related and unrelated suppliers and performs manufacturing activities to turn the raw materials into finished products branch through the activities of its employees located in country u also performs manufacturing activities with respect to the products fsub-3 then sells the manufactured products to fsub-2 at a price that allows fsub-3 to earn a cost-plus manufacturing return thereafter fsub-2 sells the products to unrelated third party dealers in country t at an established dealer net price on the sale of the products branch performs selling activities with respect to the sale of the products in country t fsub-2 remits a payment to branch equal to a percentage of the proceeds from the sale of the products in country t which can vary in order to compensate branch for its role in the manufacturing marketing and selling of products in country t although branch is significantly involved in manufacturing marketing and selling activities with respect to the products it never takes legal_title to the raw materials work in process or finished goods for products that are sold in country t representations taxpayer makes the following representations a fsub-1 fsub-2 fsub-3 and partners are each properly treated as a controlled_foreign_corporation cfc within the meaning of sec_957 of the internal_revenue_code b fsub-3’s manufacturing activities with respect to products sold in country t constitute manufacturing within the meaning of sec_1_954-3 or iii c branch makes a substantial contribution to the manufacture production or construction of products sold in country t within the meaning of sec_1_954-3 d other than the employees of branch no other employees of foreign_partnership or partners perform material purchasing manufacturing or selling activities with respect to products sold in country t e branch’s income from the payments received from fsub-2 is derived from branch’s contributions to the manufacture and sale of products in country t plr-141337-12 f products sold in country t are sold for use consumption or disposition in country t within the meaning of sec_1_954-3 g in all cases in which a cfc owned by taxpayer derives income whether in the form of profits commission fees or otherwise in connection with the sale of personal_property to any person on behalf of a related_person or the purchase of personal_property from any person on behalf of a related_person taxpayer will treat the income as foreign_base_company_sales_income fbcsi within the meaning of sec_954 subject_to the applicable exceptions in sec_954 and the regulations thereunder including sec_1_954-3 regardless of whether the income could constitute foreign_base_company_services_income within the meaning of sec_954 without taking into account any exceptions in sec_954 ruling requested although branch does not take or pass legal_title to products sold in country t the income from the payments received by branch from the sale of products is excluded from fbcsi pursuant to sec_1_954-3 because branch makes a substantial contribution through the activities of its employees to the manufacture production or construction of the products within the meaning of sec_1 a iv law sec_951 defines a u s shareholder with respect to any foreign_corporation as a united_states_person as defined in sec_957 who owns directly indirectly or constructively percent or more of the total combined voting power of all classes of stock entitled to vote of the foreign_corporation u s shareholder sec_957 defines a cfc as a foreign_corporation with respect to which more than percent of the total combined voting power of all classes of stock entitled to vote or the total value of the stock of the corporation is owned directly indirectly or constructively by u s shareholders generally sec_951 provides that if a foreign_corporation is a cfc for a period of thirty days or more during any taxable_year a u s shareholder of the cfc must include in gross_income its pro_rata share of the cfc’s subpart_f_income sec_952 defines subpart_f_income to include foreign_base_company_income fbci sec_954 defines fbci to include fbcsi as defined in sec_954 plr-141337-12 sec_954 defines fbcsi to mean income whether in the form of profits commissions fees or otherwise derived in connection with the purchase of personal_property from a related_person and its sale to any person the sale of personal_property to any person on behalf of a related_person the purchase of personal_property from any person and its sale to a related_person or the purchase of personal_property from any person on behalf of a related_person where a the property which is purchased or in the case of property sold on behalf of a related_person the property which is sold is manufactured produced grown or extracted outside the country under the laws of which the cfc is created or organized and b the property is sold for use consumption or disposition outside the foreign_country or in the case of property purchased on behalf of a related_person is purchased for use consumption or disposition outside the foreign_country sec_954 provides that a person is a related_person with respect to a cfc if a the person is an individual corporation partnership trust or estate which controls or is controlled by the cfc or b the person is a corporation partnership trust or estate which is controlled by the same person or persons that control the cfc control is defined as the direct or indirect ownership of more than percent of the total voting power of all classes of stock entitled to vote or the total value of a corporation or more than percent of the beneficial_interest in a partnership trust or estate sec_1_954-3 provides that fbcsi of a cfc except as provided in sec_1_954-3 a and a consists of gross_income whether in the form of profits commissions fees or otherwise derived in connection with the purchase of personal_property from a related_person and its sale to any person the sale of personal_property to any person on behalf of a related_person the purchase of personal_property from any person and its sale to a related_person or the purchase of personal_property from any person on behalf of a related_person sec_1_954-3 provides that fbcsi does not include income of a cfc derived in connection with the sale of personal_property manufactured produced or constructed by the corporation a cfc will have manufactured produced or constructed personal_property which the corporation sells only if the corporation satisfies the provisions of sec_1_954-3 iii or iv through the activities of its employees as defined in sec_31_3121_d_-1 with respect to the property sec_1_954-3 provides that if personal_property purchased by a foreign_corporation is substantially transformed by the foreign_corporation prior to sale the property sold by the selling corporation is manufactured produced or constructed by the selling corporation sec_1_954-3 provides that if purchased property is used as a component part of personal_property that is sold the sale of the property will be treated plr-141337-12 as the sale of a manufactured product rather than the sale of component parts if the assembly or conversion of the component parts into the final product by the selling corporation involves activities that are substantial in nature and generally considered to constitute the manufacture production or construction_of_property sec_1_954-3 provides that if an item of personal_property would be considered manufactured produced or constructed under the principles of sec_1_954-3 or a iii prior to sale by the cfc had all of the manufacturing producing and constructing activities undertaken with respect to that property prior to sale been undertaken by the cfc through the activities of its employees then sec_1_954-3 applies if sec_1_954-3 applies and if the facts and circumstances evince that the cfc makes a substantial contribution through the activities of its employees to the manufacture production or construction of the personal_property sold then the personal_property sold by the cfc is manufactured produced or constructed by the cfc sec_1_952-1 provides that a cfc’s distributive_share of any item_of_income of a partnership is income that falls within a category of subpart_f_income described in sec_952 to the extent the item_of_income would have been income in the category if received by the cfc directly sec_1_954-1 provides that unless otherwise provided to determine the extent to which a cfc’s distributive_share of any item_of_gross_income of a partnership would have been subpart_f_income if received by it directly under sec_1 g if a provision of subpart_f requires a determination of whether an entity is a related_person within the meaning of sec_954 or whether an activity occurred within or outside the country under the laws of which the cfc is created or organized this determination is made by reference to the cfc and not by reference to the partnership sec_1_954-3 provides that to determine the extent to which a cfc’s distributive_share of any item_of_gross_income of a partnership would have been fbcsi if received by it directly under sec_1_952-1 the property sold will be considered to be manufactured produced or constructed by the cfc within the meaning of sec_1_954-3 only if the manufacturing exception of sec_1_954-3 would have applied to exclude the income from fbcsi if the cfc had earned the income directly determined by taking into account only the activities of the employees of and property owned by the partnership analysis taxpayer is a u s shareholder with respect to each partner each of which is a cfc accordingly taxpayer is required to include amounts in income under sec_951 with respect to partners including it’s pro_rata share of partners’ subpart_f_income which includes fbcsi unless an exception applies fbcsi includes income derived in plr-141337-12 connection with the purchase of personal_property from any person and its sale to a related_person and the sale of personal_property to any person on behalf of a related_person each partner’s distributive_share of gross_income of foreign_partnership is fbcsi to the extent the item_of_income would have been fbcsi if received by the partner directly income from the payments received by branch is included in foreign partnership’s gross_income branch receives payments from fsub-2 in compensation_for branch’s role in the manufacturing marketing and selling of products in country t unless the substantial contribution exception in sec_1_954-3 applies each partner’s distributive_share of income from the payments received by branch would meet the definition of fbcsi even though branch does not take title to the products because the income is derived in connection with a sale on behalf of a related_person and the products are both physically manufactured and sold for use consumption or disposition in country t and therefore outside of the countries of organization of the partners taxpayer represents that branch makes a substantial contribution to the manufacture production or construction of products sold in country t within the meaning of sec_1_954-3 sec_1_954-3 provides that fbcsi does not include income of a cfc derived in connection with the sale of personal_property manufactured produced or constructed by the corporation and further provides that a cfc will have manufactured produced or constructed personal_property that the corporation sells only if the corporation satisfies the exceptions set forth at sec_1_954-3 iii or iv similarly sec_1_954-3 provides that the substantial contribution exception applies if a cfc makes a substantial contribution to the manufacture production or construction_of_property prior to sale by the cfc the references in sec_1_954-3 and iv to a cfc being a selling entity eg sells and prior to sale should be construed consistently with the statutory definition of fbcsi to refer to any case in which the cfc derives income from selling activities that would otherwise be fbcsi accordingly sale and sells and sold in sec_1 a i and iv are interpreted to include the performance of sales activities on behalf of a related_person ruling based on the information submitted and the representations made we rule as follows although branch does not take or pass legal_title to products sold in country t the income from the payments received by branch from the sale of the products is excluded from fbcsi pursuant to sec_1_954-3 because branch makes a plr-141337-12 substantial contribution through the activities of its employees to the manufacture production or construction of the products within the meaning of sec_1 a iv 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 private_letter_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_ruling is being sent to your authorized representative a copy of this letter_ruling must be attached to any federal_income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely jeffery g mitchell branch chief branch international


tcmemo_2016_8 united_states tax_court sandra k shockley transferee et al petitioners v commissioner of internal revenue respondent docket nos filed date jenny l johnson aharon s kaye guinevere m moore ziemowit t smulkowski and alexander s vesselinovitch for petitioners lyle b press steven n balahtsis and gail campbell for respondent cases of the following petitioners are consolidated herewith terry k shockley transferee docket no and shockley holdings limited_partnership transferee docket no this opinion supplements our previously filed opinions shockley v commissioner tcmemo_2015_113 and shockley v commissioner tcmemo_2011_96 rev’d and remanded 686_f3d_1228 11th cir second supplemental memorandum opinion cohen judge these cases remain before the court on petitioners’ motion under rule for reconsideration of our supplemental memorandum opinion in shockley v commissioner tcmemo_2015_113 686_f3d_1228 11th cir shockley ii rev’g and remanding tcmemo_2011_96 shockley i in shockley iii we held inter alia that petitioners were liable as transferees under both wisconsin law and sec_6901 for the federal_income_tax liability additions to tax and accuracy-related_penalty of shockley communications corp scc for its short tax_year ended date id at unless otherwise indicated all section references are to the internal_revenue_code in effect at all relevant times and all rule references are to the tax_court rules_of_practice and procedure petitioners also filed a motion to vacate decisions under rule we vacated the decisions to allow time for us to address interest issues that the parties agreed were not sufficiently addressed in shockley iii respondent has provided estimates of prenotice and postnotice interest discussed infra as follows petitioner interest amount received as transferee prenotice -8 postnotice sandra k shockley dollar_figure dollar_figure dollar_figure terry k shockley dollar_figure dollar_figure shockley holdings lp dollar_figure dollar_figure dollar_figure dollar_figure prenotice interest is calculated pursuant to wis stat sec dollar_figure postnotice interest is calculated pursuant to sec_6601 date is the date that scc’s income_tax payment was due for its short_year ended date see sec_6151 sec_6072 date is the date the transferee notice of liability statements were issued date is an arbitrary ending date selected by respondent to perform the interest estimate background for convenience and clarity we repeat below the facts found in our prior memorandum opinions that are necessary for the disposition of this motion for reconsideration terry k shockley and sandra k shockley resided in florida at the time they filed their petitions shockley holdings l p ’s principal_place_of_business was florida at the time it filed its petition petitioners received the following distributions from scc date of distribution terry k shockley sandra j shockley shockley holdings date dollar_figure dollar_figure dollar_figure date dollar_figure dollar_figure dollar_figure date dollar_figure dollar_figure dollar_figure date dollar_figure dollar_figure dollar_figure date dollar_figure dollar_figure dollar_figure date date date dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure date dollar_figure dollar_figure dollar_figure date dollar_figure dollar_figure dollar_figure total dollar_figure dollar_figure dollar_figure on date the internal_revenue_service irs assessed the following amounts against scc for the tax_year ended date corporate_income_tax of dollar_figure an addition_to_tax under sec_6651 of dollar_figure an accuracy-related_penalty under sec_6662 of dollar_figure and interest of dollar_figure the irs sent to petitioners transferee notice of liability statements on date discussion reconsideration under rule serves the limited purpose of correcting substantial errors of fact or law and allows the introduction of newly discovered evidence that the moving party could not have introduced by the exercise of due diligence in the prior proceeding 110_tc_440 accord fed r civ p b reconsideration is not the appropriate forum for rehashing previously rejected legal arguments or tendering new legal theories to reach the end result desired by the moving party estate of quick v commissioner t c pincite the decision of whether to grant a motion for reconsideration rests within the discretion of the court and generally requires a showing of unusual circumstances or substantial error 79_tc_1054 aff’d 755_f2d_790 11th cir as grounds for their motion as supplemented in their supporting memorandum petitioners argue that scc was never shown to be insolvent as a result of the transfer wisconsin fraudulent transfer law does not incorporate the substance_over_form_doctrine and the economic_substance_doctrine was not properly applied these concerns were addressed in shockley iii and petitioners’ arguments do not demonstrate that substantial error or unusual circumstance exists or that reconsideration is otherwise warranted petitioners further argue that four issues--involving the determination of the amount of the liability--should be considered the correct amount of petitioners’ windfall equitable_recoupment liability for penalties and liability for interest the first three of these issues are newly raised theories that appear to be introduced only to reach a more desirable result for petitioners these issues could have been raised before trial and we do not consider them now with respect to the fourth issue the parties first argued transferee_liability for interest on brief in this proceeding this court generally does not consider issues raised for the first time on brief rule b however because we agree with the parties that clarification of this issue is necessary we proceed to determine petitioners’ liability for interest and calculation of the correct amounts see 64_tc_589 ndollar_figure recognizing the court’s jurisdiction over interest in connection with transferee_liability interest in transferee_liability cases is calculated in accordance with two separate periods--prenotice and postnotice--and under some circumstances two separate rates see generally 37_tc_945 the postnotice interest period starts from the date when the notice of liability is issued and runs to whenever the liability is fully paid see 281_f2d_577 5th cir citing as authority section of the internal_revenue_code_of_1939 predecessor of sec_6601 sec_6651 and sec_6654 estate of stein v commissioner t c pincite interest accruing in this period is determined under sec_6601 estate of stein v commissioner t c pincite referencing the same section in the internal_revenue_code of see also sec_6621 establishing the interest rate determining the earlier prenotice interest period depends upon the amount of assets the transferee received if the transferee received assets in excess of the transferor’s liability then the period would run from the date that the transferor’s tax payment was due up to the date the notice of liability was issued and interest would still be determined under federal_law see estate of stein v commissioner t c pincite 35_tc_393 if as in these cases the transferee received assets less than the creditor’s claim against the transferor then the period is measured from a point of time that would not be earlier than the date of transfer up to but not including the notice of liability issue_date lowy v commissioner t c pincite see patterson f 2d pincite determining the prenotice interest period to be prior to the date on which the transferee received the notice of liability in this instance interest including its applicable_rate is determined under state law see lowy v commissioner t c pincite the reasoning behind prenotice interest is that the government may be entitled to interest for this period as compensation_for the transferee’s wrongful use of those assets id pincite petitioners first argue that they cannot be held liable for any interest because respondent failed to issue any notices of liability the basis of their argument is that the irs issued two notices of deficiency on date instead of issuing notices of liability as required by sec_6901 we reject this argument having already found that the irs sent to each petitioner a transferee notice of liability statement on date shockley iii at shockley i slip op pincite while no particular form is prescribed for a notice of transferee_liability it must determine transferee_liability and notify the transferee that the liability will be assessed see 88_tc_167 see also oyer v commissioner tcmemo_2003_178 slip op pincite n equating the deficiency procedures for transferee_liability cases including the mailing of the requisite notice with those of deficiency cases aff’d 97_fedappx_68 8th cir despite being titled notice_of_deficiency the notices of liability sent to petitioners meet and exceed these requirements cf mcgarvie v commissioner tcmemo_1988_85 55_tcm_264 holding that errors--made in a notice of deficiency--do not render that notice invalid if they do not mislead a taxpayer as to the nature or amount of the commissioner’s adjustments the first page of each of the three notices confirms that a set portion of scc’s deficiency is to be assessed against the respective petitioner as a transferee of scc’s assets the notices also include pages clearly titled transferee notice of liability statement which explain the irs’ determination of transferee_liability and directly state that t he amounts above reflect your liability as a transferee of assets of shockley communications corporation for the unpaid deficiency of income_tax due from shockley communications as shown below the notices then show the tax period the unpaid tax and the penalties and also inform that i n addition you are liable for interest as computed under all applicable federal and state laws these notices were sufficient and valid notices of liability accord shockley ii f 3d pincite finding that the irs mailed notices of transferee_liability to petitioners petitioners next argue that they did not have scc assets in their hands when scc’s tax_liabilities accrued the court however held that petitioners are transferees of scc and received distributions from the proceeds of the sale of its assets shockley iii at we thus dismiss this argument as it requires the form of the overall transaction to be respected--contrary to our ruling that it be disregarded we are unpersuaded by the above arguments as petitioners’ remaining arguments pertain only to prenotice interest we hold that they are liable for postnotice interest and next consider prenotice interest because petitioners as transferees received assets less than scc’s tax_liability wisconsin law must determine the extent to which petitioners are liable for prenotice interest wisconsin caselaw provides considerable authority on the award of interest accruing prior to a judgment--applicable here because such a prejudgment period may permit and define the prenotice period in issue wisconsin law has long held that a party can recover prejudgment_interest but only on damages that are either liquidated or determinable by a reasonably certain standard of measurement laycock v parker n w wis see wyandotte chems corp v royal elec mfg co n w 2d wis echoing the rule_of laycock see also beacon bowl inc v wis elec power co n w 2d wis if the damages are liquidated or determinable a defendant can avoid the accrual of interest by tendering the amount of the damages to the plaintiff the rule_of course is that the debtor should pay interest from the time when he ought to have paid the debt as fixed by law laycock n w pincite see sulzer v diedrich n w 2d wis ct app interest is normally awarded where one party has wrongfully retained use of a second party’s money in the absence of a specific contractual rate of interest prejudgment_interest is calculated at the legal rate of pursuant to wis stat sec dollar_figure see kilgust heating v kemp n w 2d n wis petitioners identify three exceptions to prejudgment_interest that they contend they fall within citing wyandotte they argue that wisconsin courts observe these exceptions to the recovery_of prejudgment_interest the party seeking damages has instituted suit against more than one party and alleges joint liability for the damages the withholding party reasonably disputes whether the law applies to that party and there are policy considerations that prevent the assessment of prejudgment_interest with respect to petitioners’ first argument a wisconsin court generally does not award prejudgment_interest where a plaintiff seeks damages from more than one defendant see eg city of franklin v badger ford truck sales inc n w 2d wis the underlying policy concern for this exception is that the existence of multiple defendants prevents any single defendant from knowing prior to trial the precise amount of his ultimate liability and therefore tender that amount so that interest will not accrue johnson v pearson agri-sys inc n w 2d wis see laycock n w pincite petitioners thus contend that they have no way of knowing their exact liabilities because respondent has pursued not only them for scc’s tax_liability but also four other parties in similar actions petitioners’ tax_liabilities however are determinable--despite that there are multiple cases involving the same scc tax_liability because scc’s liability for income_tax additions to tax penalty and interest exceeds the amounts scc transferred to petitioners their liabilities are limited to the transferred amounts with interest see lowy v commissioner t c pincite see also 39_tc_170 determining that the transferee was accountable up to an amount not in excess of what had been distributed to her aff’d 331_f2d_485 2d cir petitioners were able to determine their liabilities before trial and each set liability could not be attributed or apportioned to any other transferee additionally petitioners are not disadvantaged as a result of multiple transferee cases stemming from the same transferor’s tax_liability a transferee is severally liable for the unpaid tax of the transferor to the extent of the assets received and other stockholders or transferees need not be joined 283_us_589 in the event that one transferee is called upon to pay more than his pro_rata share of the tax he is left to his rights of contribution from the other transferees 16_tc_727 construing sec_311 of the internal_revenue_code_of_1939 predecessor to sec_6901 see also 61_tc_278 holding that t ransferee liability is several under sec_6901 because having multiple transferee- petitioners does not prevent any single petitioner from knowing before trial the precise amount of his her or its ultimate liability this first exception does not apply accord 480_fsupp_1280 n d ill holding that plaintiffs were entitled to prejudgment_interest under wisconsin law where defendants were jointly and severally liable for damages under ill644_f2d_633 7th cir petitioners next argue that they cannot be liable for prejudgment_interest because they reasonably questioned whether the statute_of_limitations prevented the application of sec_6901 see shockley i shockley ii they assert that an exception arises where the withholding party reasonably challenges the application of law to the circumstances relying on luber v milwaukee cty n w 2d wis and state ex rel schilling v baird n w 2d wis as authority they contend that where defendants do not tender payment because they justifiably challenge the application of a law--on the basis of issues such as constitutionality or the interpretation of what is required under the law--then prejudgment_interest should be denied petitioners misinterpret this exception to prejudgment_interest in luber n w 2d pincite the wisconsin supreme court held that prejudgment_interest could not be recovered on a claim of lost rent where the parties disputed the constitutionality of the statute under which the amount of the plaintiff’s claim was computed in schilling n w 2d pincite the same court determined that prejudgment_interest could not be recovered where inter alia the parties disputed a law regarding a credit that would legally define the amount of damages recoverable in the action these cases address challenges to statutes that affect how a plaintiff’s claims or damages are computed thus conforming with wisconsin’s overarching concern that damages be determinable for prejudgment_interest to be allowable in contrast petitioners’ dispute over the statute_of_limitations affected only the enforceability of their liabilities not the amounts of them thus this exception is not applicable accord u s fire ins co v good humor corp n w 2d wis ct app the question is whether the amount of the claim is determinable not whether the cause of action is disputed a dispute as to liability has never been recognized as a bar to the payment of interest petitioners lastly argue that a third exception to prejudgment_interest applies when policy considerations weigh against such an accrual as an example they identify a case where a plaintiff was denied an award of prejudgment_interest because it claimed damages nearly double what it was able to prove at trial see congress bar rest inc v transam ins co n w 2d wis the policy consideration of congress bar is that the court refused to award prejudgment_interest because it did not want to encourage overstatements of claims id pincite respondent’s claims if they can be called that are not overstated but are in the amounts prescribed by law ie the amounts transferred to petitioners plus interest petitioners fail to explain how this or any other policy consideration corresponds to their cases accordingly petitioners do not fall under this exception because petitioners’ tax_liabilities are determinable and no exceptions appear to apply we hold that petitioners are liable for prenotice interest as determined under wisconsin state law regarding prejudgment_interest we now consider proper calculation of prenotice interest we have determined two mistakes with respect to respondent’s calculations of prenotice interest shown supra as discussed prenotice interest is to be calculated no earlier than the date of transfer respondent has calculated prenotice interest on the basis of each petitioner’s full transferee_liability using date the date scc’s payment was due as the starting point however petitioners received many transfers over time only two distributions occurred before date the remaining eight distributions were separately and subsequently received after that date accordingly respondent must recalculate prenotice interest properly to reflect these different transferred amounts accruing at different intervals during the period of date through date the second mistake is that the postnotice interest calculation should start from the date the notice of liability was issued to determine the starting date for postnotice interest the court_of_appeals in patterson f 2d pincite relied on section of the internal_revenue_code_of_1939 that section with regard to a tax payment not paid within days from the date of notice_and_demand provided that interest shall be collected upon the unpaid amount from the date of such notice_and_demand until it is paid sec b i r c therefore under patterson as relied upon by estate of stein and lowy the starting date for postnotice interest is the date the notice of liability is issued as federal_law controls from the date the notice of liability is issued prenotice interest under state law as applicable here can run only up to that date_of_issuance therefore respondent must recalculate postnotice interest as starting from date and prenotice interest as ending on date in reaching our decisions we have considered all arguments made and to the extent not mentioned we conclude that they are moot irrelevant or without merit to reflect the foregoing an appropriate order will be issued and appropriate decisions will be entered


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 3-plr-123986-02 date date company trust a_trust b a b c date date year year year legend plr-123986-02 dear this letter responds to a letter dated date submitted on behalf of company requesting inadvertent termination relief under sec_1362 of the internal_revenue_code facts company elected to be an s_corporation effective date year on date year trust a and trust b became shareholders of company it is represented that both trust a and trust b satisfy the requirements of a qualified_subchapter_s_trust qsst under sec_1361 and that they timely filed qsst elections a is the income_beneficiary of trust a and b is the income_beneficiary of trust b under each trust's governing instrument the trustees are not required to distribute annually all of the trust's income within the meaning of sec_643 to each trust's current income_beneficiary when preparing company’s year tax returns company’s new accountants discovered that the trustees had not distributed trust a’s or trust b’s income to a and b respectively for the taxable years ending year year and year the trustees were unaware that the failure to distribute all the income of a qsst would result in a termination of company's s election upon discovery of the requirement the trustees immediately took corrective action by making the required distributions for year and reporting the distributions on the relevant parties’ year tax returns company and its shareholders trust a_trust b and c represent that they have filed their returns for year sec_1 through consistent with the treatment of company as an s_corporation it is further represented that a and b’s individual income_tax returns for year sec_1 through properly included all of their share of the s_corporation income that they should have received from trust a and trust b respectively because the trusts did not distribute their income in year sec_1 and some of the other income of the trusts was not reported by the income beneficiaries in those years however it is represented that this income was taxed at the higher trust rate for those tax years company and its shareholders agree to make any adjustments consistent with the treatment of company as an s_corporation as may be required by the secretary company requests that inadvertent termination relief be granted under sec_1362 law and analysis sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for the taxable_year sec_1361 provides that an s_corporation cannot have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual plr-123986-02 sec_1361 provides that a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder for purposes of sec_1361 sec_1361 provides that a qsst whose beneficiary makes an election under sec_1361 will be treated as a_trust described in sec_1361 sec_1361 defines a qsst as a_trust a the terms of which require that i during the life of the current income_beneficiary there shall be only one income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current beneficiary in the trust shall terminate on the earlier of the beneficiary's death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to that beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to one individual who is a citizen or resident_of_the_united_states sec_1361 provides that if any qsst ceases to meet any requirement of sec_1361 but continues to meet the requirements of sec_1361 the provisions of sec_1361 shall not apply to the trust as of the first day of the first taxable_year beginning after the first taxable_year for which the trust failed to meet the requirements of sec_1361 sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect to be an s_corporation sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which a corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that if an election under sec_1362 by any corporation was terminated under paragraph or of sec_1362 the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such termination the corporation shall be treated as an s_corporation during the period specified by the secretary plr-123986-02 conclusion based on the facts submitted and the representations made we conclude that company's s_corporation_election terminated on date year because the trustees of trust a and trust b failed to distribute all of the trusts’ income for the taxable_year ending year we also conclude that the termination was inadvertent under sec_1362 therefore under sec_1362 company will be treated as continuing to be an s_corporation from date year and thereafter provided that company's s_corporation_election is valid and is not otherwise terminated under sec_1362 if company trust a_trust b or c fail to treat company as described above this ruling will be null and void moreover this ruling is contingent on company and all of its shareholders treating company as having been an s_corporation for the period date year and thereafter and on company and its shareholders making any adjustments necessary for the consistent treatment of company as an s_corporation except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express or imply no opinion regarding whether company is otherwise qualified to be an s_corporation or whether trust a or trust b is a valid qsst in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to company’s authorized representative this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent enclosures copy of this letter copy for sec_6110 purposes sincerely s christine ellison chief branch office of the associate chief_counsel passthroughs and special industries


t c summary opinion united_states tax_court dimitri l harris petitioner v commissioner of internal revenue respondent docket no 26168-06s filed date dimitri l harris pro_se james h brunson iii for respondent couvillion special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year at issue sec_7491 in certain instances shifts the burden_of_proof to the commissioner where the taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer however the burden shifts to the continued 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 respondent determined a deficiency of dollar_figure in federal_income_tax for petitioner’s tax_year the issues for decision are whether for the year petitioner is entitled to dependency_exemption deductions for two children under sec_151 head_of_household filing_status under sec_2 the earned_income_credit under sec_32 the child_care_credit under sec_21 and the additional_child_tax_credit under sec_24 some of the facts were stipulated those facts with the exhibits annexed thereto are so found and are made part hereof petitioner’s legal residence at the time the petition was filed was atlanta georgia for reasons of privacy the two children claimed as dependents on petitioner’s federal_income_tax return are not identified by name and are referred to simply as the children continued commissioner only if the taxpayer has complied with all requirements as to substantiation and has maintained the necessary books_and_records with respect to the factual issues the burden does not shift to respondent in this case because petitioner maintained no books_and_records or any other factual evidence to establish his entitlement to the principal issue entitlement to dependency_exemption deductions for the year petitioner timely filed a form 1040a u s individual_income_tax_return he filed as a head_of_household and reported gross wage and salary income of dollar_figure petitioner claimed two children as dependents the child_care_credit the additional_child_tax_credit and the earned_income_credit in the notice_of_deficiency respondent determined that petitioner’s filing_status was single and disallowed the two claimed dependency_exemption deductions the child_care_credit the additional_child_tax_credit and the earned_income_credit petitioner was not married during the year at issue however he lived with a woman and her four children petitioner was not the father of these children on his return petitioner claimed two of the children as dependents the two children claimed were born respectively in and the mother of the children was not employed during the year at issue on his return petitioner listed the two children as his niece and nephew petitioner however was not so related to the children the place where petitioner the children and their mother lived was an apartment which was shared with another tenant petitioner and the co-tenant paid the rent on the apartment the mother of the children who was unemployed did not pay any portion of the rent sometime after petitioner had filed his return petitioner mailed to the internal_revenue_service irs two additional returns for that were intended to be amended returns on one return the two children claimed as dependents were listed as adopted children and on the other return he again claimed the same two children as dependents but also claimed their mother as a dependent neither of the two amended returns was accepted by the irs dependency_exemption deductions the first issue is whether petitioner is entitled to claim dependency_exemption deductions for two children of the woman with whom he lived under sec_151 a taxpayer may be entitled to a dependency_exemption deduction for each of his or her dependents however a taxpayer is entitled to claim a dependency_exemption deduction only if the claimed dependent is a qualifying_child or a qualifying_relative under sec_152 or d under sec_152 a qualifying_child is a child who bears a relationship to the taxpayer under sec_152 that relationship for purposes of this case exists if the claimed dependent is either a child of the taxpayer or a at trial petitioner explained that the purpose of one of the amended returns was to clarify that the two claimed dependent_children on the original return were not his niece and nephew but because he and the mother of the children were planning to marry the two children would be considered adopted children and thus qualify as dependents the second amended_return included the same two children and also the mother as dependents descendant of such child or is a brother sister stepbrother or stepsister of the taxpayer or a descendant of any such relative sec_152 and the two children claimed as dependents by petitioner do not fall within any of the relationship requirements of sec_152 described above since petitioner and the mother of the children were not married in hence the children do not qualify as stepchildren of petitioner therefore the court holds that petitioner is not entitled to the dependency_exemption deductions for the two children of the woman with whom he lived during the year at issue and respondent’s determination is sustained head_of_household filing_status the second issue is whether petitioner is entitled to head_of_household filing_status under sec_2 sec_152 allows a qualifying_relative as a dependent sec_152 defines a qualifying_relative as an individual who has the same principal_place_of_abode as the taxpayer and is a member of the taxpayer’s household at trial petitioner did not assert that the two children were qualifying relatives nor did he present any evidence to establish that he provided more than one-half of the total support for the two children petitioner the children and their mother lived in an apartment in which petitioner was a co-tenant with another individual it appears from the record that the cotenant paid at least half of the rent for the apartment no evidence was presented to establish the total amount of support provided to the two children for the year at issue a taxpayer who cannot establish the total amount of support provided to a claimed dependent generally may not claim that individual as a dependent 56_tc_512 sec_1 imposes a special tax_rate on an individual filing a federal_income_tax return as head_of_household sec_2 defines head of a household as an individual taxpayer who is unmarried at the close of the taxable_year and maintains as his home a household which constitutes for more than one-half of the taxable_year the principal_place_of_abode of a qualifying_child of the taxpayer or a dependent of the taxpayer with respect to whom the taxpayer is allowed a dependency_exemption deduction under sec_151 sec_2 since this court concludes that the children were not qualifying children of petitioner as defined in sec_152 and that petitioner is not entitled to dependency_exemption deductions for the children under sec_151 and sec_152 it follows that petitioner is not entitled to head_of_household filing_status respondent’s determination is sustained on this issue earned_income_credit the third issue is petitioner’s claim to the earned_income_credit under sec_32 sec_32 provides for an earned_income_credit in the case of an eligible_individual sec_32 in pertinent part defines an eligible_individual as an individual who has a qualifying_child for the taxable_year sec_32 a qualifying_child means a qualifying_child of the taxpayer as defined in sec_152 sec_32 as discussed above petitioner is not entitled to the earned_income_credit because the two children upon whom petitioner claims the earned_income_credit are not qualifying children respondent therefore is sustained on this issue child_care_credit the fourth issue is whether petitioner is entitled to claim the child_care_credit under sec_21 sec_21 generally allows a credit against the tax to any individual who maintains a household that includes as a member one or more qualifying individuals the term qualifying_individual under sec_21 includes a dependent of the taxpayer as defined in sec_152 under age the allowable credit under sec_21 generally is based upon employment-related_expenses that are incurred to enable the taxpayer to be gainfully_employed including expenses_incurred for the care of a qualifying_individual petitioner is not entitled to the child_care_credit for the same reason he is not entitled to the dependency_exemption deductions for the two children further petitioner failed to establish that he incurred employment-related_expenses for the care of the children that enabled him to be employed respondent is sustained on this issue additional_child_tax_credit the final issue is whether petitioner is entitled to claim the additional_child_tax_credit under sec_24 sec_24 authorizes a child_tax_credit with respect to each qualifying_child of the taxpayer the term qualifying_child is defined in sec_24 as relevant to this case a qualifying_child means a qualifying_child as defined in sec_152 who has not reached the age of sec_24 earlier in this opinion the court held that the children were not qualifying children of petitioner as defined in sec_152 accordingly petitioner is not entitled to the additional_child_tax_credit under sec_24 respondent is sustained on this issue decision will be entered for respondent


department of the treasury internal_revenue_service washington d tax_exempt_and_government_entities_division oct - set ep pat uniform issue list anak wae kkk week legend taxpayer a taxpayer b amount c plan x ira y dear kak wkk kkk kak t this is in response to your undated letter whigh we received on date in which you request a supplemented by faxed information dated jung waiver of the 60-day rollover requirement con ained in sec_402 of the internal_revenue_code code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a was an active_participant in plan kx taxpayer b is taxpayer a's surviving_spouse and prior to the date on whith he waived his right to receive a survivor benefit was the designated beneficidty of taxpayer a’s account in plan on x taxpayer a’s pension commencement_date was february february taxpayer a executed an elgction authorization form with respect to plan x pursuant to which she chos of her account balance with plan x to be rolled over into ira y at that time taxpayer b provided written consent to the distribution of amount c from plan x to receive a jump sum distribution eae and waved his rights to a joint and survivor amnuity under plan x plan x is a qualified_plan as defined in sec_401 of t ‘the 60-day rollover period on february ee prior to the expiration prescribed in sec_402 of the code taxpayer a died taxpayer a had not set up ira y at that time taxpayer a wa as of her date of death code on march ie taxpayer b received a chek dated march a for amount c addressed to ira y for the benefit df taxpayer a upon receiving a will promptly deposit amount c waiver of the 60-day rollover rule taxpayer b into an ira set up and maintained in taxpayer a’s name based on the facts and representations you request that the service waive the 60-day rollover requirement with respect to th the failure to waive such requirement would béagainst equity or good conscience under the provisions of sec_402 of the code ‘distribution of amount c because sec_402 c sets down the rules governing rollovers of eligible rollover distributions into eligible retirement plans’ sec_402 of the code defines eligible_rollover_distribution such that said term includes a single sum distribution made to a year old qualified_plan participant sec_402 of the code provides in retirement_plan includes an individual retirempnt account described in sec_408 of the code or an individual_retirement_annuity described in sec_408 of the code felevant part that an eligible in general sec_402 provides that except as provided in to any transfer of a distribution subparagraph b paragraph shall not apply which the distributee received the made after the day following the day on property distributed subparagraph b provides that the secretary may waive the 60-day requirement under subparagraph where the failure to waive such requirement would be against equity or good tonscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only eligible rollover distributions that occurred after date are eligible for the waiver under sec_402 of the code revproc_2003_16 2003_4_irb_359 janupry provides that in determining whether to grant a waiver of the 40-day rollover requirement pursuant to sec_402 or sec_408 d i the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollpver due to death disability hospitalization incarceration restrictions impo error the use of the amount distributed fo by check whether the check was cashed an distribution occurred xample in the case of payment the time elapsed since the onstrates that taxpayer a had account balance and that the the information presented by taxpayer b de requested a lump sum distribution of her plan march i check was made payable to ira y for the benefit of taxpayer a dated march j payable to taxpayer a did not timely roll over the check taxpayer a’s ira y or execute the documents to create ira y because of her death on february ee taxpayer b did npt receive the distribution check until march therefore pursuant to sec_402 of the code the service hereby waives the 60-day rollover requirement with respect tq the distribution of amount c from plan x taxpayer b as surviving_spouse and jepresentatve of taxpayer a is granted a period of days from the issuance of this ruling letter to complete the rollover of an amount not to exceed amount cinto an ira in taxpayer a’s name provided all other requirements of sec_402 of the code except the day requirement are met with respect to such contribution this amount will be considered a rollover_contribution within the meaning of sec_402 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 of the code made applicable to iras under sec_408 of the code the service notes that the ira into which ampunt c will be rolled over will not defined in code sec_401 have a designated_beneficiary as that term is period with respect to the rollover thus the code sec_401 distribution ira referenced above is that applicable to an individual who died prior to having attained her required_beginning_date without thereof faving designated a beneficiary no opinion is expressed as to the tax treatme no the transaction described herein under the provisions of any other section which may be applicable thereto of either the code or regulations this letter is directed only to the taxpayer whq requested it sec_61 k of the code provides that it may not be used or ited as precedent - ' f you wish to inquire about this ruling please contact at please address all correspondence to se t ep ra t3 sincerely yours fanon se anager employee_plans technical group enclosures deleted copy of this letter notice of intention to disclose notice


t c memo united_states tax_court dan s and nancy j mitchell petitioners v commissioner of internal revenue respondent docket no filed date dan s mitchell and nancy j mitchell pro_se bruce w wilpon for respondent memorandum findings_of_fact and opinion cohen judge respondent determined deficiencies of dollar_figure and dollar_figure in petitioners’ federal income taxes for and respectively respondent also determined accuracy-related_penalties of dollar_figure and dollar_figure under sec_6662 for those years unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure after concessions the issues remaining for decision are whether petitioners are entitled to deduct losses from farming claimed on amended returns for the years in issue whether mortgage interest and property taxes paid_by petitioners are properly deducted on schedule a or on schedule f of their returns whether petitioners are entitled to deduct a net_operating_loss carryforward from whether petitioners are entitled to depreciation expense and legal expense deductions on schedule c whether petitioners can change from the cash to the accrual_method of accounting on their schedules c and f where respondent’s permission was neither sought nor secured and whether petitioners are liable for the penalties for negligence findings_of_fact some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioners resided in boerne texas at the time that they filed their petition petitioner dan s mitchell mr mitchell is a certified_public_accountant who operates a sole_proprietorship known as mitchell associates petitioner nancy j mitchell mrs mitchell is a secretary with an accounting firm on date petitioners purchased a 205-acre rural property in kendall county texas the real_property which includes a residence since its purchase petitioners have maintained the residence as their homestead petitioners financed the purchase of the real_property with a bank loan in the amount of dollar_figure on their and form sec_1040 u s individual income_tax returns petitioners claimed schedule a mortgage interest deductions of dollar_figure and dollar_figure respectively for interest_paid on the real_property loan the correct amounts of interest_paid on the real_property loan were dollar_figure for and dollar_figure for on their and form sec_1040 petitioners claimed schedule a real_property tax deductions of dollar_figure and dollar_figure respectively for taxes paid on the real_property the correct amounts of real_property_taxes paid were dollar_figure for and dollar_figure for during mr mitchell had a business loan with groos bank on schedule c to their form_1040 for petitioners claimed interest_expense of dollar_figure in relation to the groos bank loan the correct amount of interest_expense for on this loan was dollar_figure on date petitioners filed a voluntary chapter petition in bankruptcy no tax returns were ever filed for the bankruptcy_estate in a second amended disclosure statement filed in the bankruptcy proceeding date petitioners represented that the filing of the bankruptcy petition was required by the scheduled foreclosure sale on their real_property they also asserted the following mr mitchell was raised on a farm in dallas county texas close to lancaster texas where his family grew wheat cotton corn and alfalfa which is a hay crop similar to coastal bermuda and raised dairy and beef cattle the mitchells live on acres of land in boerne texas which they purchased in to begin farming operations although mr mitchell had not been an active farmer for years he believes he has and can make a profit at farming operations mr mitchell planted coastal bermuda in on acres and expects to generate from this crop cash_flow of dollar_figure a month during april to september and a profit of dollar_figure a year although a profit was not made in a market exists for coastal bermuda for horses and cattle in the hill country area which has been enhanced by the race tracks now in operation in frederickburg twenty-two miles from the mitchells’ home and in bandera fifteen miles from the mitchells the mitchells plan to plant oats or wheat over the coastal bermuda in winter and graze the cattle on the oats rather than buying feed thus saving dollar_figure a year in fee sic bills the mitchells are attempting to obtain a fmha loan to purchase head of cattle and operating_expenses for hay coastal bermuda production including drilling a well and installing an irrigation system for the coastal bermuda acreage mr mitchell expects to make a yearly profit of dollar_figure from the cattle if the sic the loan is not obtained mr mitchell believes he will still be able to meet the expenses buy the cattle and make the projected profit as of the date of the statement however no farming operation had commenced on schedules filed in the bankruptcy proceeding petitioners stated that they owned no farm animals farm supplies or farm equipment operating statements filed with the bankruptcy court showed no cash receipts or cash disbursements for any farming activity the bankruptcy proceeding was closed by final decree filed date petitioners’ form sec_1040 for and were prepared using the cash_basis method_of_accounting prior to date an examination of petitioners’ returns was commenced by the internal_revenue_service in date petitioners filed a form 1040x amended u s individual_income_tax_return for in date petitioners filed a form 1040x for and a second form 1040x for the statutory_notice_of_deficiency for and was sent to petitioners on date in date petitioners filed a third form 1040x for and a form 1040x for on each of the amended form sec_1040x petitioners claimed farm_losses on schedule f and recharacterized the interest and tax expenses claimed on schedule a as farm loss expenses claimed the standard_deduction instead of itemized_deductions on schedule a and purportedly changed from cash to accrual accounting for farm operations allegedly begun in they claimed depreciation of unidentified farm equipment in the amount of dollar_figure on the amended returns for and they then claimed a net_operating_loss carried forward from to and during the course of the bankruptcy proceeding petitioners returned to the vendors certain office equipment that had been possessed by mitchell associates pursuant to lease purchase agreements rent and lease expense deductions for office equipment of mitchell associates were claimed on schedules c for and in the amounts of dollar_figure and dollar_figure respectively on the amended returns petitioners claimed depreciation for the equipment that was returned to the lessor vendors opinion petitioners contend that they are entitled to additional deductions and losses not claimed on their returns as originally filed they assert that after conceding that amounts of unreported income determined in the statutory notice were erroneous respondent sought ways to deny them deductions that they erroneously did not claim on their original returns in order to sustain some deficiency in tax for each year according to respondent the amounts now in dispute approximate dollar_figure for and dollar_figure for petitioners’ accusations against respondent’s agents have no persuasive effect in this case see 62_tc_324 the only remaining issues are whether petitioners are entitled to the additional deductions that they now claim and whether they are liable for the penalties for negligence they have the burden_of_proof on these factual issues rule a 503_us_79 512_f2d_882 9th cir affg tcmemo_1972_133 unless petitioners substantiate their deductions we do not reach legal issues raised by respondent to wit whether any farm_losses would belong to the bankruptcy_estate and not be deductible on petitioners’ personal tax returns and whether petitioners could change their method_of_accounting without permission mr mitchell testified at trial mrs mitchell failed to appear and no witnesses corroborated mr mitchell’s assertions concerning his alleged farm activity although a few receipts were produced the purpose of the expenditures is not apparent from the face of the receipts and was not specifically or adequately explained by mr mitchell his testimony consisted almost exclusively of attacking respondent’s agents and arguing that he was engaged in farm activity mr mitchell stated that we feel that the fact that we live there that we care for the farm every day is substantiation enough his uncorroborated testimony was vague and conclusory and particularly in view of the belatedness of the claims is not persuasive petitioners have not proven that they have any depreciable basis in any equipment respondent suspects that petitioners are now claiming depreciation_deductions on the same equipment for which lease payments were previously deducted the only references in the record pertaining to business equipment relate to lease purchase agreements and respondent’s suspicion that petitioners have already deducted the lease payments on the same equipment is not as petitioners’ contend a ludicrous statement although mr mitchell denies that the equipment depreciated is the same as that for which deductions were already taken he has not presented any evidence substantiating either the purchase of the equipment on which depreciation is claimed or the lease of different equipment respondent concedes that petitioners paid dollar_figure to their bankruptcy attorney but contends that the amount is a personal_expense because the purpose of the proceeding was to prevent foreclosure on petitioners’ homestead petitioners have given us no basis for concluding that the bankruptcy attorney’s fee was an ordinary and necessary business_expense or for allocating the fee between personal services and business services see 26_f3d_116 11th cir 68_tc_294 with respect to the penalties for negligence the parties stipulated that the interest deducted on petitioners’ returns for the years in issue exceeded substantially the amounts that they were entitled to deduct although mr mitchell asserted that he relied on forms received from banks his testimony is uncorroborated and not persuasive as a certified_public_accountant he should have maintained accurate records of his interest payments and deducted only the amounts actually paid petitioners have failed to prove that the recomputed underpayments are not due to negligence and recomputed penalties under sec_6662 will be sustained to take account of the concessions by the parties decision will be entered under rule