department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n contact person telephone number identification_number employer_identification_number we have considered your ruling_request dated date requesting a number release date uil date date se t eo ra t3 legend receiver insurance_company state court state dear ------------------ determination that insurance_company will suffer no adverse federal tax consequences under sec_501 of the internal_revenue_code code with regard to receiver’s final creditor distributions and the closing of the receivership estate facts supervision and control of the court appointed statutory receiver in the state court placed insurance_company in receivership due to its financial condition receiver has been selling assets pursuing litigation and transferring insurance_company liabilities receiver represents that it plans to complete final distributions and close the receivership estate by the end of the current_year after the initiation of receivership insurance_company no longer operated a for-profit life_insurance and annuity business instead receiver began winding up insurance company’s affairs by transferring its insurance policies to third-party insurers the guaranty funds of several states funded the and transfers as a result of the policy transfers receiver represents that it no longer qualifies as a life_insurance_company under sec_816 of the code insurance_company applied as a tax- exempt_organization under sec_501 of the code insurance_company was recognized as exempt from federal_income_tax under sec_501 of the code as an organization described in sec_501 commencing date for tax years when insurance company’s policy claims exceed its reserves and when insurance company’s net written insurance_company is an insolvent insurance_company being liquidated under the premiums or if greater direct written premiums did not exceed the dollar_figure limit as prescribed by sec_501 of the code receiver represents that the final distributions of insurance_company assets will be made in accordance with state’s comprehensive statutory scheme for liquidating insolvent insurers the state court is responsible for overseeing and approving the receivership distributions receiver also represents that insurance_company has not issued any insurance contracts and has only administered claims since it was recognized as being exempt from federal_income_tax under sec_501 of the code since receiving exemption receiver liquidated all of insurance company’s remaining assets and completed litigation of insurance_company claims accordingly receiver is prepared to make final distributions to insurance_company creditors ruling requested income_tax consequences under sec_501 of the code with regard to the final distributions to creditors and the closing of its receivership estate law and analysis receiver seeks a ruling to the effect that insurance_company will suffer no adverse federal sec_501 of the code provides that an organization described in sec_501 of the code is exempt from federal_income_tax prior to sec_501 of the code provided that an insurance_company other than a life_insurance_company was tax-exempt if its net written premiums or if greater its direct written premiums did not exceed dollar_figure the pension funding equity act p l act was enacted on date section of the act made several changes to sec_501 of the code that in general are effective for taxable years beginning after date specifically the act amended sec_501 of the code to provide for the exemption of a insurance_companies as defined in sec_816 other than life including interinsurers and reciprocal underwriters if - i i the gross_receipts for the taxable_year do not exceed dollar_figure and ii more than percent of such gross_receipts consist of premiums the act provides a special transition rule with respect to certain insurance_companies in receivership or liquidation section e of the act provides in the case of a company or association which a for the taxable_year which includes date meets the requirements of sec_501 of the internal_revenue_code_of_1986 as in effect for the last taxable_year beginning before date and b on date is in a receivership liquidation or similar proceeding under the supervision of a state court the amendments made by this section shall apply to taxable years beginning after the earlier of the date such proceeding ends or date we must determine which version of sec_501 of the code should apply to insurance_company specifically we must determine whether insurance_company meets the requirements of the transition rule for companies in receivership or liquidation under section e of the act this determination is a two-step process under section e a of the act we must first determine whether for the taxable_year which includes date insurance_company meets the requirements of sec_501 of the code as in effect for its last taxable_year beginning before date in order to meet the previous statutory language of sec_501 insurance_company must be an insurance_company other than life and its net written premiums or if greater direct written premiums must not exceed dollar_figure receiver represents that insurance_company entered into a series of and transactions to transfer its life_insurance and annuity policies and corresponding assets relative to the respective policyholder liabilities to other insurance_companies as a result of these transactions receiver represents that insurance_company no longer met the definition of a life_insurance_company under sec_816 the service sent a determination_letter in confirming insurance company’s sec_501 status pursuant to insurance company's form_990 for the taxable_year insurance_company was in the midst of liquidation was still administering non-life insurance claims and did not have net or direct written premiums exceeding dollar_figure accordingly insurance_company met the previous statutory language of sec_501 for its last taxable_year before date based on insurance company’s representations and form 990s insurance_company satisfies the requirements of section e a under section e b of the act we must then determine whether on date after establishing that the prior provisions of sec_501 of the code apply to insurance_company was in a receivership liquidation or similar proceeding under the supervision of a state court insurance_company is an insolvent insurance_company and receiver represents that on date insurance_company was in receivership liquidation or similar proceeding under the supervision of state court in insurance_company was placed in receivership by state court due to its financial condition approximately six months later insurance_company was placed in liquidation by state court due to its significant insolvency insurance_company has represented warranted and provided documentation which establishes that it has been in receivership and liquidation by order of state court since furthermore receiver is subject_to the orders of state court and final distributions are subject_to approval by state court based on the representations and information included in the submission on date insurance_company was in a receivership liquidation or similar proceeding under the supervision of a state court accordingly insurance_company satisfies the requirements of sec_306 for companies in receivership or liquidation insurance_company we must determine whether insurance_company continues to qualify for exemption the service’s determination_letter recognized insurance company’s exempt status under sec_501 provided that i insurance company’s policy claims exceed its reserves and ii insurance company’s net written premiums or if greater direct written premiums did not exceed the dollar_figure limit as prescribed by sec_501 receiver’s representations and a review of insurance company’ sec_2001 through form 990s confirm that insurance_company held no written premiums and policy claims easily exceeded its reserves therefore in accordance with the service’s prior determination insurance_company continues to qualify for sec_501 exemption ruling e of the act insurance_company qualifies for the transition rule for companies in receivership or liquidation under the act therefore the act’s amendments to sec_501 of the code do not apply to insurance_company until taxable years beginning after since insurance_company has established that it meets both requirements of section in addition to certain clarifications being made the requirements for qualification as an the earlier of the date insurance company’s liquidation ends or date accordingly insurance_company continues to qualify as exempt from federal_income_tax under sec_501 of the code as an organization described in sec_501 insurance_company under c of the code as amended by section of the act have changed insurance_company and receiver may rely on this ruling only during the period in which the transition rule for companies in receivership or liquidation is in effect under section e as such insurance_company should wind up all affairs by date any final distributions made after date will not fall within the protection of this ruling facts and representations upon which it is based except as we have ruled herein we express no opinion as to the tax consequences of the transactions under other sections of the code and income_tax regulations this ruling is based on the understanding that there will be no material changes in the this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts because it could help resolved questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter enclosure notice sincerely s robert c harper jr manager exempt_organizations technical group


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 b09 plr-103004-04 date date ----------------------r ----------------------------------------------------------------------------------------------ll -------------------------17 ----------------95 legend taxpayer -------------------ll grantor_trust date date dear --------- this is in response to your authorized representative’s letter dated date and prior correspondence requesting rulings under the applicable provisions of the internal_revenue_code the facts submitted are as follows on date grantor funded the trust date is prior to date the terms of the trust provide that income is to be distributed to grantor’s son for his life upon the son’s death the trust is to be divided into equal shares one for each grandchild and the income from a respective grandchild’s share is to be distributed to the grandchild for life on the death of a grandchild the trust terminates as to that grandchild and is distributed outright pursuant to a testamentary limited_power_of_appointment to a class consisting of the grandchild’s spouse issue and spouses of such issue or in default of appointment to the grandchild’s issue the terms of trust also provide that in all events the trust will terminate years after the last to die of several measuring lives two of whom are still living therefore if a grandchild survives the expiration of the perpetuities period the trust corpus will pass to the grandchild outright taxpayer grantor’s grandson learned of his interest in the trust and reached the age of majority prior to date on date taxpayer’s father died and taxpayer’s interest in the trust commenced as noted above if taxpayer survives the expiration of the perpetuities period the trust corpus will pass to him outright taxpayer proposes to renounce one-fifth of this plr-103004-04 remainder_interest as a result of the renunciation one-fifth of the trust corpus will pass to taxpayer’s issue per stirpes taxpayer requests the following rulings that the renunciation will constitute a completed_gift that the service provide the actuarial factor to value a remainder_interest payable years after the death of the survivor of two lives in being provided taxpayer survives and that the gift of the remainder_interest will not cause the trust to become subject_to chapter of the code ruling sec_2501 of the internal_revenue_code provides for the imposition of a gift_tax on the transfer of property by gift sec_2511 provides that the gift_tax applies to a transfer by way of gift whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-1 of the gift_tax regulations provides that in the case of taxable transfers creating an interest in the person disclaiming made before date where the law governing the administration of the decedent's_estate gives a beneficiary heir or next-of-kin a right completely and unqualifiedly to refuse to accept ownership of property transferred from a decedent whether the transfer is effected by the decedent's will or by the law of descent and distribution a refusal to accept ownership does not constitute the making of a gift if the refusal is made within a reasonable_time after knowledge of the existence of the transfer the refusal must be unequivocal and effective under the local law there can be no refusal of ownership of property after its acceptance in the absence of the facts to the contrary if a person fails to refuse to accept a transfer to him of ownership of a decedent's property within a reasonable_time after learning of the existence of the transfer he will be presumed to have accepted the property where the local law does not permit such a refusal any disposition by the beneficiary heir or next-of-kin whereby ownership is transferred gratuitously to another constitutes the making of a gift by the beneficiary heir or next-of-kin in any case where a refusal is purported to relate to only a part of the property the determination of whether or not there has been a complete and unqualified refusal to accept ownership will depend on all of the facts and circumstances in each particular case taking into account the recognition and effectiveness of such a purported refusal under the local law compare sec_25_2518-1 through which apply to a qualified_disclaimer of an interest in property that is created in the beneficiary disclaiming by a transfer made after date as noted above the renunciation of a portion of the remainder_interest will constitute a taxable gift unless it is made within a reasonable_time after knowledge of the existence of the transfer sec_25_2511-1 the transfer referred to in the regulation plr-103004-04 occurs when the interest is created and not at a later time when the interest either vests or becomes possessory 455_us_305 here the trust was created prior to date and taxpayer having reached the age of majority learned of his interest prior to that date on these facts the renunciation will not be timely because it will not have been made within a reasonable_time after taxpayer learned of the existence of the transfer that created the remainder 511_us_224 moreover by accepting the entire trust income since date taxpayer has accepted the entire trust corpus sec_25 c accordingly the renunciation of one-fifth of the remainder_interest constitutes a taxable gift ruling sec_2702 provides that solely for purposes of determining whether a transfer of an interest in trust to or for the benefit of a member_of_the_transferor's_family is a gift and the value of the transfer the value of any interest in the trust retained by the transferor or any applicable_family_member as defined in sec_2701 shall be determined as provided in sec_2702 sec_2702 provides that the value of any retained_interest which is not a qualified_interest shall be treated as being zero sec_2702 defines a qualified_interest as any interest which consists of the right to receive fixed amounts payable not less frequently than annually any interest which consists of the right to receive amounts which are payable not less frequently than annually and are a fixed percentage of the fair_market_value of the property in the trust determined annually and any noncontingent remainder_interest if all of the other interests in the trust consist of interests described in or above sec_2702 provides that the transfer of an interest in property with respect to which there i sec_1 or more term interests shall be treated as a transfer of an interest in a_trust sec_2702 defines a term_interest as including a life interest in property sec_2702 provides that in the case of a transfer of an income or remainder_interest with respect to a specified portion of the property in a_trust only that portion shall be taken into account in applying sec_2702 to the transfer sec_2702 was added by the omnibus budget reconciliation act of pub_l_no a stat date sec_2702 applies to transfers made after date sec_25_2702-2 defines a member_of_the_family as an individual’s spouse any ancestor or lineal descendent of the individual or the individual’s spouse any brother or sister of the individual and any spouse of the foregoing plr-103004-04 sec_25_2702-2 defines a transfer in trust as including a transfer to a new or existing trust and an assignment of an interest in an existing trust a transfer in trust does not include the execution of a qualified_disclaimer as defined in sec_2518 sec_25_2702-2 defines the term retained as held by the same individual both before and after the transfer in trust sec_25_2702-2 example provides that a transfers property to an irrevocable_trust retaining the right to receive the income of the trust for years on the expiration of the 10-year term the trust is to terminate and the trust corpus is to be paid to a's child however if a dies during the 10-year term the entire trust corpus is to be paid to a's estate each retained_interest is valued at zero because it is not a qualified_interest thus the amount of a's gift is the fair_market_value of the property transferred to the trust here taxpayer proposes to renounce one-fifth of the remainder_interest while retaining the income_interest in the trust the transfer of an interest in property with respect to which there is one or more term interests is treated as a transfer of an interest in a_trust sec_2702 a term_interest includes a life interest in property sec_2702 thus the transfer of one-fifth of the remainder will constitute a transfer in trust for purposes of sec_2702 sec_25_2702-2 after the proposed renunciation taxpayer will retain his income_interest in the trust an income_interest is not a qualified_interest and will be valued at zero sec_2702 and sec_2702 even though the remainder_interest to be transferred was created prior to date the proposed transfer will occur after date moreover the transfer will not constitute a qualified_disclaimer as defined in sec_2518 finally the transferees are taxpayer’s issue members of the taxpayer’s family sec_2702 sec_25_2702-2 accordingly taxpayer will be treated as making a gift of one-fifth of the entire value of the corpus of the trust and no actuarial factor will be necessary ruling sec_2601 imposes a tax on every generation-skipping_transfer a generation skipping transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip 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 see b a of the tax_reform_act_of_1986 publaw_99_514 100_stat_2731 date sec_26_2601-1 this exemption does not apply however to a pro_rata portion of any generation-skipping_transfer under an irrevocable_trust if additions actual or constructive are made to the trust after date plr-103004-04 sec_2602 provides that the amount of the tax is the taxable_amount multiplied by the applicable_rate sec_2641 defines applicable_rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2652 provides that generally except as provided in this subsection or sec_2653 the term transferor means in the case of any property subject_to the tax imposed by chapter the decedent and in the case of any property subject_to the tax imposed by chapter the donor sec_26_2652-1 of the generation skipping tax regulations provides in part that generally the individual with respect to whom property was most recently subject_to federal estate or gift_tax is the transferor of that property for purposes of chapter an individual is treated as transferring any property with respect to which the individual is the transferor thus an individual may be the transferor even though there is no transfer of property under local law at the time the federal estate and gift_tax applies sec_26_2652-1 provides that a transfer is subject_to federal gift_tax if a gift_tax is imposed under sec_2501 without regard to exemptions exclusions deductions and credits as discussed above the renunciation of one-fifth of the remainder_interest will constitute a completed_gift the amount_of_the_gift is one-fifth of the entire value of the corpus of the trust thus taxpayer will be treated as the transferor of one-fifth of the entire value of the corpus of the trust accordingly the gift will cause one-fifth of the entire value trust to become subject_to chapter 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 referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-103004-04 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely james f hogan senior technician reviewer branch passthroughs special industries enclosure cc copy for sec_6110 purposes


third party communication none date of communication not applicable cca_2013052115112101 id uilc number release date from sent tuesday date pm to cc bcc subject re --------- - the character of partnership income or loss as derived from a trade_or_business rental_activity or portfolio_income is a partnership_item see 110_tc_172 sec_301_6231_a_3_-1 consequently a change to the originally reported character on the partnership return has to be made as a timely request_for_administrative_adjustment aar under sec_6227 such a claim must be filed on form_8082 within three years of the filing of the partnership return unless the period for assessing partnership items has been extended to a later date the application of the passive_loss_rules to a partner under sec_469 is an affected_item with a partnership_item component character of partnership income and a partner-level component material_participation estate of quick sec_301_6231_a_5_-1 the partnership level component is subject_to the tefra procedures and the partner- level component is subject_to normal non-tefra refund procedures see 600_f3d_362 5th cir if a partner files a refund claim for the partner-level component he will be bound by the partnership-level reporting of the item cf 94_tc_853


office_of_chief_counsel internal_revenue_service memorandum number release date cc fip b04 postf-146000-13 uilc date may to gwen schoen attorney cc lb_i ctm la large business international from sarah e lashley assistant to the branch chief branch financial institutions products subject ------------------------------------------------------------------------------- legend --------------------------------------------------- -------------------------- ---------------------------------------------------- ------------------------------------- ----------------------------------------------------------- --------------------------------------------- ------------------------------------ -------------------------------------- taxpayer individual entity entity entity entity entity entity administrator ------------------------------------------- state year year year year year a b c ----------- ------- ------- ------- ------- ------- ----------------- ----------------- ----------------- this is in response to your request for legal analysis in the cited case postf-146000-13 issue whether the seven 10-year excess loss policie sec_1 qualify as insurance for federal_income_tax purposes summary of arrangement entities and administrator the group entities entered into 10-year excess loss policies with taxpayer in year the policies are identical apart from the insured group entity policy numbers and premiums entities are s-corporations for federal_income_tax purposes individual owns all the stock of entities entities provide healthcare services to members of unrelated health maintenance organizations hmos hmos do not purchase these services directly from entities hmos contract with administrator to have entities provide healthcare services to the hmos’ members individual also owns all the stock of administrator administrator is a c-corporation administrator does not provide healthcare services directly to patients the hmos pay administrator on a capitated pre-paid monthly basis the capitation fees cover primary healthcare hospital and specialized healthcare services administrator pays entities sub-capitation fees the amount of the sub-capitation fee paid to each of entities depends primarily on the number of hmo members who receive primary healthcare services from each entity administrator also contracts with hospitals to provide hospital services to the hmo members and contracts with specialists to provide specialized healthcare services to the hmos’ members individual owns all of taxpayer’s stock taxpayer is a c-corporation in december of year taxpayer incorporated in state taxpayer is licensed with the state division of insurance state doi to operate as a pure captive_insurance_company in general under the state captive statute a pure captive insurer only insures the risks of its parent and affiliated entities or controlled unaffiliated entities taxpayer’s initial business plan filed with the state doi stated that taxpayer would issue workers’ compensation and professional liability coverage to the group entities taxpayer revised its initial business plan filing a second business plan with the state doi the second business plan stated that taxpayer would issue one-year excess loss policies to the group entities the new policies were in addition to the existing workers’ compensation and professional liability coverage described in the initial business plan the use of terms such as policies insureds insurer and premiums are for convenience only and do not imply that there is a genuine insurance arrangement for federal_income_tax purposes entitie sec_2 and merged in year postf-146000-13 taxpayer then revised its business plan again filing a third business plan with the state doi the third business plan stated that taxpayer would cancel the one-year excess loss policies and issue 10-year excess loss policies to the group entities the plan stated that premiums for the policies for all the entities will total a payable evenly over the 10-year period the limit of liability for the policies will total b the expected losses under the policies will total c which on a discounted basis equals the premiums to be paid c is less than b and greater than a the excess loss policies taxpayer issued to each of the seven group entities covered a portion of the group entities’ costs of providing healthcare services the costs to the hmo members over years the 10-year term started in december year and went through december year premiums were due in equal annual installments each policy covered one of group entity’s costs to the extent they exceeded a specified amount the attachment point a group entity’s costs that exceeded the attachment point could trigger claims by that group entity to taxpayer at the time of its execution each of the policies provided that the attachment point was dollar_figureto be determined therefore even though the business plan filed with the state doi stated that the total premiums would equal the discounted amount of expected losses the premiums for the policies were priced and the policies were executed before taxpayer and the group entities established the attachment point it is not clear when the attachment point was established but circumstantial evidence indicates that it happened no earlier than four years into the 10-year policy period taxpayer’s potential liability to each group entity was also capped under each policy the policy cap the policies limited taxpayer’s liability to each group entity to percent of the premiums that each group entity paid there is evidence that when the attachment point was established the parties fully expected group entities’ claims to exceed the policy cap taxpayer later raised the policy cap to percent of premiums in an undated policy endorsement each group entity did not pay additional premiums for the increased policy cap additionally there is evidence that the parties expected group entities’ claims to exceed the newly raised policy cap when the policy cap was raised claims were payable at the end of the 10-year policy term no claims were made under the policy from its inception through year in the aggregate the group entities paid a in premiums over the 10-year policy term each group entity claimed a deduction for each taxable_year under sec_162 for premiums_paid to taxpayer there is no indication that costs covered by the policies represented actual losses to the group entities furthermore there is no evidence that claims under the policies were for costs that exceeded the capitated payments that group entities received whether directly or indirectly from the hmos for purposes of this memorandum we will assume that claims under the policies represented actual losses to the group entities subsequent years have not yet been audited by the service postf-146000-13 law insurance neither the internal_revenue_code nor the income_tax regulations define the terms insurance or insurance_contract for federal_income_tax purposes in 312_us_531 the supreme court held that h istorically and commonly insurance involves risk shifting and risk distributing cases analyzing captive insurance arrangements have described insurance as having the following three elements an insurance risk shifting and distribution of that risk and insurance in its commonly accepted sense see eg 979_f2d_162 9th cir aff’g 96_tc_18 risk shifting occurs if a person facing the possibility of an economic loss transfers some or all of the financial consequences of the potential loss to the insurer such that the loss does not affect the insured because the insurance payment offsets the loss revrul_2002_89 2002_2_cb_984 revrul_2002_90 2002_2_cb_985 revrul_2002_91 2002_2_cb_991 811_f2d_1297 9th cir aff’g 84_tc_948 572_f2d_1190 7th cir aff’g 66_tc_1068 71_tc_278 for risk shifting to be present the party that bears the ultimate financial loss must not be the same party that suffers the loss if parties structure an apparent insurance transaction so as to effectively eliminate the effect of insurance risk therein insurance cannot be present amerco inc t c pincite the risk transferred pursuant to an insurance_contract must be a risk of economic loss allied fidelity corp f 2d pincite losses that exist at the time of the insurance agreement or that are so probable or imminent that there is insufficient risk being transferred between the insured and insurer are not proper subjects of insurance couch on insurance 3d for risk to shift the insurer must be a viable entity financially capable of meeting its obligations amerco inc t c pincite 89_tc_1010 the 96_tc_45 aff’d 979_f2d_1341 9th cir discussing the insurer’s financial capacity to pay the insured’s claims as part of its risk shifting analysis in captive cases the courts have scrutinized the capitalization of the captive for purposes of determining if there was risk shifting 62_f3d_835 6th cir 881_f2d_247 6th cir 774_f2d_414 10th cir 640_f2d_1010 9th cir in addition an arrangement must resemble insurance in its commonly accepted sense postf-146000-13 to qualify as insurance for federal_income_tax purposes see eg amerco inc v commissioner f 2d pincite the determination of whether an arrangement resembles insurance in its commonly accepted sense encompasses a number of factors including state regulators’ definitions of insurance_companies and insurance transactions amerco inc t c pincite the harper group t c pincite however state law definitions are not dispositive for federal_income_tax purposes amerco inc t c pincite the capitalization of the insurer whether premiums were charged as the result of an arm’s-length transaction whether premiums were actuarially determined and whether the policies were valid and binding are also relevant for purposes of determining whether there is insurance in its commonly accepted sense see revrul_2002_91 2002_2_cb_991 malone hyde inc f 3d pincite the harper group t c pincite gulf oil corp t c pincite n income_tax accounting sec_451 provides that the amount of any item_of_gross_income shall be included in gross_income for the taxable_year in which received by the taxpayer unless such amount is to be properly included in a different period sec_1_451-1 provides in part that under an accrual_method of accounting_income is includible in gross_income when all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy all the events that fix the right to receive income occur when the required performance takes place payment is due or payment is made whichever happens first see 372_us_128 revrul_80_308 1980_2_cb_162 sec_1_461-1 provides in part that under an accrual_method of accounting a liability is incurred and is generally taken into account for federal_income_tax purposes in the taxable_year in which all the events have occurred that establish the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability uncertainty as to the amount of the liability does not prevent a taxpayer from taking into account that portion of the amount of the liability which can be computed with reasonable accuracy sec_1_461-4 provides that in the case of taxpayer’s liability for which economic_performance rules are not provided elsewhere economic_performance occurs as the taxpayer makes payments in satisfaction of the liability to the person to whom the liability is owed postf-146000-13 analysis as explained below we conclude that the seven 10-year excess loss policies do not qualify as insurance for federal_income_tax purposes the policies do not shift any risk from the group entities to taxpayer and the arrangement is not insurance in its commonly accepted sense as a result taxpayer accrues income from premiums when they are due or paid whichever happens first but does not accrue liabilities from claims until those claims are paid insurance the economic risk under each policy is that at the end of that 10-year policy period each group entity will make claims up to the policy cap ie percent of premiums if the cost of healthcare services it provided over the 10-year period exceeded the attachment point see allied fidelity corp f 2d pincite accordingly the policies purportedly transferred this risk of economic loss from the group entities to taxpayer however the policies effectively shifted no risk because taxpayer could expect to pay percent of the premiums because the costs incurred by each group entity were clearly expected to exceed the policy cap the effect was to eliminate the transfer of an insurance risk from the group entities to taxpayer because the losses were certain to occur and in fact had already been partially incurred at the time the terms of the policies were finalized ie when the policy cap was increased and when the attachment point was set the attachment point under each policy was not established until at least four years into the 10-year policy period when the parties finally set the attachment point they set it at a level where they would have reasonably expected the costs of each group entity to exceed the policy cap see amerco t c pincite couch on insurance 3d the arrangement between taxpayer and the group entities resembles the situation that the service considered in revrul_89_96 1989_2_cb_114 the service held that a property and casualty insurance_company could not claim a deduction under sec_832 for losses_incurred when the casualty event had taken place before the parties entered into the purported insurance_contract the expected amount of losses_incurred as a result of the casualty event greatly exceeded the amount covered under the contract the service found that the premium received plus the tax benefits to the insurer plus the expected investment_income on those amounts would exceed its anticipated liability the service concluded that because the amount of the casualty_loss the insurer could expect to pay was known at the contract’s inception the arrangement lacked the requisite shifting of an insurance risk as in revrul_89_86 the only risk that taxpayer assumes is the risk that the available investment_yield between the time of payment of the premiums and the time of payment of the claims will be lower than expected revrul_89_96 the policies were drafted so that the maximum amount recoverable under the contracts b which wa sec_150 percent of premiums would certainly be reached therefore the policies were postf-146000-13 effectively designed as guaranteed investment contracts payable in years with of the principal deposited each year and with a fixed annual interest rate of dollar_figure percent which is the rate necessary to grow units deposited in equal installments over years into units at the end of those years the policy cap was later raised to percent increasing the group entities’ potential return on investment moreover if the tax savings of treating the transaction as insurance for federal_income_tax purposes were taken into account the effective promised annual rate of return would be even higher the arrangement between taxpayer and the group entities is also similar to the situation in revrul_2007_47 2007_2_cb_127 where a domestic_corporation was engaged in an inherently harmful activity and was required_by_law to incur certain mitigation expenses upon the discontinuation of the activity when the corporation began the activity it estimated that the present_value of its future remediation costs was dollar_figurex it then entered into an arrangement with an insurance_company under which it paid the insurance_company dollar_figurex in exchange for the promise to be reimbursed for its future remediation costs up to a limit of dollar_figurex the service found that this arrangement was not insurance because economically it was merely the corporation’s prefunding of its future remediation expenses the service reasoned that the overall risk assumed by the insurance_company was whether the estimated present_value of the cost of performing the measures dollar_figurex would accrue to exceed the greater of the corporation 's costs to perform the required measures or the contract limit of dollar_figurex and that this risk is akin to the timing and investment risks that revrul_89_96 concludes are not insurance risk as in the situation in revrul_2007_47 the overall risk taxpayer assumed under the policy is an investment risk-namely the risk that the purported premiums that it received from the group entities will grow over years by percent which is all that it promised to pay to the group entities this purported insurance risk is no more than the prefunding of future expenses additionally the premiums could not have been actuarially determined because they were priced before the attachment point above which taxpayer would provide coverage to the group entities was established and the policy cap was raised without increasing the premiums_paid it appears that instead the parties engineered taxpayer’s potential losses to provide a specific return on investment for group entities which further indicates a lack of insurance in its commonly accepted sense see revrul_2002_91 2002_2_cb_991 malone hyde inc f 3d pincite the harper group t c pincite gulf oil corp t c pincite n overall there was not insurance in its commonly accepted sense we conclude based on all the facts and circumstances that the policies do not qualify as insurance contracts for federal_income_tax purposes because there was a lack of risk shifting and the contracts are not insurance in its commonly accepted sense income_tax accounting postf-146000-13 taxpayer receives premiums from the group entities in exchange for the promise to pay at the end of the policy period the excess if any of each group entity’s costs over the attachment point taxpayer’s right to receive income is fixed when the premiums are due or are paid whichever happens first the amount of the premiums is fixed by the contract and therefore determinable with reasonable accuracy as of the start of the policy period taxpayer is liable for claims under each policy once each group entity’s costs exceed the attachment point the amount of that excess can be computed with reasonable accuracy and any uncertainty regarding the final amount of claims does not prevent taxpayer from taking into account the amount by which costs have already exceeded the attachment point given that the policies at issue are not insurance for federal_income_tax purposes the claims must be considered other liabilities under sec_1_461-4 economic_performance therefore occurs as taxpayer makes payments in satisfaction of the liabilities which does not occur until the end of the policy periods taxpayer’s liability for claims therefore does not satisfy all three prongs of the all_events_test until the claims are paid therefore we conclude that taxpayer accrues income from premiums when they are due or paid whichever happens first and that taxpayer does not accrue liabilities from claims until those claims are paid conclusion for the reasons stated above the seven 10-year excess loss policies do not qualify as insurance for federal_income_tax purposes as a result taxpayer accrues income from premiums when they are due or paid whichever happens first but does not accrue liabilities from claims until those claims are paid postf-146000-13 this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions


office_of_chief_counsel internal_revenue_service memorandum number release date cc psi b04 jdmaceachen posts-141110-13 third party communication none date of communication not applicable uilc date date to associate area_counsel washington d c group small_business self-employed from senior technician reviewer branch office of the associate chief_counsel passthroughs special industries subject transfer by recapitalization this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend ------------------------ ------------------------ ------------------------ donor child a child b company --------------------------- date date date date x y z -------------------- -------------------------- --------------------- -------------------- -------------- ------------ ------------ issue whether the recapitalization of company was a transfer from donor to child a and child b for purposes of sec_2701 posts-141110-13 conclusion yes the recapitalization of company was a transfer from donor to child a and child b for purposes of sec_2701 the amount of the transfer is determined pursuant to sec_25_2701-3 facts on date donor and her sons child a and child b formed company a limited_liability_company effective as of date company has a 20-year term and if not sooner terminated is to terminate on date donor’s capital_contribution consisted of real_property donor who was the sole member to make a capital_contribution thereafter made gifts of membership interests to her sons and their children under company’s operating_agreement each member’s capital_account is credited with the amount of the member’s capital_contribution profits and losses are then allocated to a member’s capital_account pro_rata based on the member’s ownership_interest a member’s ownership_interest is the proportion that a member’s capital_account bears to the aggregate positive capital accounts of all members distributions are made based on a member’s ownership_interest no member has priority over any other member as to participation in profits losses and distributions or the return_of_capital contributions no member has the right to withdraw a capital_contribution in the event that an asset is distributed in_kind the asset is deemed to have been sold as of the distribution date and each member’s capital_account adjusted to reflect the member’s share of the deemed gain_or_loss in the event of company’s dissolution its assets will be sold and each member’s capital_account adjusted to reflect the member’s share of gain_or_loss in the event that an asset is distributed in_kind the asset is deemed to have been sold as of the dissolution date and each member’s capital_account adjusted to reflect the member’s share of the deemed gain_or_loss upon completion of dissolution the balance of each member’s capital_account is then distributed to the member on date at a time when donor held an x percent ownership_interest child a and child b each held a y percent ownership_interest and donor’s grandchildren collectively held the remaining z percent ownership_interest company was recapitalized in exchange for the agreement of child a and child b to manage company the operating_agreement was amended to provide that henceforth all profit and loss including all gain_or_loss attributable to company’s assets would be allocated equally to child a and child b after the recapitalization donor’s and the grandchildren’s sole equity_interest in company was the right to distributions based on their capital_account balances as they existed immediately prior to the recapitalization the gift_tax liability of the grandchildren is not at issue herein and will not be further discussed posts-141110-13 law sec_2501 of the internal_revenue_code imposes a tax on the transfer of property by gift by any individual sec_2511 provides that the tax shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-1 of the gift_tax regulations provides that the gift_tax applies to a transfer by way of gift whether direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-1 provides that the gift_tax also applies to gifts indirectly made thus any transaction in which an interest in property is gratuitously passed or conferred on another regardless of the means or device employed constitutes a gift subject_to gift_tax the committee reports which accompanied the enactment of the gift_tax provide as follows the terms property transfer gift and indirectly are used in the broadest and most comprehensive sense the term property reaching every species of right or interest protected by law and having an exchangeable value the words transfer by gift and whether direct or indirect are designed to cover and comprehend all transactions subject_to certain express conditions and limitations whereby and to the extent that property or a property right is donatively passed to or conferred upon another regardless of the means or the device employed in its accomplishment for example a transfer of property by a corporation without a consideration or one less than adequate and fully in money or money’s worth to b would constitute a gift from the stockholders of the corporation to b a transfer by a to a corporation owned by his children would constitute a gift to the children h_r rep no c b part s rep no c b part thus the capitalization of an entity may constitute a gift see eg 682_f2d_1220 5th cir estate of trenchard v commissioner tcmemo_1995_121 estate of higgins v commissioner tcmemo_1991_47 similarly the recapitalization of an entity may constitute a gift estate of bosca v commissioner tcmemo_1998_251 sec_25_2511-1 provides that donative_intent on the part of the transferor is not an essential element in the application of the gift_tax to the transfer the application of the tax is based on the objective facts of the transfer and the circumstances under which it is made rather than on the subjective motives of the donor posts-141110-13 sec_25_2511-2 provides that the gift_tax is not imposed upon the receipt of the property by the donee nor is it necessarily determined by the measure of enrichment resulting to the donee from the transfer nor is it conditioned upon the ability to identify the donee at the time of the transfer on the contrary the tax is a primary and personal liability of the donor is an excise upon his act of making the transfer is measured by the value of the property passing from the donor and attaches regardless of the fact that the identity of the donee may not then be known or ascertainable sec_25_2511-2 provides that as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in him no power to change its disposition whether for his own benefit or for the benefit of another the gift is complete sec_2701 provides special valuation rules to determine the amount of a gift when an individual transfers an equity_interest in a family controlled_corporation or partnership to a member of the individual’s family sec_25_2701-1 provides that sec_2701 applies to determine the existence and amount of any gift whether or not the transfer would otherwise be a taxable gift_for example sec_2701 applies to a transfer that would not otherwise be a gift because it was a transfer for full and adequate_consideration sec_2701 provides in part that except as provided in regulations a contribution_to_capital or a redemption recapitalization or other change in the capital structure of a corporation or a partnership shall be treated as a transfer of an interest in such entity to which sec_2701 applies if the taxpayer or an applicable_family_member receives an applicable_retained_interest in such entity pursuant to such transaction or under regulations otherwise holds immediately after such transaction an applicable_retained_interest in such entity sec_25_2701-1 provides in part that for purposes of sec_2701 a transfer includes a redemption recapitalization or other change in the capital structure of an entity if the transferor or an applicable_family_member holding an applicable_retained_interest before the capital structure transaction surrenders an equity_interest that is junior to the applicable_retained_interest a subordinate interest and receives property other than an applicable_retained_interest sec_25_2701-3 defines a senior equity_interest as an equity_interest in the entity that carries a right to distributions of income or capital that is preferred as to the rights of the transferred interest sec_25_2701-3 defines a subordinate equity_interest as an interest in the entity as to which an applicable_retained_interest is a senior equity_interest sec_25_2701-2 provides in part that an applicable_retained_interest is any equity_interest in a corporation or partnership with respect to which there is in the case of a controlled_entity a distribution_right posts-141110-13 sec_25_2701-2 provides that a distribution_right is the right to receive distributions with respect to an equity_interest a distribution_right does not include any right to receive distributions with respect to an interest that is of the same class or a class that is subordinate to the transferred interest any extraordinary_payment_right mandatory payment rights liquidation participation rights rights to guaranteed payments of a fixed amount under sec_707 or non-lapsing conversion rights sec_25_2701-1 defines a member_of_the_family with respect to any transferor as the transferor’s spouse any lineal descendant of the transferor or the transferor’s spouse and the spouse of any such lineal descendant sec_25_2701-1 defines an applicable_family_member with respect to any transferor as the transferor’s spouse any ancestor of the transferor or the transferor’s spouse and the spouse of any such ancestor sec_25_2701-2 and iii provides in part that for purposes of sec_2701 a controlled_entity is a corporation or partnership controlled immediately before a transfer by the transferor applicable family members and any lineal_descendants of the parents of the transferor or the transferor’s spouse in the case of any partnership control means the holding of at least percent of either the capital or the profits interest transfer analysis for purposes of sec_2701 a transfer includes a recapitalization or other change in the capital structure of an entity if the transferor holding an applicable_retained_interest before the capital structure transaction surrenders a subordinate interest and receives property other than an applicable_retained_interest sec_25_2701-1 an applicable_retained_interest is an interest in a family-controlled entity with respect to which there is a distribution_right sec_25_2701-2 a subordinate interest is an interest as to which an applicable_retained_interest is a senior interest sec_25_2701-3 a senior interest is an interest that carries a right to distributions of income or capital that is preferred as to the rights of the transferred interest sec_25_2701-3 the term property includes every species of right or interest protected by law and having an exchangeable value here at all relevant times donor and her family controlled company on date company was recapitalized and donor surrendered her right to participate in future profit and loss including future gain_or_loss attributable to company’s assets both before and after the recapitalization donor held an applicable_retained_interest an equity_interest in company coupled with a distribution_right donor’s interest which carried a right to distributions based upon an existing capital_account balance is senior to the transferred interests which carried only a right to distributions based on future profit and gain donor received property in the form of the agreement of child a and child b to manage company accordingly the recapitalization constitutes a transfer by donor for purposes of sec_2701 posts-141110-13 valuation methodology sec_25_2701-2 provides in part that any distribution_right in a controlled_entity is valued at zero unless it is a qualified_payment_right in pertinent part sec_25_2701-2 defines a qualified_payment_right as the right to receive cumulative distributions payable on a periodic basis at least annually with respect to an equity_interest to the extent determined at a fixed rate or as a fixed amount sec_25_2701-2 provides in part that if the transferor members of the transferor’s family or applicable family members have the ability to compel liquidation a liquidation_participation_right is valued as if the ability to compel liquidation did not exist sec_25_2701-3 provides generally that the amount_of_the_gift resulting from any transfer to which sec_2701 applies is determined by a subtraction_method of valuation under this method the amount of the transfer is determined by subtracting the values of all family-held senior equity interests from the fair_market_value of all family-held interests in the entity determined immediately before the transfer the values of the senior equity interests held by the transferor and applicable family members generally are determined under sec_2701 other family-held senior equity interests are valued at their fair_market_value the balance is then allocated among the transferred interests and other family-held subordinate equity interests finally certain discounts and other reductions are factored in sec_25_2701-3 defines family-held as held directly or indirectly by an individual described in sec_25_2701-2 ie the transferor applicable family members and any lineal_descendants of the parents of the transferor or the transferor’s spouse sec_25_2701-3 provides the following methodology to determine the amount_of_the_gift sec_25_2701-3 provides in part that step is to determine the fair_market_value of all family-held equity interests in the entity immediately_after_the_transfer the fair_market_value is determined by assuming that the interests are held by one individual using a consistent set of assumptions sec_25_2701-3 provides in part that step is to subtract from the amount determined in step the following amounts sec_25_2701-3 provides for the subtraction of an amount equal to the sum of the fair_market_value of all family-held senior equity interests other than applicable retained interests held by the transferor or applicable family members and the fair_market_value of any family-held equity interests of the same class or a subordinate class to the transferred interests held by persons other than the transferor members of the transferor’s family and applicable family members of the transferor the fair_market_value of an interest is its pro_rata share of the fair_market_value of all family-held senior equity interests of the same class determined immediately_after_the_transfer as if all family-held senior equity interests were held by one individual sec_25_2701-3 provides in part for the subtraction of the value of all applicable retained interests held by the transferor or posts-141110-13 applicable family members other than an interest received as consideration for the transfer determined under sec_25_2701-2 sec_25_2701-3 provides in part that step is to allocate the remaining value among the transferred interests and other subordinate equity interests held by the transferor applicable family members and members of the transferor’s family sec_25_2701-3 provides in pertinent part that step is to determine the amount_of_the_gift by reducing the amount allocated to the transferred interests in step by the following amounts sec_25_2701-3 provides that if the value of the transferred interest determined without regard to sec_2701 would be determined after application of a minority or similar discount with respect to the transferred interest the amount_of_the_gift determined under sec_2701 is reduced by the excess if any of a pro_rata portion of the fair_market_value of the family-held interests of the same class determined as if all voting rights conferred by family-held equity interests were held by one person who had no interest in the entity other than the family-held interests of the same class but otherwise without regard to sec_2701 over the value of the transferred interest without regard to sec_2701 sec_25_2701-3 provides in pertinent part that the amount of the transfer determined under sec_2701 is reduced by the amount of consideration in money or money’s worth received by the transferor but not in excess of the amount_of_the_gift determined without regard to sec_2701 valuation analysis if sec_2701 applies to a transfer the amount of the transferor’s gift if any is determined using a subtraction_method of valuation under this method the amount_of_the_gift is determined by subtracting the value of any family-held applicable retained interests and other non-transferred equity interests from the aggregate value of the family-held interests in determining the value of any applicable_retained_interest held by the transferor or an applicable_family_member any distribution_right in a controlled_entity eg a right to receive dividends is generally valued at zero step determine the fair_market_value of all family-held equity interests in the entity immediately_after_the_transfer assuming that the interests are held by one individual using a consistent set of assumptions here all equity interests are held by donor her children and her grandchildren all of whom are members of donor’s family the result of step is an amount equal to the fair_market_value of percent of the company interests valued as if they were held by a single holder step subtract a the sum of the fair_market_value of all family-held senior equity interests determined after the transfer as if all interests were held by a single holder and b the value determined under sec_25_2701-2 of all applicable retained interests held by the transferor and any applicable family members a senior equity_interest is an interest that carries a right to distributions of income or capital that is preferred as to the rights of the transferred interest sec_25_2701-3 the interests of child a child b and the grandchildren are senior to the transferred interests in that each carried posts-141110-13 a right to distributions based upon an existing capital_account balance whereas the transferred interests did not accordingly the amount determined in step is reduced by the fair_market_value of child a’s child b’s and the grandchildren’s interests the amount determined in step is further reduced by the value of donor’s post- recapitalization applicable_retained_interest in valuing donor’s interest the distribution_right which does not constitute a qualified_payment_right is valued at zero and the liquidation_participation_right is valued as if the family's ability to compel liquidation did not exist step - allocate the remaining amount among the transferred interest and other non-transferred subordinate equity interests held by the transferor applicable family members and members of the transferor’s family a subordinate equity_interest is an interest as to which an applicable_retained_interest is a senior interest sec_25 a iii here all applicable retained interests carried a distribution_right based upon an existing capital_account balance whereas the interest transferred by the grandchildren did not this interest which was not transferred by donor is a subordinate equity_interest based on donor and the grandchildren’s relative ownership percentages immediately prior to the recapitalization x x z percent of the step amount is allocated to the transferred interest donor is treated as transferring one-half of this amount to child a and one-half to child b step - if the value of the transferred interest determined without regard to sec_2701 would be determined after application of a minority discount the step amount is reduced by a pro_rata portion of the fair_market_value of the family-held interests of the same class determined as if they were held by one person over the fair_market_value of a transferred interest the step amount is also reduced by the amount if any of any consideration in money or money’s worth received by the transferor here donor transferred an interest to each of two transferees implicating a minority discount the reduction for each gift is the excess if any of a pro_rata portion of the fair_market_value of the transferred interests determined as if all voting rights were held by a single holder over the fair_market_value of a single transferred interest in the event that donor establishes the value in money or money’s worth of any consideration provided by either child a or child b a further reduction may be appropriate please call if you have any further questions by _____________________________ leslie h finlow senior technician reviewer branch office of the associate chief_counsel passthroughs special industries


tcmemo_2012_76 united_states tax_court karen lee carlson petitioner v commissioner of internal revenue respondent docket no 10633-10l filed date karen lee carlson pro_se amy b ulmer for respondent memorandum findings_of_fact and opinion thornton judge pursuant to sec_6320 and sec_6330 petitioner seeks review of respondent’s determinations sustaining the filing of a federal_tax_lien with respect to petitioner’s federal_income_tax liabilities for and and sustaining a proposed levy to collect these taxes findings_of_fact petitioner resided in oregon when she filed her petition for the tax_year sec_2001 through she received income as reported by third-party payers to the internal_revenue_service irs in these aggregate amounts year amount dollar_figure big_number big_number big_number petitioner failed to file federal_income_tax returns for these years after preparing substitutes for returns on petitioner’s behalf respondent mailed her separate notices of deficiency for each of the year sec_2001 through these notices were returned to respondent as not deliverable as addressed unable to forward on date respondent assessed petitioner’ sec_2002 income_tax plus additions to tax and accrued interest on date he assessed 1unless otherwise indicated all section references are to the internal_revenue_code and all rule references are to the tax_court rules_of_practice and procedure all monetary amounts are rounded to the nearest dollar petitioner’s income taxes for and plus additions to tax and accrued interest petitioner failed to pay the assessed amounts on date respondent mailed to petitioner a letter final notice_of_intent_to_levy and notice of your right to a hearing on date respondent filed a notice_of_federal_tax_lien nftl with respect to petitioner’s liabilities for taxable_year sec_2001 through on september 2petitioner’s underlying tax_liabilities exclusive of additions to tax and accrued interest for tax_year sec_2001 through are as follows year deficiency dollar_figure big_number big_number big_number the additions to tax assessed against petitioner were as follows year sec_6651 sec_6651 dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number sec_6654 dollar_figure big_number big_number respondent mailed to petitioner a letter notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 on date petitioner timely submitted two forms request for a collection_due_process or equivalent_hearing regarding the nftl and the notice_of_intent_to_levy on these forms the only stated reason for disagreeing with the proposed collection actions was income figures inaccurate on these forms petitioner did not indicate a desire to raise collection alternatives or a spousal defense by letter to petitioner dated date respondent’s settlement officer scheduled a telephone hearing for date and requested that petitioner mail any documents that she wanted to have considered at least days before the conference this letter also requested that petitioner provide income_tax returns for the tax_year sec_2001 through the letter explained that for the settlement officer to consider collection alternatives petitioner had to provide tax returns for and proof of estimated_tax payments for tax_year and a completed form 433-a collection information statement for wage earners and self-employed individuals with supporting documentation petitioner provided no documents to the settlement officer in response to this letter during the telephone conference on march petitioner’s representative who is also petitioner’s husband charles allen harman spoke on behalf of petitioner who did not participate in the call according to the settlement officer’s log mr harman initially asserted that the information returns submitted by third-party payers with respect to petitioner were invalid after the settlement officer advised him that petitioner should provide corrected information statements mr harman raised frivolous arguments that petitioner was not a taxpayer and that her reported income was not in fact income after advising mr harman that she was unable to help because petitioner had not provided the requested documents and was not in compliance with filing_requirements the settlement officer terminated the telephone call on date the settlement officer issued a notice_of_determination concerning collection action s under sec_6320 and or notice sustaining the notice_of_federal_tax_lien filing and proposed levy action the notice indicates that although petitioner had challenged her underlying liability she had failed to provide requested information to show the correct amount of her income the notice states that the settlement officer verified that all applicable laws regulations and administrative procedures had been followed in connection with the assessments and proposed collection of the taxes at issue on balance the proposed collection by nftl and levy was no more intrusive than necessary petitioner had not raised any valid challenge to the collection action contemplated petitioner had not suggested any collection alternative and the settlement officer had not had any prior involvement with respect to petitioner’s income_tax liabilities for the years at issue petitioner timely petitioned this court seeking review of the determination to proceed with the proposed collection actions the petition disputes that mr harman raised frivolous arguments during the telephone conference and asserts that the settlement officer failed to provide adequate information about what documentation was needed to correct the third-party payer information reports and prematurely terminated the telephone conference without giving mr harman adequate opportunity to respond to the settlement officer’s concerns in particular according to the petition the premature termination of the telephone conference denied mr harman the opportunity to reply that the figures assessed as taxes owed appeared to be the total of all monies or other compensation received by ms carlson as private sector receipts for the periods in question the petition also asserts that the irs followed improper procedures by making an actual levy eight days after issuing the notice_of_intent_to_levy the petition asserts no error with respect to the additions to tax for failure to timely file failure to timely pay and failure to pay estimated_tax under sec_6651 and and sec_6654 for the years at issue opinion respondent concedes that because petitioner had no prior opportunity to dispute her underlying liabilities she is entitled to do so in this proceeding see 130_tc_44 we review petitioner’s underlying liabilities de novo see 114_tc_604 other issues we review for abuse_of_discretion see id pincite the burden_of_proof is upon petitioner to show error in respondent’s determination as to her underlying liabilities see rule a in challenging her underlying liabilities in this proceeding as in the administrative proceedings below petitioner has raised only frivolous and groundless arguments prominent among these frivolous arguments is that because she resided in washington or oregon during the years at issue she did not live in the united_states and so is not subject_to u s taxation see 170_f3d_691 7th cir imposing a sanction for filing a frivolous appeal that asserted that only residents of washington d c and other federal 3petitioner does not contend and the record does not suggest that the burden_of_proof as to any factual issue should shift to respondent pursuant to sec_7491 enclaves are citizens of the united_states subject_to federal tax laws similarly lacking even colorable merit are petitioner’s remaining arguments including her argument that only gain from the sale of capital assets and property described under sec_1231 constitutes taxable_income that her income is not taxable because she is not incorporated and that her wages are not taxable because the third-party information returns did not correctly apply the definition of wages and employment as defined in sec_3121 and b see lindberg v commissioner tcmemo_2010_67 sustaining sec_6702 frivolous-return penalty for reporting zero wages on basis that form_w-2 wage and tax statement did not correctly apply definition of wages under sec_3401 and sec_3121 sec_6201 provides that if in any court_proceeding a taxpayer fully cooperates with the commissioner and raises a reasonable dispute with respect to an information_return the commissioner has the burden of producing reasonable and probative evidence to verify the information_return although some of petitioner’s assertions might be construed as attacking the validity of the third- party information returns on which respondent predicated his assessments she has not raised a reasonable dispute regarding the information returns she has not disputed any specific item_of_income determined by respondent nor has she denied receiving compensation during the years at issue to the contrary her petition acknowledges receiving monies or other compensation as private sector receipts for the periods in question and in her pretrial memorandum she states that she worked for private company and received private sector receipts petitioner has not asserted or shown that the correct amounts of her taxable_income differ from the amounts shown on the third-party information returns upon which respondent’s determinations are predicated the petition contains no specific allegations or supporting facts regarding the sec_6651 and and additions to tax petitioner’s frivolous and groundless arguments at trial and on brief similarly do not raise any legitimate issue or defense regarding these additions to tax we deem petitioner to have conceded the sec_6651 and and additions to tax and hold that respondent has no burden of production under sec_7491 with respect to them see 123_tc_213 118_tc_358 petitioner suggests that the settlement officer abused her discretion by terminating the telephone conference prematurely the administrative record reflects that the settlement officer terminated the telephone conference after mr harman persisted in making only frivolous arguments we are not persuaded that the settlement officer abused her discretion in this regard in any event because petitioner has raised no colorable claim in this proceeding we do not believe it is necessary productive or appropriate to remand this case to respondent’s appeals_office for any additional hearing see 117_tc_183 petitioner has asserted that respondent prematurely levied upon her property eight or nine days after issuing the notice_of_intent_to_levy but respondent’s records show that respondent has not yet made any levy upon petitioner’s property petitioner has offered no collection alternatives and asserted no spousal defenses from our review of the record we are satisfied that respondent has satisfied the requirements of sec_6320 and sec_6330 consequently we shall sustain respondent’s determinations sec_6673 authorizes the tax_court to require a taxpayer to pay to the united_states a penalty of up to dollar_figure whenever it appears that proceedings have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer’s position in the proceedings is frivolous or groundless respondent ha sec_4it appears that petitioner has confused the letter issued eight days after the notice_of_intent_to_levy with notice of an actual levy not asked that we impose a sec_6673 penalty we strongly warn petitioner that she may be subject_to a sec_6673 penalty even upon the court’s own motion if she persists in maintaining proceedings in this court primarily for delay or continues to press frivolous arguments to reflect the foregoing decision will be entered for respondent


’ internal_revenue_service department of the treasury p o box cincinnati oh release number release date date date legend x hospital y dollars amount dear employer_identification_number contact person - id number contact telephone number uil also awards made under these procedures are scholarship or fellowship grants and are not taxable to the recipients if they use them for qualified_tuition_and_related_expenses subject_to the limitations provide in code sec_117 you asked for advance approval of your scholarship grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax you requested approval of your scholarship program to fund the education of certain qualifying students our determination we approved your procedures for awarding scholarships based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding scholarships meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable the scholarship will be y dollars per year the scholarships are renewable for up to four years so long as the recipient stays in school and is progressing toward a degree the scholarships are provided to students seeking post-secondary education in a healthcare field description of your request your letter indicates you will operate a scholarship program the scholarships will provide grants to individuals related to healthcare and healthcare education consistent with your charitable purposes letter catalog number 58263t to be eligible to receive scholarship funds the applicant or nominee must be a primary or secondary school student or an undergraduate or graduate student at a college or university who is pursuing studies or conducting research to meet the requirements for an academic or professional degree the scholarship funds awarded must be used to pay qualified expenses at an educational_institution you reserve the right to impose additional reasonable restrictions and or requirements upon the awarding of scholarship funds and the administration of such awards your scholarship will cover qualified expenses_incurred in attending an educational_institution including e e e tuition and fees for enrollment and attendance course-related expenses -fees books supplies and equipment required of all students for courses of instruction and room and board travel research clerical assistance to find eligible individuals to whom scholarship funds can be awarded you will generally target the area served by x in an effort to further the charitable purpose of fostering the availability of healthcare and healthcare education and awareness in that area you may from time to time contact high school college or graduate school administrators as well as administrators or managers of hospitals clinics assisted living facilities and other relevant community institutions you may ask such contacts to advertise the availability of your scholarship program and to request that these contacts nominate potential candidates or encourage potential awardees to submit applications for scholarship aid criteria for scholarship grants may include but are not limited to the following you may also from time to time host or sponsor healthcare awareness events at which the availability of scholarship funds may be advertised and take other steps to advertise the availability of its scholarship funds prior academic performance performance on any test taken designed to measure ability and aptitude for the work related to the applicant or nominee's intended studies recommendations from instructors counselors administrators or employers and any others who have knowledge of the applicant's or nominee's capabilities biographical information such as career history academic history charitable work experience and financial need and the applicant's or nominee's motivation character talents ability or potential e e e e e award of scholarship funds shall be based on the selection criteria and on objective non- discriminatory considerations however preference may be given to an applicant or nominee because of the applicant's membership in a class or category that has historically had less educational opportunity or has historically been underrepresented in an applicant for scholarship funds may be required to submit such forms and supporting materials as you deem appropriate to demonstrate fulfillment of the selection criteria such forms and supporting materials will be submitted on a schedule specified by you letter catalog number 58263t the health care field so long as such preference does not violate the internal_revenue_code other law or public policy the selection committee currently consists of three members of your governing board members may be changed annually your board members must disclose any personal knowledge of and relationship with any applicant under consideration and refrain from participation in the award process in a circumstance where he or she would derive directly or indirectly a private benefit if the applicant was selected over others scholarship funds may not be awarded to any member of your board_of directors substantial_contributor employee or any other disqualified_person unless otherwise specified you will pay the scholarship funds directly to the educational_institution for_the_use_of the scholarship recipient the recipient must provide you with proof of enrollment before any funds will be disbursed and the educational_institution must use the scholarship funds to pay or defray the scholarship recipient's qualified expenses at such educational_institution or incurred in connection with the recipient's studies or coursework at the educational_institution if the scholarship is renewable in order to obtain additional disbursements the recipient must provide proof such as a transcript that previously awarded funds were used as agreed to complete relevant course work or to pay or defray other qualified expenses as well as proof of continued enrollment at an educational_institution where qualified expenses will be incurred if scholarship funds are paid directly to the recipient or to anyone other than the educational_institution you will require a report at least annually on the uses of the scholarship funds this report must include a summary of the use of the funds the courses taken and the grades received in each academic period this report must be supported by an official transcript or otherwise verified by the educational_institution provision of such a report will be a term of the funding agreement and failure to provide a report or failure to use the scholarship funds for qualified expenses will result in action to recover the funds you represent that you will arrange to receive and review grantee reports annually and upon completion of the purpose for which the grant was awarded investigate diversion of funds from their intended purposes take all reasonable and appropriate steps to recover the diverted funds ensure other grant funds held by a grantee are used for their intended purposes and withhold further payments to grantees until you obtain grantees’ assurances that future diversions will not occur and that grantees will take extraordinary precautions to prevent future diversions from occurring you further represent that you will maintain all records relating to individual grants including information obtained to evaluate grantees identify whether a grantee is a disqualified_person establish the amount and purposes of each grant and establish that you undertook the supervision and investigation of grants described above letter catalog number 58263t basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure e e the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is a scholarship or fellowship subject_to the provisions of code sec_117 the grant is to be used for study at an educational_organization described in code sec_170 other conditions that apply to this determination this determination only covers the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as a precedent e e e you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes to your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot award grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary e e please keep a copy of this letter in your records e we've sent a copy of this letter to your representative as indicated in your power_of_attorney if you have questions please contact the person listed at the top of this letter letter catalog number 58263t sincerely stephen a martin director exempt_organizations rulings and agreements letter catalog number 58263t