t c memo united_states tax_court lender management llc marvin k lender revocable_trust tax_matters_partner petitioner v commissioner of internal revenue respondent lender management llc keith f lender revocable_trust tax_matters_partner petitioner v commissioner of internal revenue respondent docket nos filed date david d aughtry patrick j mccann jr and john w hackney for petitioners christopher d bradley david delduco and john w sheffield iii for respondent memorandum findings_of_fact and opinion kerrigan judge petitioners in these consolidated cases are marvin k lender revocable_trust marvin lender trust and keith f lender revocable_trust keith lender trust on date respondent issued notices of final_partnership_administrative_adjustment fpaas to marvin lender trust as tax_matters_partner for lender management llc lender management for tax_year and to keith lender trust as tax_matters_partner for lender management for tax_year sec_2011 and sec_2012 in the fpaas respondent disallowed deductions claimed pursuant to sec_162 and instead allowed the deductions pursuant to sec_212 reflecting respondent’s determination that lender management was not engaged in carrying_on_a_trade_or_business the sole issue for consideration is whether lender management carried on a trade_or_business within the meaning of sec_162 during tax years tax years in issue all section references are to the internal_revenue_code code in effect for the tax years in issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference at the time the petitions were filed lender management’s principal_place_of_business was in connecticut lender management is a limited_liability_company formed under the laws of the state of connecticut it operates as a fund_manager and has been in continuous operation for years lender management elected to be treated as a partnership for federal_income_tax purposes i the lender family harry lender harry founded the company that became lender’s bagels harry’s sons marvin lender marvin and murray lender murray worked together with their father and after his death for many years managing lender’s bagels harry had three other children that survived to adulthood and only the families of marvin and murray participated in the partnerships that lender management managed keith lender keith sondra lender and heidi lender are the children of marvin and his wife helaine lender helaine m l j l 1murray was deceased at the time of trial d l and e l are grandchildren of marvin and helaine carl lender carl jay lender and haris lender are the children of murray a l r l j r o r l d l c and c l are murray’s grandchildren during the tax years in issue marvin had a residence in naples florida the children and grandchildren of marvin and murray resided in different states and some lived outside the united_states carl resided and worked full time for a cable communications company in fort lauderdale florida other children of marvin and murray lived in california and south america the children of marvin and murray all had careers one of marvin’s grandchildren lives in israel marvin’s grandchildren and murray’s grandchildren are rarely in contact with one another numerous divorces among lender family members created tension around murray divorced his wife and the divorce affected the financial affairs of murray’s branch of the family murray’s ex-wife’s taking her share of financial_assets resulted in murray’s family’s having fewer assets under management with lender management than marvin’s family 2the court refers to minor children by their initials see rule a ii lender management initial ownership of lender management was vested in two revocable trusts marvin lender trust and helaine g lender revocable_trust helaine lender trust until date helaine lender trust owned a interest in lender management and marvin lender trust owned a interest marvin through marvin lender trust acted as managing member of lender management until date on date keith lender trust acquired by assignment a interest in lender management and held that interest through date after date and through date marvin lender trust owned the remaining interest after date keith through keith lender trust acted as lender management’s managing member lender management reported net losses of dollar_figure and dollar_figure for tax_year sec_2010 and sec_2011 respectively it reported net_income of dollar_figure and dollar_figure for tax_year sec_2012 and sec_2013 respectively a investment llcs during the tax years in issue lender management provided direct management services to three limited_liability companies murray marvin lender investments llc m m lenco investments llc lenco and lotis equity llc lotis collectively investment llcs each of the investment llcs elected to be treated as a partnership for federal_income_tax purposes lender management directed the investment and management of assets held by the investment llcs for the benefit of their owners the end-level owners with respect to m m lenco and lotis were in each case all children grandchildren or great-grandchildren of harry the following tables show the members of m m and lenco and their respective interests as of december for each of the tax years in issue m m member yearend yearend yearend marvin lender family llc murray lender family llc dollar_figure marvin lender irrevocable_trust lender management total dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure 3all ownership percentages have been rounded lenco member yearend yearend yearend marvin lender family llc murray lender family llc marvin lender irrevocable_trust murray lender irrevocable_trust lender management total dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure as of and for some time after date the members of lotis were marvin lender family llc murray lender family llc marvin lender irrevocable_trust murray lender irrevocable_trust and lender management in lotis merged with lenco with lenco as the surviving entity the members of marvin lender family llc and murray lender family llc were the following individuals and trusts marvin lender family llc member yearend yearend yearend keith sondra lender dollar_figure dollar_figure dollar_figure heidi lender marvin lender revocable_trust under agreement u a helaine lender trust marvin helaine lender children grantor_trust m l irrevocable_trust j l irrevocable_trust d l irrevocable_trust e l irrevocable_trust totals dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure --- dollar_figure dollar_figure dollar_figure dollar_figure --- dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure murray lender family llc member yearend yearend yearend carl jay lender haris lender murray lender revocable_trust murray lender family irrevocable_trust u a dated date a l irrevocable_trust r l irrevocable_trust u a j r irrevocable_trust u a dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure --- --- dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure o r l irrevocable_trust d l c irrevocable_trust c l irrevocable_trust totals dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure marvin owned indirectly interests in the investment llcs during the tax years in issue and keith owned indirectly interests in the investment llcs during the years that he served as managing member of lender management through his interests in marvin lender family llc and marvin lender irrevocable_trust during the tax years in issue marvin held combined interests in lenco of and respectively through the same entities he held interests in m m of and respectively during the tax years in issue keith was a member of marvin lender family llc during each of the tax years in issue keith owned indirectly less than of lenco and of m m structure and purpose the investment llcs were created in as part of a reorganization of lender management the goals of the reorganization were to accommodate greater diversification of the managed investments and more flexible asset allocation at the individual investor level as part of the restructuring lender management shifted from a cost-based office model to a profit-based model lender management engaged a hedge fund specialist to help it restructure its affairs and its managed portfolio using a hedge fund or fund of funds manager model pursuant to the restructuring strategy lender management divided its managed portfolio into the three investment llcs each formed for the purpose of holding investments in a different class of assets m m invested in private equities lenco in hedge funds and lotis in public equities from forward over one-half of the assets under management were invested in private equity operating agreements lender management’s operating_agreement permitted it without limitation to engage in the business of managing the lender family office and to provide management services to lender family members related entities and other third- party nonfamily members the operating agreements for the investment llcs designated lender management as the sole manager for each entity lender 4lotis merged into lenco in because lender management determined that lenco’s hedge fund investments held enough public equities to meet the company’s asset diversification goals management held the exclusive rights to direct the business and affairs of the investment llcs lender management also managed downstream entities in which m m held a controlling_interest investors in some of these downstream entities included persons who were not members of the lender family it received fees for managing these entities for the tax years in issue between and of m m’s net investment portfolio consisted of these downstream entities members understood that they could withdraw their investments in the investment llcs at any time subject_to liquidity constraints if they became dissatisfied with how the investments were being managed the operating agreements for lenco and lotis provided that members could withdraw all or a portion of their capital accounts on specified dates of each year or on any other date approved by the manager the operating_agreement for m m provided that members could withdraw all or a portion of their capital accounts with the consent of the manager in the exercise of the manager’s discretion b compensation lender management received a profits interest in each of the investment llcs in exchange for the services it provided to the investment llcs and their members these profits interests were designated class a interests under the operating agreements for the investment llcs the class a interests were structured concurrent with lender management’s reorganization and its shift to a profit-based office model under the initial terms of the operating agreements effective date lender management was entitled to receive for its class a interests the following percentages from lenco of net asset value annually plu sec_5 of any increase in net asset value from the prior fiscal period from m m of gross_receipts annually plu sec_2 of any increase in net asset value from the prior fiscal period and from lotis of net asset value annually plu sec_5 of net trading profits lender management received income from the class a interests only to the extent that the investment llcs generated profits net asset value was defined as the amount by which the fair_market_value of the investment llc’s assets exceeded its liabilities as of date the operating agreements for m m and lenco were amended to provide lender management with increased profits interests the class a interests for m m and lenco were increased to equal the aggregate of of net asset value plu sec_25 of the increase in net asset value annually 5for lotis class a interests were entitled to a share of the adjusted profit as defined in the operating_agreement similar to the initial terms of the operating agreements lender management received payments for its class a interests only to the extent that m m and lenco generated net profits the increased profits interests were intended to more closely align lender management’s goal of maximizing profits with that of its clients and to create greater incentive for lender management and its employees to perform successfully as managers of the invested portfolios during the tax years in issue any payments that lender management earned from its profits interests were to be paid separately from the payments that it would otherwise receive as a minority member of each of the investment llcs c lender management services during the tax years in issue lender management made investment decisions and executed transactions on behalf of the investment llcs it operated for the purpose of earning a profit and its main objective was to earn the highest possible return on assets under management lender management provided individual investors in the investment llcs with one-on-one investment advisory and financial planning services lender management employed five employees during each of the tax years in issue it had a total payroll for its employees of dollar_figure dollar_figure and dollar_figure during the tax years in issue respectively for tax_year the payroll included a dollar_figure guaranteed_payment to keith for tax_year the payroll included a dollar_figure guaranteed_payment to keith role of keith keith was lender management’s chief investment officer cio during the tax years in issue and in he became president keith has an undergraduate business degree from cornell university and a master’s degree in business administration m b a from the kellogg school of management at northwestern university after obtaining his m b a he worked for several years in marketing and brand management for major corporations after joining lender management he took continuing education classes in finance and market theory at new york university and classes at wharton graduate school of business keith joined lender management full time in and participated in its reorganization beginning early in his business career keith frequently discussed with marvin how he could become involved in lender management’s activities during the tax years in issue keith worked approximately hours per week for lender management which included time spent working in the evenings and on weekends 6during the tax years in issue keith taught one business class at a private high school which met less than weekly keith referred to the members of the investment llcs as the clients of lender management lender management’s clients all had jobs and worked and keith had to be available to communicate with them during nonbusiness hours mostly he worked out of lender management’s rented office space in new jersey these offices were rented so that keith could work close to outside consultants before becoming lender management’s managing member in keith received wages for his services starting in he received a guaranteed_payment as cio keith retained the ultimate authority to make all investment decisions on behalf of lender management and the investment llcs most of his time was dedicated to researching and pursuing new investment opportunities and monitoring and managing existing positions for example he discovered a company in israel and lender management owned an interest in and participated in the management of this company he reviewed personally approximately private equity and hedge fund proposals per year on behalf of the investment llcs he met with and attended presentations of hedge fund managers private equity managers and investment bankers lender management is not an active trader but in a typical year the firm would enter into multiple new private equity deals and make one or two hedge fund trades lender management arranged annual business meetings which were for all clients in the investment llcs these group meetings were held so that lender management could review face-to-face with all of its clients the performance of their investments at least once per year the location of the annual meeting changed each year so that no single investor was repeatedly inconvenienced by having to travel a long distance because of conflicts keith had difficulty getting all of lender management’s clients to attend these meetings he would conduct additional face-to-face meetings with clients who were more interested in the status of their financial investments at times and locations that were convenient for them keith interacted directly with lender management’s clients he collected information from and worked with these individuals to understand their cashflow needs and their risk tolerances for investment and lender management engaged in asset allocation based on these and other factors lender management devised and implemented special ventures known as eligible investment options eios which allowed clients to participate in investments more directly suited to their age and risk tolerance keith developed and maintained a number of computer models including a model that projected the cash needs of individual investors and a model that tracked and forecasted the cashflows associated with m m’s private equity investments chief financial officer lona flament served as lender management’s chief financial officer chief operating officer and controller during the tax years in issue she is not related to the lender family she worked full time primarily out of the office in woodbridge connecticut woodbridge at the woodbridge office lender management also employed a full-time office manager and at certain times other part-time workers ms flament worked closely with keith during the tax years in issue they spoke over the phone three or four times per day and exchanged between and emails per day they worked from the same office at least one day per week ms flament attended manager meetings for investments and assisted keith in reviewing and making decisions about new investment opportunities one of ms flament’s primary duties was to oversee daily cash management she actively monitored the status of current investments to determine how much cash lender management had available and she had authority to move cash on behalf of lender management and the investment llcs she was involved in the process of communicating with individual clients and forecasting their cash needs for the near future close monitoring of cash positions was critical to meeting the needs of clients and to covering capital calls that arose in connection with private equity investments lender management managed m m’s and lenco’s revolving lines of credit during the tax years in issue as part of her cash management duties ms flament would secure necessary capital call funds from these lines of credit to obtain the lines of credit lender management had to produce and provide to creditors extensive financial and other documentation regarding the investment llcs and their assets the lines of credit were collateralized by the investment llcs’ private equity investments to draw down on and keep open the lines of credit for the investment llcs lender management was required to provide updated financial information to creditors at least monthly ms flament prepared monthly quarterly and annual reports regarding the lines of credit pathstone lender management interviewed accounting and investment firms to provide outsourced management services beginning in it hired harris mycfo a division of harris bank which provided both accounting and investment advice in two of the principals of harris mycfo formed their own firm pathstone family office llc pathstone and lender management engaged pathstone on date during the tax years in issue pathstone provided lender management with accounting and investment advisory services pathstone’s accounting professionals were based in atlanta georgia ms flament spoke with the accounting professionals over the phone between three and five times per week and they exchanged between and emails per week during the tax years in issue pathstone prepared lender management’s partnership tax returns pathstone also prepared quarterly financial reports for the investment llcs keith worked at the same office buildings as pathstone’s investment professionals in englewood cliffs and later fort lee new jersey he collaborated with pathstone’s principal investment adviser in selecting new investments for the investment llcs he presented pathstone’s advisers with his own research on investment opportunities and he often received their advice 7lender management began the process of terminating its relationship with harris mycfo in in anticipation of its move to pathstone when discussing outsourced management services received by lender management during the tax years in issue we refer hereinafter to pathstone although the record is unclear as to whether lender management still engaged harris mycfo in the early months of before acting on prospective deals pathstone’s advisers also presented him with investment opportunities keith exercised ultimate authority over the investment llcs’ investments and did not always follow pathstone’s advice pathstone did not have the authority to move cash on behalf of lender management or the investment llcs iii lender management’s tax returns lender management reported ordinary business_losses for the tax years in issue for each of the tax years in issue it claimed deductions for business_expenses pursuant to sec_162 it claimed deductions for salaries and wages repairs and maintenance rent taxes and licenses depreciation retirement plans employee benefit programs and other deductions for and it claimed deductions for guaranteed payments to partners lender management’s total claimed business_expense deductions for the tax years in issue were dollar_figure dollar_figure and dollar_figure respectively respondent issued two fpaas one for tax_year and the other for tax_year sec_2011 and sec_2012 both fpaas disallowed the business_expense deductions that lender management claimed pursuant to sec_162 and allowed them pursuant to sec_212 opinion i evidentiary issue respondent reserved objections to paragraphs and of the stipulation of facts and to exhibits 11-j and 26-j paragraphs and exhibit 11-j pertain to tax years prior to those in issue exhibit 11-j is an examination_report and no-change letter issued to lender management for tax_year respondent contends that these paragraphs and the exhibit are not relevant to the tax years in issue paragraphs and exhibit 11-j arguably show that respondent reached different conclusions in prior years regarding the tax treatment of the deductions at issue in these cases petitioners contend that the paragraphs and the exhibit are relevant pursuant to rule of the federal rules of evidence and they rely upon de boer v commissioner tcmemo_1996_174 in de boer we held that the taxpayer’s deduction of business_expenses under sec_162 was incorrect id however we concluded that for purposes of determining the penalty under sec_6662 the taxpayer was not negligent and was reasonable in relying on a no-change letter as an indication of the commissioner’s agreement that he continued to be 8respondent withdrew objections to paragraph and exhibit 26-j in respondent’s posttrial brief engaged in a trade_or_business see id slip op pincite in these cases we are not addressing a sec_6662 penalty and therefore de boer is not relevant we have rejected arguments about audits for prior years being relevant for the tax years in issue see roseman v commissioner tcmemo_2009_185 slip op pincite each taxable_year stands alone and the commissioner may challenge in a succeeding year what was condoned or agreed to in a previous year auto club of mich v commissioner 353_us_180 55_tc_28 paragraphs and exhibit 11-j are not admitted ii burden_of_proof generally the commissioner’s adjustments in an fpaa are presumed correct and the taxpayer bears the burden of proving those adjustments are erroneous rule a 290_us_111 see also 107_tc_94 petitioner bears the burden of proving respondent’s determinations in the fpaa are erroneous clovis i v commissioner 88_tc_980 holding that an fpaa is the functional equivalent of a notice_of_deficiency the burden_of_proof may shift to the commissioner if the taxpayer establishes that it complied with the requirements of sec_7491 and b to substantiate items to maintain required records and to cooperate fully with the commissioner’s reasonable requests petitioners claim they meet the requirements of sec_7491 to shift the burden_of_proof to respondent regarding the sec_162 deductions the resolution of this issue however does not depend on which party has the burden_of_proof we resolve it on a preponderance_of_the_evidence in the record see 136_tc_263 iii deductions for business_expenses sec_162 allows as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_212 allows an individual a deduction for ordinary and necessary expenses paid_or_incurred in connection with an activity engaged in for the production_or_collection_of_income although the purpose of these two sections was to place all income-producing activities on an equal footing in terms of allowable deductions 372_us_39 certain limitations apply to deductions claimed under sec_212 that do not apply to deductions under sec_162 see green v commissioner tcmemo_2005_250 slip op pincite aff’d 507_f3d_857 5th cir expenses deducted under sec_162 generally are subtracted in full from gross_income to arrive at adjusted_gross_income however expenses deducted under sec_212 ordinarily are subtracted from adjusted_gross_income to arrive at taxable_income and are subject_to certain floor limitations in sec_67 a deduction under sec_212 may also be limited by application of the alternative_minimum_tax see sec_56 see also 112_tc_325 additionally net operating losses may carry over under sec_172 from the year in which they were incurred to another year only if the losses were the result of operating a trade_or_business within the meaning of sec_162 see 77_tc_246 aff’d 682_f2d_207 9th cir the code does not define the term trade_or_business deciding whether the activities of a taxpayer constitute a trade_or_business requires an examination of the facts in each case 312_us_212 to be engaged in a trade_or_business the taxpayer must be involved in the activity with continuity and regularity and the taxpayer’s primary purpose for engaging in the activity must be for income or profit 480_us_23 a sporadic activity a hobby or an amusement diversion does not qualify id although the taxpayer’s activities need not generate an immediate profit or produce a profit for the tax_year in issue the taxpayer must initiate or carry on the enterprise in good_faith for the purpose of making a profit id see also barker v commissioner tcmemo_2012_77 slip op pincite certain activities are not considered trades_or_businesses an investor is not by virtue of his activities undertaken to manage and monitor his own investments engaged in a trade_or_business 373_us_193 higgins v commissioner u s pincite no matter how large the estate or how continuous or extended the work required may be overseeing the management of one’s own investments is generally9 regarded as the work of a mere investor higgins v commissioner u s pincite expenses_incurred by the taxpayer in trading securities or performing other investment-related activities strictly for his own account generally may not be deducted under sec_162 as expenses_incurred in carrying_on_a_trade_or_business see id beals v commissioner tcmemo_1987_171 the taxpayer’s activities as an investor may produce income or profit but profit from investment is not taken as evidence 9an exception to the general_rule applies when the taxpayer is also an active trader of securities see 721_f2d_810 fed cir liang v commissioner 23_tc_1040 petitioners do not contend that lender management operated as a trader during the tax years in issue that the taxpayer is engaged in a trade_or_business any profit so derived arises from the successful conduct of the trade_or_business of the corporation or other venture in which the taxpayer has taken a stake rather than from the taxpayer’s own activities whipple v commissioner u s pincite a common factor distinguishing the conduct_of_a_trade_or_business from mere investment has been the receipt by the taxpayer of compensation other than the normal investor’s return whipple v commissioner u s pincite compensation other than the normal investor’s return is income received by the taxpayer directly for his or her services rather than indirectly through the corporate enterprise id pincite if the taxpayer receives not just a return on his or her own investment but compensation attributable to his or her services provided to others then that fact tends to show that he or she is in a trade_or_business dagres v commissioner t c pincite the trade-or-business designation may apply even though the taxpayer invests his or her own funds alongside those that are managed for others provided the facts otherwise support the conclusion that the taxpayer is actively engaged in providing services to others and is not just a passive investor id pincite an activity that would otherwise be a business does not necessarily lose that status because it includes an investment function id pincite work that includes investing or facilitating the investing of others’ funds may qualify as a trade_or_business id in dagres we held that s elling one’s investment expertise to others is as much a business as selling one’s legal expertise or medical expertise id investment advisory financial planning and other asset management services provided to others may constitute a trade_or_business see id a positions of the parties petitioners contend that lender management’s activities during the tax years in issue meet the test for an active trade_or_business under groetzinger they contend that lender management provided investment management and financial planning services to others during the tax years in issue and that these activities constituted a trade_or_business petitioners also contend that lender management and the investment llcs must be respected as separate business entities distinct from their owners and that these entities engaged with one another at arm’s length respondent contends that lender management’s activities did not constitute carrying_on_a_trade_or_business respondent contends that lender management’s primary activity is managing the lender family fortune for members of the lender family by members of the lender family b analysis groetzinger does not create a single test that would be dispositive in all cases on the issue of a trade_or_business see commissioner v groetzinger u s pincite this court has traditionally viewed that case as setting certain uniform requirements which must be met for all trades_or_businesses and we treat it as a starting point for evaluating all trade_or_business determinations see eg barker v commissioner tcmemo_2012_77 mcmanus v commissioner tcmemo_1987_457 aff’d without published opinion 865_f2d_255 4th cir in prior cases we have looked at the following three factors whether the taxpayer undertook the activity intending to make a profit whether the taxpayer was regularly and actively involved in the activity and whether the taxpayer’s business operations had actually commenced see mcmanus v commissioner tcmemo_1987_457 these three general requirements have been met and the parties are not disputing these requirements the parties dispute whether the activities of lender management constitute a trade_or_business first we will consider the activities of lender management second we will consider the familial aspect of the activities activities of lender management lender management provided investment advisory and financial planning services for the investment llcs and their individual investors its employees worked full time keith’s work involved researching investment opportunities negotiating and executing new investments monitoring existing positions and working with individual clients to understand their investment needs ms flament assisted keith in performing his duties and she was also responsible for overseeing lender management’s financial_accounting compliance and cash management she expended considerable time and effort keeping open multiple revolving lines of credit which were necessary for the investment llcs’ ongoing investment activities lender management employed a full-time office manager and part-time employees and it engaged the services of an outside firm to supplement its ability to provide its clients a complete set of investment management services the services lender management provided to its clients were comparable to the services that hedge fund managers provide lender management had a responsibility to provide its clients with sound investments with growth potential and investments tailored to their financial needs lender management’s activities in these cases went far beyond those of an investor see 136_tc_263 in dagres the management entity provided the facilities and staff to perform the venture capital business and this staff helped with identifying and researching potential investment targets and helped manage the investments id pincite lender management performed services similar to those in dagres through the operating agreements lender management had the exclusive right to direct the business and affairs of the investment llcs lender management and its staff found various investments investigated potential investments managed cashflow prepared asset allocations and performed other related functions lender management was entitled to profits interests as compensation_for its services to its clients to the extent that it successfully managed its clients’ investments in beals v commissioner tcmemo_1987_171 the taxpayer actively investigated and followed the investments made by him and his family but he did not receive compensation attributable to his services for overseeing his family member’s accounts he benefited solely from his share of dividends which constituted a normal investor’s return and he operated under the name of a firm that was previously dissolved id lender management was a duly constituted business_entity and it was entitled to profits interests for services lender management and its managing members during the tax years in issue held minority interests in the investment llcs in dagres v commissioner t c pincite the management entities held capital interests in the underlying investment funds the management entities were also entitled to profits interests as compensation_for their services as the funds’ managers id these profits interests were the primary incentive for the management entities to work to maximize the funds’ success id we cited the disproportion between the capital and the profits interests as a reason for concluding that the predominant activity of the management entities was management of investments for others rather than investing for their own account id pincite in dagres the management entities received management fees of to of the total committed capital in the funds id pincite lender management did not receive similar fees lender management received payment for its services only if the investment llcs earned net profits the absence of fees motivated lender management to increase the net values of the investment llcs to the extent that the net assets of the investment llcs increased in value the operating agreements provided that lender management could receive compensation separate from and in addition to the amounts that it received for its membership interests in the class a profits interests for m m and lenco did not offer lender management as great an opportunity for earnings as they did in later years nevertheless the profits interests represented potential compensation separate from and in addition to lender management’s normal investor’s return and these profit interests provided substantial incentive to deliver high-quality management services in and the amended class a interests guaranteed lender management a share of potential profits separate from and in addition to what it would receive with respect to its investments the contingent nature of the profits interests does not negate their being compensation_for services lender management’s compensation structure shows that during the tax years in issue its predominant activity was providing investment management services to others rather than passive investing see id pincite during the tax years in issue lender management held membership interests in lenco of and respectively and in m m of and respectively although in most years lender management’s interests exceeded the held by the management entities in dagres these interests each year were far less than what it could have earned for its services via contingent profits interests payments between and of the portfolios that lender management managed for lenco and m m were made up of investments beneficially owned and controlled by others lender management’s activities were providing investment management services which it primarily provided to and for the benefit of clients other than itself as in dagres we conclude that lender management was in the business of providing investment management services to its clients family relationship these cases differ from dagres in that a family relationship and connection existed between the managing members of lender management and the owners of the investment llcs respondent cites this aspect of the relationship between the entities in support of respondent’s contention that lender management’s activities consisted solely of making investments on its own behalf pursuant to the tax equity and fiscal responsibility act of tefra pub_l_no sec_402 stat pincite there are partnership and nonpartnership_items a partnership_item means any item taken into account for the partnership’s taxable_year sec_6231 the disputed deductions are partnership items attributable to lender management and sec_6221 provides that the tax treatment of these items shall be determined at the partnership level we examine the facts and circumstances specific to lender management rather than the investment llcs or their members to determine whether it carried on a trade_or_business respondent contends in respondent’s reply brief that this court often considers the relationship between people who interact through entities for the obvious reason that the relationships between the individuals might affect how the entities interact with each other respondent further contends that managing investments for yourself and for members of your family is not within the meaning of a trade_or_business for the purpose of sec_162 generally transactions within a family group are subjected to heightened scrutiny 124_tc_95 82_tc_335 where a payment is made in the context of a family relationship we carefully scrutinize the facts to determine whether there was a bona_fide business relationship and whether the payment was not made because of the familial relationship see 337_us_733 martens v commissioner tcmemo_1990_42 aff’d without published opinion 934_f2d_319 4th cir in didonato v commissioner tcmemo_2013_11 we concluded that certain payments between cousin-owned businesses were not deductible the payments were not deductible because the record did not establish that services were actually rendered we find that lender management satisfies a review under heightened scrutiny the end-level investors in the investment llcs during the tax years in issue were all members of the lender family lender management’s cio keith is a member of the lender family his father marvin was managing member and -owner of lender management in and keith occupied the same position in and at all relevant times only two members of the lender family were owners of lender management separate from lender management marvin owned of lenco and of m m in keith owned indirectly less than of lenco and of m m during the years he served as managing member there was no requirement or understanding among members of the lender family that lender management would remain manager of the assets held by the investment llcs indefinitely lender management’s investment choices and related activities were driven by the needs of clients and its clients were able to withdraw their investments if they became dissatisfied with its services investors in lenco and lotis were entitled to withdraw their capital interests for any reason at least annually although a complete withdrawal from m m required the manager’s approval we are satisfied on the facts before us that there was a common understanding that lender management would grant such approval if any investor became unhappy with how his or her funds were being managed apart from what they received as returns on their respective investments lender management’s clients generally earned employment income for example carl worked in sales for a cable communications company keith like carl would have benefited from his membership in the investment llcs during the tax years in issue regardless of whether he chose to work for lender management keith’s position compensated him for the services that he provided to lender management and it was his only full-time job during the tax years in issue as managing member he was highly motivated to excel and to see lender management receive the benefit of the class a interests although each investor in the investment llcs was in some way a member of the lender family lender management’s clients did not act collectively or with a single mindset lender management’s clients were geographically dispersed many did not know each other and some were in such conflict with others that they refused to attend the same business meetings their needs as investors did not necessarily coincide lender management did not simply make investments on behalf of the lender family group it provided investment advisory services and managed investments for each of its clients individually regardless of the clients’ relationship to each other or to the managing member of lender management in higgins v commissioner u s pincite the taxpayer maintained two offices the operations of which were to manage his personally held investments in real_estate bonds and stocks the commissioner disallowed deductions claimed for salaries and expenses allocable to the management of the taxpayer’s securities and the supreme court upheld the commissioner’s determination observing that the taxpayer merely kept records and collected interest and dividends from his securities through managerial attention for his investments id pincite lender management was not managing its own money most of the assets under management were owned by members of the lender family that had no ownership_interest in lender management lender management managed investments and did substantially more than keeping records and collecting interest and dividends in beals v commissioner tcmemo_1987_171 we rejected the taxpayer’s contention that he was engaged in a trade_or_business managing investments owned by him his wife and three of his children in that case there was no business relationship by contrast lender management had an obligation to its clients and it tailored its investment strategy allocated assets and performed other related financial services specifically to meet the needs of its clients there is no dispute that lender management provided services the profits interests were provided in exchange for services and not because marvin and keith were part of the lender family the lender family members that participated in the investment llcs expected lender management to provide them with services similar to those of a hedge fund_manager the relationship between lender management and the investment llcs was a business relationship respondent cites no applicable attribution_rules that would require us to treat lender management or its managing member as owning all of the interests in the investment llcs lender management carried on its operations in a continuous and businesslike manner for the purpose of earning a profit and it provided valuable services to clients for compensation_for the tax years in issue lender management was carrying_on_a_trade_or_business for the purpose of sec_162 to reflect the foregoing decisions will be entered for petitioners


department of the treasury internal_revenue_service washington d c of f i c e of c h i e f c ou n s e l date number release date cc pa apjp b01 tl-n-6644-00 uilc internal_revenue_service national_office field_service_advice memorandum for doug h rogers national director office of interest and penalty administration s c cp rc p c9-156 from assistant chief_counsel administrative provisions and judicial practice cc pa apjp subject interest on replacement refund check this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend taxpayer year year year dollar_figurex refund check y issue whether taxpayer is entitled to overpayment interest to the date of the replacement refund when the service properly issued taxpayer an original refund check within the days required by sec_6611 but taxpayer never received the original refund check conclusion taxpayer is not entitled to overpayment interest because the delay in the delivery of the refund check was not due to any fault of the government and because under the presumption of delivery the service tendered the refund check to taxpayer within days after the return was filed facts taxpayer timely filed his year return on october year pursuant to an approved extension taxpayer’s return indicated an overpayment of dollar_figurex taxpayer requested that the overpayment be refunded by direct deposit to taxpayer’s financial_institution the service did not refund the overpayment by direct deposit but instead issued a refund check on november year in december year taxpayer’s representative contacted the service and stated that taxpayer had not received the refund the service confirmed with taxpayer’s representative that the refund was issued to the correct taxpayer and mailed to the correct address the service researched the claim and discovered that the refund check was never negotiated and was never returned to the service as undeliverable the service issued a second refund to taxpayer on february year law and analysis the government may only pay interest if specifically allowed by a statutory provision see u s ex rel angarica v bayard 127_us_251 sec_6611 of the internal_revenue_code provides in general that interest shall be allowed and paid on any overpayment of any internal revenue tax at the overpayment rate established under sec_6621 sec_6611 adds that in the case of a refund interest is paid from the date of the overpayment to a date to be determined by the secretary preceding the date of the refund check by not more than days whether or not such refund check is accepted by the taxpayer after tender of such check to the taxpayer the acceptance of such check shall be without prejudice to any right of the taxpayer to claim any additional overpayment and interest thereon in addition sec_6611 provides that no overpayment interest will be paid if the overpayment is refunded within days after the last day prescribed for filing the return determined without regard to any extension of time for filing the return or if the return is filed after such last date the refund is made within days after the date the return is filed sec_6611 provides that if the taxpayer files a claim for a credit or refund for any overpayment_of_tax and such overpayment is refunded within days after the filing_date of the claim no overpayment interest is paid from the filing_date of the claim until the refund date the delay in the delivery of the refund check was not due to any fault of the government taxpayer claims interest to the date of the replacement check because taxpayer never received the original refund check and thus according to taxpayer the overpayment was not refunded within the days prescribed in sec_6611 interest is not allowed when the delay in effecting the delivery of the refund check is not due to any fault of the government revrul_76_74 1976_1_cb_388 irm in revrul_76_74 the service endorsed two situations in which the government paid additional interest because the government improperly delayed the delivery of refunds in the first situation the service erroneously issued a refund check in the name of a person other than the taxpayer and thus prevented negotiation of the check by the taxpayer in the second the service held the taxpayer’s refund to offset a debt erroneously reported by another agency in both situations the service determined that the periods of interest ran to the dates of the subsequently issued replacement checks not the dates of the original checks the service recommended the payment of additional interest because the refunds’ deliveries were delayed due to the fault of the government in this case the service established that the refund was issued to the correct taxpayer and mailed to the correct location therefore unlike the situations in revrul_76_74 the delay in the delivery of the refund was not due to any fault of the service and interest should not be allowed the government tendered the refund check to taxpayer on november year taxpayer relies on 918_f2d_15 2d cir and 997_f2d_335 7th cir in asserting that a refund check cannot be tendered unless the taxpayer has some knowledge of it and an opportunity to accept or decline to accept the check however in doolin and godfrey the courts also acknowledged the presumption of delivery doolin f 2d pincite godfrey f 2d pincite under the presumption of delivery proof that a letter properly directed was placed in a post office creates a presumption that it reached its destination in usual time and was actually received by the person to whom it was addressed 111_us_185 285_us_427 therefore under the presumption of delivery a refund is tendered when placed with the postal service in godfrey the seventh circuit held that to invoke the presumption of delivery the government could either present evidence of actual mailing such as an affidavit from the employee who mailed the check or present proof of procedures followed in the regular course of operation which give rise to a strong inference that the check was properly addressed and mailed godfrey f 2d pincite the financial management service of the treasury_department fms in austin texas was responsible for issuing and mailing taxpayer’s refund fms creates a progress sheet for each set of payments that are delivered to the post office for mailing the progress sheet indicates the check number and amount for each payment included in the set according to taxpayer’s payment record refund check y for dollar_figurex was issued on november year the progress sheet for november year indicates that refund check y for dollar_figurex was included among the checks delivered to the post office that day the service placed the refund with the postal service on november year therefore under the presumption of delivery the refund was tendered to taxpayer on november year november year is within days after the date the return is filed therefore no interest should be allowed under sec_6611 in godfrey the court noted that even if the irs presents sufficient evidence of mailing the presumption of delivery may be rebutted by other evidence of non- delivery godfrey f 2d pincite n taxpayer claims that the service is not entitled to the presumption of delivery because the service failed to issue taxpayer a cp notice and therefore did not follow regular procedures whether the service followed regular procedures in issuing or not issuing taxpayer a cp notice is irrelevant to whether the service followed regular procedures in issuing and mailing taxpayer’s refund check thus whether the service issued taxpayer a cp notice does not effect the service’s ability to invoke the presumption of delivery for taxpayer’s refund check fms followed regular procedures for mailing taxpayer’s refund check and therefore the service is entitled to the presumption of delivery for taxpayer’s refund check in addition taxpayer claims that the service did not follow proper procedures because the service did not direct deposit taxpayer’s refund although the service has offered the option for the wire transfer of refunds the service is not required to accede to every wire transfer request onan corp v united_states cl_ct furthermore announcement 1985_4_irb_43 provides that taxpayers must file a form_8302 application_for electronic funds transfer eft of tax_refund of dollar_figure million or more with their tax returns in order to receive a wire transfer taxpayer did not file a form_8302 with his tax_return thus the service followed proper procedures when it did not direct deposit taxpayer’s refund and the service is entitled to the presumption of delivery case development hazards and other considerations taxpayer’s letter of april year states a review of irs procedures in internal_revenue_manual refund transactions does not support the irs position regarding the absolute necessity of issuing a paper check if the refund is in excess of dollar_figure million it appears that the service has relied on irm dollar_figure to assert that the service could not direct deposit taxpayer’s refund because overpayments in excess of dollar_figure require issuance of a check through manual refund procedures according to irm an account with an overpayment of dollar_figure requires that a manual refund be issued since a tc will not generate we believe that the language a manual refund be issued may be misinterpreted to mean that a refund check should be issued we believe that this language should be interpreted to mean that the refund should be processed manually refunds for over dollar_figure are eligible for direct deposit see form_8302 application_for electronic funds transfer eft of tax_refund of dollar_figure million or more this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views if you have any questions please call michelle b baxter at curtis g wilson by pamela w fuller senior technician reviewer branch


internal_revenue_service number release date index number -------------------------------------------- ----------------------------------------------- -------------------------- ----------------------------- in re ----------------------- department of the treasury washington dc person to contact --------------------------------------------- telephone number --------------------- refer reply to cc psi b04 - plr-154516-02 date april legend legend trustor trust date date date date date date date a b court grandchild grandchild grandchild dear ------------ --------------- ---------------------------------------------- -------------------------- ---------------------- ------------------- ------------------------- --------------------- ------------------ ------------------- -------------- -------------------------------------------------- ---------------------------- ------------------------------- --------------------------------- this is in response to your date letter and other correspondence requesting a ruling concerning the income gift and generation-skipping_transfer gst tax consequences of the proposed settlement you have requested the following rulings the proposed settlement of bona_fide administrative issues and the judicial construction of the trust will not cause the trust to lose its exempt status for gst tax purposes under section b a of the tax_reform_act_of_1986 the proposed settlement of bona_fide administrative issues and the judicial construction of the trust will not cause a taxable gift to be made by any beneficiary under sec_2501 of the internal_revenue_code plr-154516-02 the modification of the trust will not cause any beneficiary nor the trust to recognize any gain_or_loss from a sale_or_other_disposition of the property under sec_61 or sec_1001 the facts submitted are as follows trustor established trust on date by means of a_trust indenture trustor amended the trust on date trustor died and trust became irrevocable on date before date paragraph b of trust provides that upon trustor s death after payment of certain specific bequests the trustee shall hold the remainder of the trust property less taxes and other obligations of the trustor in a continuing trust the trustee shall pay a of the net_income of the trust to each of trustor s children and the remaining a to the grandchildren in equal shares in the event that any or all of the trustor s children shall not survive the trustor or in any event upon their death the a share of the net_income of the trust shall then become subject_to distribution by the trustee in its sole discretion among the surviving trustor s children grandchildren and great-grandchildren in such amounts as the trustee deems prudent the trustee may also from time to time accumulate all or any part of the income for any of the persons to the extent that such accumulation is allowed by law and as the trustee deems advisable any income so accumulated as authorized by this paragraph may be added to principal and if so added shall thereafter be treated as principal and not as income the trustee shall have the right at any time and from time to time to exclude any beneficiary above designated from any distribution of income among the so designated beneficiaries and to make unequal distributions of income among the designated beneficiaries the trustee may also pay such portions of principal to the children or grandchildren or great-grandchildren as it may in its sole discretion determine to be in their best interests paragraph b also provides that following the death of a child the trustee shall have the right in its sole discretion to continue to pay prudent amounts of income to and for the benefit of a surviving_spouse of child the trustee shall in its sole discretion be entitled to distribute reasonable amounts of principal to such spouses if such should become necessary in properly maintaining and supporting them this trust shall terminate upon the death of the survivor of trustor s children and grandchildren living at the date of her death and the balance then on hand shall be distributed to the great-grandchildren per stirpes no addition has been made to the trust since trustor s death all trust income has been distributed during each year since trustor s death trustor s last surviving child died on date trustor had three grandchildren grandchild grandchild and grandchild each of whom are still living plr-154516-02 the trustee believes that the trust is ambiguous regarding whether the trustee s authority to accumulate income make unequal distributions and exclude any beneficiary from distributions affects the grandchildren s interests in the trust income or applies only to all other distributions from the trust also the trustee believes that the language of the trust creates an ambiguity whether the trust remainder is to be distributed among the great-grandchildren by right of representation or in equal shares the trustee petitioned court for an order instructing trustee as to the administration of the trust on three related issues i do the grandchildren have a vested interest in a of the trust income ii may the trustee pay to the beneficiaries a unitrust_amount equal to b of the value of the trust during each year to be paid from income and to the extent that income is insufficient from the principal of the trust iii is each great-grandchild entitled to an equal portion of the remainder upon the ultimate distribution of the trust the trust beneficiaries consisting of the grandchildren great-grandchildren and a court-appointed guardian ad litem representing the unascertained trust beneficiaries entered into an agreement for adjudicated compromise_agreement with the trustee executed by the interested parties in counterparts between date and date on date the court issued an order which i found that the interpretation of the trust instrument posed issues involving reasonable doubt and ii approved the terms of the agreement sec_3 of the agreement provides that trust continues until the death of the survivor of trustor s grandchildren during this time income and principal is distributed among the grandchildren and great-grandchildren distributions will not during the term of the trust be paid to more remote descendants or to any person other than a grandchild or great-grandchild the trustee will throughout the term of the trust distribute income and principal in the manner provided by this section sec_3_1 provides that the trustee will during each year distribute a unitrust_amount equal to the greater of a of the trust income or b of the value of the trust property sec_3_2 provides that the unitrust_amount will be divided into three equal shares allocating one share for each of the grandchildren whether living or deceased each share will consist of a pro_rata portion of each item_of_income and corpus comprising the unitrust_amount distributions to a grandchild or to the children of the grandchild will be charged exclusively against the share which is set_aside for that grandchild each share will be distributed in the following manner plr-154516-02 first to the grandchild the greater of i a of the trust accounting_income or ii a of the unitrust_amount which is allocated to the respective share second to the grandchild all or such portion of her remaining share of the unitrust_amount as the trustee considers appropriate to provide for the comfort and reasonable desires of the grandchild and last to the extent the unitrust_amount is not exhausted by payment to the grandchild the balance of the share will be distributed among the then living children of the grandchild in the manner provided by sec_3_4 sec_3_3 provides that following the death of a grandchild the trustee will allocate a of the accrued and undistributed_income determined as of the grandchild s death among the separate shares the income allocated the deceased grandchild s share will be distributed to the estate of the deceased grandchild the balance of the allocated unitrust_amount for the period in which the grandchild s death occurs and the unitrust_amount which is allocated to the share throughout the remaining term of the trust will be distributed among the then living children of the deceased grandchild in the manner provided by sec_3_4 if all great-grandchildren who are eligible to participate in distributions from a share have died that share of the unitrust_amount will be allocated to the other share s throughout the remaining term of the trust sec_3_4 provides that distributions of the unitrust_amount to great-grandchildren whether during or after the life of the respective parent - i will be paid exclusively from the share which is set_aside for the parent of the respective great-grandchild ii will be paid only to those great-grandchildren who are living at the time the distribution is made and iii will be in the proportions and relative amounts which the trustee in its discretion considers to be in the best interests of the distributee the amount distributed to a great-grandchild may differ from that distributed to his sibling s and the trustee may exclude any great-grandchild from participating in one or more distributions sec_3_5 provides in part that in addition to distribution of the unitrust_amount the trustee may from time to time distribute principal to a grandchild or great-grandchild of trustor if the trustee considers the distribution to be in the best interest of the distributee as authorized by paragraph b of the trust instrument sec_4 provides that upon the death of the survivor of grandchild grandchild and grandchild and after having set_aside the accrued and undistributed_income payable the deceased grandchild s estate the remaining trust property will be divided and distributed among the great-grandchildren in equal shares the descendants of a deceased great-grandchild will take by representation the share to which their deceased parent would have been entitled if a deceased great-grandchild has no then living descendant that share will lapse and be added to plr-154516-02 the shares of the remaining great-grandchildren and descendants of those who are deceased the order further states that the trustee is instructed to implement the foregoing provisions upon receipt of a ruling issued by the internal_revenue_service which determines that compliance with the provisions of the agreement will not result in adverse gst consequences law and analysis ruling sec_2601 imposes a tax on every generation-skipping_transfer the term ageneration-skipping transfer is defined in sec_2611 as a taxable_distribution a taxable_termination or a direct_skip sec_26_2601-1 provides rules for determining when a modification sec_26_2601-1 provides that a judicial construction of a governing under section a of the tax_reform_act_of_1986 act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the gst is generally applicable to generation-skipping transfers made after date however under section b a of the act and sec_26_2601-1 the gst does not apply to a transfer under a_trust that was irrevocable on date but only to the extent that such transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added under sec_26_2601-1 will not cause the trust to lose its exempt status judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax will not cause the trust to lose its exempt status instrument to resolve an ambiguity in the terms of the instrument or to correct a scrivener's error will not cause an exempt trust to be subject_to the provisions of chapter if the judicial action involves a bona_fide issue and the construction is consistent with applicable state law that would be applied by the highest court of the state instrument of an exempt trust including a construction that does not satisfy sec_26_2601-1 will not cause an exempt trust to be subject_to the gst tax if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in sec_26_2601-1 provides that a modification of the governing plr-154516-02 either an increase in the amount of a generation-skipping_transfer or the creation of a new generation-skipping_transfer a modification that is administrative in nature that only indirectly increases the amount transferred will not be considered to shift a beneficial_interest in the trust sec_26_2601-1 example considers a situation where in grantor established an irrevocable_trust for the benefit of grantor's children a and b and their issue the trust is to terminate on the death of the last to die of a and b at which time the principal is to be distributed to their issue however the provision governing the termination of the trust is ambiguous regarding whether the trust principal is to be distributed per stirpes only to the children of a and b or per capita among the children grandchildren and more remote issue of a and b in the trustee files a construction suit with the appropriate local court to resolve the ambiguity the court issues an order construing the instrument to provide for per capita distributions to the children grandchildren and more remote issue of a and b living at the time the trust terminates the court's construction resolves a bona_fide issue regarding the proper interpretation of the instrument and is consistent with applicable state law as it would be interpreted by the highest court of the state therefore the trust will not be subject_to the provisions of chapter of the internal_revenue_code grantor established an irrevocable_trust under the terms of which trust income is payable to a for life and upon a's death the remainder is to pass to a's issue per stirpes in the appropriate local court approves a modification to the trust that converts a's income_interest into the right to receive the greater of the entire income of the trust or a fixed percentage of the trust assets valued annually unitrust_interest to be paid each year to a for life the modification does not result in a shift in beneficial_interest 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 in this case the modification can only operate to increase the amount distributable to a and decrease the amount distributable to a's issue in addition 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 therefore the trust will not be subject_to the provisions of chapter of the internal_revenue_code sec_26_2601-1 example considers a situation where in in this case the order will clarify the ambiguous language of the trust the order will also modify the distribution of income and principal provisions and distribute unitrust interests to trustor s grandchildren these actions will not result in a shift of any beneficial_interest to any beneficiary who occupies a generation lower than the persons holding the beneficial interests further the proposed actions will not extend the time for vesting of any beneficial_interest in trust accordingly based on the facts submitted and representations made we conclude that the proposed settlement of bona_fide administrative issues and the judicial construction of ambiguous language of the trust will not cause the trust to lose its exempt status for gst purposes plr-154516-02 ruling sec_2501 imposes a tax for each calendar_year on the transfer of property by gift by an individual sec_2511 provides that the tax imposed by sec_2501 applies 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 describes a situation in which the transfer of a vested_remainder interest was subject_to the gift_tax that example provides as follows if a is possessed of a vested_remainder interest in property subject_to being divested only in the event he should fail to survive one or more individuals or the happening of some other event an irrevocable assignment of all or any part of his interest would result in a transfer includible for federal gift_tax purposes in this case no atransfer of a beneficial_interest in the trust or of a part of a beneficial_interest in the trust has occurred as a result of the execution of the agreement or the issuance of the order the agreement and order represent a mutual understanding that clarifies and defines the interests that each of the beneficiaries received from the trustor at the time that the trust became irrevocable accordingly based on the facts submitted and representations made we conclude that the proposed settlement of bona_fide administrative issues and the judicial construction of ambiguous language of the trust will not cause a taxable gift to be made by any beneficiary under sec_2501 ruling sec_61 provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized over the adjusted_basis provided in sec_1011 for determining loss over the amount_realized under sec_1001 the entire amount of gain_or_loss must be recognized except as otherwise provided sec_1_1001-1 of the income_tax regulations provides that except as otherwise provided in subtitle a of the code the gain_or_loss realized from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or as loss sustained an exchange of property results in the realization of gain_or_loss under sec_1001 if the properties exchanged are materially different 499_us_554 properties exchanged are materially different if the properties embody legal entitlements different in_kind or extent or if the properties confer different rights and powers id pincite in cottage savings the court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interest in the loans id pincite in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent id pincite in this case the modification of the discretionary income trust to a unitrust pursuant to the court order issued date and the other provisions in the court order do not result in a material difference in the legal entitlements enjoyed by the beneficiaries of the trust under the terms of the trust the trustee had discretion to pay portions of principal to the grandchildren under the unitrust the beneficiaries now have a right to a fixed amount of principal in the event the yearly income is not large enough the grandchildren are still only entitled to share equally in the a share of the income accordingly we conclude that no gain_or_loss is recognized as a result of the modification of the trust for purposes of sec_1001 in accordance with the power_of_attorney on file with this office copies of this except as expressly provided herein no opinion is expressed or implied the rulings contained in this letter are based upon information and letter are being sent to your authorized representative concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter 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 provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer s requesting it sec_6110 of sincerely yours _________________________ lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosure copy of letter for sec_6110 purposes


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 plr-125136-09 date --------------------------------------------------------------------- x -------------------------------------------------- country date -------- ------------------ dear ------------- this responds to a letter dated date submitted on behalf of x requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to make an entity classification election the information submitted states that x was formed under the laws of country x represents that x is a foreign_entity eligible to be treated as a partnership but that it failed to timely file form_8832 entity classification election sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-3 provides guidance on the classification of a foreign_entity for federal_income_tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if the foreign eligible_entity has only one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 plr-125136-09 sec_301_7701-3 provides that to elect to be classified other than as provided in sec_301_7701-3 an eligible_entity must file form_8832 with the designated service_center and that an entity classification election must be filed on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based solely on the information submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as a partnership effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-125136-09 in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representatives sincerely curt g wilson associate chief_counsel office_of_chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


office_of_chief_counsel department of the treasury internal_revenue_service washington d c date number info release date uil cc intl br2 ---------- ----------------------- genin-122834-04 ------------------------ ------------------------- -------------------------------- ------------------- this letter responds to your letter received by our office on date generally consideration for reelecting the sec_911 foreign_earned_income dear ------------ requesting permission to reelect the provisions of sec_911 of the internal_revenue_code code for tax_year ------- and subsequent tax years exclusion requires a private_letter_ruling request however your request does not include the necessary information or the user_fee required to issue a ruling we are providing the following general information sec_911 of the code allows qualified citizens or residents of the united_states living abroad to elect to exclude from gross_income the foreign_earned_income and housing cost amounts of such individuals sec_1_911-7 provides that if an individual revoked a sec_911 election under b of this section and within five taxable years the individual wishes to reelect the exclusion then the individual may apply for consent to the reelection by requesting a ruling from the associate chief_counsel international in determining whether to consent to a reelection the associate chief_counsel international or_his_delegate may consider any facts and circumstances relevant to the determination under sec_1_911-7 relevant facts and circumstances may include the following a period of united_states residence a move from one foreign_country to another with different tax_rates a substantial change in the tax laws of the foreign_country of residence or physical presence and or genin-114924-03 a change_of employer to reelect the provisions of sec_911 under sec_1_911-7 you must comply with the administrative procedures set forth in revproc_2004_1 2004_1_irb_1 date attached generally your ruling_request must contain the following a complete statement of facts and other information a statement of supporting authoritie sec_3 a statement of identifying information to be deleted from a copy of the letter_ruling for public inspection penalties of perjury statement user_fee see sec_15 and appendix a of revproc_2004_1 for the fee schedule please call ------------------at --------------------- with any questions sincerely phyllis e marcus chief branch associate chief_counsel international


internal_revenue_service number release date index numbers --------------------------------------------------- ------------------------ ------------------------------------------------------- --------------------------------------------- --------------------- 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 b03 plr-124300-09 date date x --------------------------------------------------------------------------------------------------- ----------------------- legend country ---------------- date ---------------------- dear ---------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting that x be granted an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as a disregarded_entity under sec_301_7701-3 facts x was formed under the laws of country on date x represents that it is a foreign_entity eligible to elect to be classified as a disregarded_entity for federal tax purposes x intended to be classified as a disregarded_entity effective date however due to inadvertence form_8832 entity classification election was not timely filed law sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in plr-124300-09 sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301 b unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides in part that for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides in part that except as provided in sec_301_7701-3 and v an eligible_entity may elect to be classified other than as provided in sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides in part that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 plr-124300-09 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as a disregarded_entity effective date a copy of this letter should be attached to the form_8832 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative the ruling contained in this letter is 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 ruling_request it is subject_to verification on examination sincerely s curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc