t c summary opinion united_states tax_court tyrone sharp and alvera sharp a k a alvera crockett petitioners v commissioner of internal revenue respondent docket no 18491-02s filed date tyrone sharp pro_se lorianne d masano for respondent carluzzo special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the taxable years in issue rule references are to the tax_court rules_of_practice and procedure the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined deficiencies in petitioners’ federal income taxes an addition_to_tax and penalties as follows petitioner s year deficiency a a sec sec tyrone sharp alvera sharp tyrone alvera sharp dollar_figure big_number big_number --- --- dollar_figure dollar_figure dollar_figure dollar_figure after concessions the following issues remain for consideration whether social_security disability benefits received in by tyrone sharp petitioner are includable in his income for that year whether petitioner is entitled to an alimony deduction for for certain payments made during that year to or on behalf of his former spouse and whether petitioner is liable for a sec_6662 accuracy-related_penalty for some of the facts have been stipulated and are so found at the time the petition was filed petitioners resided in inverness florida petitioner and margaret sharp petitioner’s former spouse married in and divorced in they entered into a joint stipulation and settlement agreement settlement agreement with the circuit_court of the fifth judicial circuit in and for citrus county florida on date relevant for our purposes the settlement agreement contains the following provisions lump sum alimony having regard for their circumstances including but not limited to a the needs of the wife for support b the ability of the husband to pay this support the parties agree that in full and final settlement and satisfaction of any and all claims and rights of the wife for support maintenance the husband will pay to the wife as non- modifiable lump sum alimony the lump sum of dollar_figure payable in eleven monthly installments of dollar_figure per month until the sum is paid in full these lump sum alimony payments shall commence on date and continue on the 1st of each and every month thereafter until paid in full the husband further agrees that upon the refinancing of the marital residence he will make an additional lump sum alimony payment of dollar_figure to the wife health insurance the husband agrees to continue to pay the wife’s health insurance premium until date should the premium increase above the current rate of dollar_figure per month then the wife agrees to be responsible for the amount of such increase debts and obligations the husband further agrees to be responsible for the sba loan which is in the wife’s name until date the husband shall make all regular payments on the sba loan until date automobiles the parties agree that the wife shall retain the toyota camary the parties agree that the husband shall continue to make the monthly lease payments until and including august the wife shall be responsible for all other expenses in relation to such automobile and shall assume responsibility for any and all lease payments or fees commencing date in accordance with the settlement agreement during the last months of petitioner made the following payments directly to or on behalf of his former spouse dollar_figure per month as lump-sum alimony dollar_figure per month for her car lease dollar_figure per month for her sba loan and dollar_figure per month for her health insurance during petitioner received social_security disability benefits in the amount of dollar_figure although paid entirely during these benefits are attributable to and petitioner married alvera sharp mrs sharp in although married to mrs sharp as of the close of petitioner and his former spouse filed a joint federal_income_tax return they reported adjusted_gross_income of dollar_figure on that return the adjusted_gross_income reported on petitioner’s return does not take into account the social_security disability benefits he received that year in the notice_of_deficiency respondent changed petitioner’s filing_status for from married filing a joint_return to married filing a separate_return as a result respondent determined that percent of the social_security disability benefits dollar_figure received by petitioner during is includable in income for that year discussion1 a social_security_benefits sec_61 provides that except as otherwise provided by law gross_income includes all income from whatever source derived relevant for our purposes sec_86 provides that if the taxpayer’s modified adjusted gross income2 plus one-half of the social_security_benefits received by the taxpayer exceeds the adjusted_base_amount then gross_income includes the lesser_of the sum of a percent of such excess plus b the lesser_of i one-half of the social_security_benefits received during the year or ii one-half of the difference between the adjusted_base_amount and the base_amount of the taxpayer or percent of the social_security_benefits received during the taxable_year see sec_86 with respect to a married taxpayer who does not file a joint_return and who does not live apart from his spouse at all times during the taxable_year both because there are no disputes with respect to any factual issues in this case we need not consider the application of sec_7491 116_tc_438 in this case ignoring adjustments not relevant here petitioner’s modified_adjusted_gross_income equals his adjusted_gross_income see sec_86 prior to certain disability benefits were excludable from an employee’s gross_income under sec_105 however this section was repealed and since social_security disability benefits have been treated in the same manner as other social_security_benefits maki v commissioner tcmemo_1996_209 the base_amount and the adjusted_base_amount are zero sec_86 and c social_security_benefits are included in the recipient’s gross_income in the taxable_year in which the benefits are received sec_86 an election may be made by taxpayers who receive lump-sum payments of social_security_benefits during the taxable_year in which a portion of the benefits is attributable to previous taxable years sec_86 sec_86 provides that if the election is made the amount included in gross_income for the taxable_year of receipt must not exceed the sum of the increases in gross_income for those previous taxable years that would result from taking into account the portion of the benefits attributable to the previous taxable years accordingly if no election is made by the taxpayer under sec_86 lump-sum_distributions of social_security_benefits are includable in the taxpayer’s gross_income in the taxable_year the benefits are received petitioner did not make an election under sec_86 with respect to the lump-sum social_security disability benefits received in he concedes that his proper filing_status for the taxable_year is married_filing_separately furthermore he does not claim that he lived apart from mrs sharp after their marriage in and nothing in the record suggests that he did accordingly petitioner’s base_amount and adjusted_base_amount for purposes of the sec_86 calculation are zero see sec_86 and c taking into account petitioner’s filing_status his modified_adjusted_gross_income and the social_security_benefits he received that year percent of those benefits are includable in his income see sec_86 c respondent’s determination in this regard is therefore sustained b alimony deduction at trial petitioner claimed an alimony deduction for the lump-sum alimony payments made to his former spouse and the payments made on her behalf as required by the terms of the settlement agreement respondent contends that the payments made by petitioner pursuant to the terms of the settlement agreement are not alimony within the meaning of sec_71 and thus petitioner is not entitled to an alimony deduction under sec_215 petitioner erroneously filed a joint_return with his former spouse as filed it would have made little sense to claim an alimony deduction on that return the alimony deduction issue raised at trial was tried by express consent see rule b respondent now concedes that the payments made by petitioner for his former spouse’s health insurance premiums meet the definition of alimony under sec_71 and are deductible by petitioner under sec_215 sec_215 allows an individual a deduction for alimony paid during the taxable_year in general a payment constitutes alimony within the meaning of sec_215 if the payment is made in cash and meets the following four criteria such payment is received by or on behalf of a spouse under_a_divorce_or_separation_instrument the divorce_or_separation_instrument does not designate such payment as a payment which is not includable in gross_income under this section and not allowable as a deduction under sec_215 in the case of an individual legally_separated from his spouse under a decree of divorce or of separate_maintenance the payee spouse and the payor spouse are not members of the same household at the time such payment is made and there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment in cash or property as a substitute for such payments after the death of the payee spouse sec_71 sec_215 respondent agrees that the payments made by petitioner under the terms of the settlement agreement satisfy the first three requirements of sec_71 the payments were made pursuant to a divorce decree the divorce decree did not designate the payments as ones that are excluded from treatment as alimony under sec_71 and sec_215 and petitioner and his former spouse were legally_separated and not members of the same household at the time the payments were made respondent contends that the payments made by petitioner under the terms of the separation agreement do not terminate in the event of his former spouse’s death in congress removed the requirement from sec_71 that a divorce or separation agreement specifically state that liability terminates upon the death of the payee spouse see tax_reform_act_of_1986 publaw_99_514 sec b 100_stat_2853 thus payments now qualify as alimony as long as termination would occur automatically under state law see human v commissioner tcmemo_1998_106 since the settlement agreement does not expressly address petitioner’s liability to make the payments in the event of his former spouse’s death we look to florida law to determine his liability in that regard 81_tc_614 affd per curiam without published opinion 829_f2d_39 6th cir florida law recognizes alimony as either periodic or lump sum fla stat ann sec dollar_figure west canakaris v canakaris so 2d fla lump sum alimony is a fixed and certain amount the right to which is vested in the recipient and which is not therefore subject_to increase reduction or termination in the event of any contingency specifically including those of death or remarriage boyd v boyd so 2d fla dist ct app see also canakaris v canakaris supra pincite although the award of lump sum alimony is not dependent upon a finding of a prior vested right there does arise upon the entry of a final judgment of a lump sum award a vested right which is neither terminable upon a spouse’s remarriage or death nor subject_to modification in the present case the settlement agreement required petitioner to pay his former spouse lump-sum alimony in eleven installments of dollar_figure the settlement agreement further provided that petitioner pay his former spouse’s automobile lease payments and sba loan payments until date the number of payments and the amount of each payment were fixed and certain thus the payments under the settlement agreement were not subject_to modification or termination in the event of any contingency since these payments meet the requirements for lump-sum alimony set forth in canakaris v canakaris supra and boyd v boyd supra it follows that they would have remained payable to the former spouse’s estate in the event of her death see human v commissioner supra accordingly we hold that the lump-sum alimony payments automobile lease payments and sba loan payments made by petitioner under the terms of the settlement agreement are not alimony within the meaning of sec_71 consequently they are not deductible to petitioner pursuant to sec_215 c sec_6662 penalty under sec_6662 a penalty is imposed on that portion of an underpayment of the tax required to be shown on a return if the underpayment is due to negligence or disregard of rules or regulations sec_6662 and b negligence is defined to include any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code sec_6662 it is further defined as the failure to do what a reasonable person with ordinary prudence would do under the same or similar circumstances 85_tc_934 disregard is defined to include any careless reckless or intentional disregard sec_6662 an accuracy-related_penalty will not be imposed with respect to any portion of an underpayment as to which the taxpayer acted with reasonable_cause and in good_faith sec_6664 whether the taxpayer acted with reasonable_cause and in good_faith depends on the pertinent facts and circumstances sec_1_6664-4 income_tax regs circumstances that may indicate reasonable_cause and good_faith include the extent of the taxpayer’s effort to properly assess the tax_liability and an honest misunderstanding of fact or law that is reasonable in light of the taxpayer’s experience knowledge and education id the taxpayer bears the burden of proving that he or she did not act negligently or disregard rules or regulations rule a 290_us_111 respondent supports the imposition of the sec_6662 accuracy-related_penalty entirely on petitioner’s failure to include the social_security disability benefits in his income we are satisfied that petitioner made a good_faith effort to properly determine his federal_income_tax liability and his failure to properly account for his social_security disability benefits results from an honest misunderstanding of fact or law that is reasonable in light of the his experience knowledge and education accordingly we hold that petitioner is not liable for the sec_6662 accuracy-related_penalty for his tax_year reviewed and adopted as the report of the small tax_division to reflect the foregoing entered under rule decision will be


internal_revenue_service number release date index number ------------------------------------------- ------------------------------------ ------------------- ------------------------------------- legend 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 b01 plr-148296-12 date date x ---------------------------------------- ----------------------------- d ---------------------- state -------- dear ---------------------- this responds to a letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated on d under the laws of state x intended to be treated as an s_corporation for federal tax purposes effective d but the proper election was not timely filed law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made if the election is made after the first two and one-half months of a corporation's taxable_year then the corporation will plr-148296-12 not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no election is made pursuant to sec_1362 or if made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such election as timely made for such taxable_year and effective as of the first day of that year x did not file a timely election to be treated as an s_corporation under sec_1362 effective d x has however established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d if within days from the date of this letter x submits a properly completed form_2553 with a copy of this letter attached to the appropriate service_center 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 specifically no opinion is expressed or implied concerning whether x otherwise qualifies as an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer’s authorized representative sincerely faith colson faith colson senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes


t c memo united_states tax_court octavio and felicitas olvera petitioners v commissioner of internal revenue respondent docket no filed date octavio olvera pro_se joseph t ferrick for respondent memorandum opinion goldberg special_trial_judge this case was heard pursuant to sec_7443a and rule sec_180 sec_181 and sec_182 respondent determined deficiencies in petitioners' federal income taxes for and in the respective amounts of dollar_figure and dollar_figure unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure petitioners concede that they failed to report dollar_figure of taxable interest_income received in respondent concedes that petitioners are entitled to two dependency_exemption deductions for their daughters for the years in issue as a result of respondent's concession there is no deficiency in income_tax for therefore we need not decide whether petitioners are entitled to additional dependency_exemption deductions for as the issue is moot however a deficiency in self-employment_tax remains at issue for see sec_1402 after concessions the issues for decision are whether petitioners are entitled to two additional dependency_exemption deductions under sec_151 with respect to the mother and sister of octavio olvera petitioner for and whether petitioners are entitled to deductions for automobile and telephone expenses in excess of amounts allowed by respondent for either of the years in issue some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioners resided in chicago illinois at the time their petition was filed petitioners are from mexico and have two daughters janet and illiana petitioners moved to the united_states to seek the computation of self-employment_tax will be resolved by this issue medical treatment for janet and they lived in chicago illinois for approximately years prior to trial sometime during or prior thereto petitioners determined that medical treatment was too costly in the united_states and janet returned to mexico for treatment janet lived with petitioner's mother altagracia figueroa and father jacinto olvera camacho petitioner's parents live in a rented two-bedroom home in the city of cuernavaca in morelos mexico in addition to janet petitioner's sister zulma olvera resided in the home petitioner's father worked periodically doing electrical or plumbing work but he did not work on a regular basis by petitioner's estimates his parents' annual expenditures_for rent utilities and food averaged approximately dollar_figure during the years in issue in date felicitas olvera mrs olvera and illiana returned to mexico to care for janet because petitioner's mother became ill mrs olvera and illiana stayed with mrs olvera's parents janet remained with petitioner's parents during the years in issue petitioner wired money to various relatives in mexico to help support his parents and his sister zulma olvera to pay for janet's care and to support mrs olvera janet and illiana petitioner wired funds at least times in and at least times in transferring amounts totaling dollar_figure and dollar_figure in and respectively of these amounts dollar_figure and dollar_figure in and were payable to mrs olvera petitioner wired an additional dollar_figure to mrs olvera but it is not clear when this transfer was made petitioner traveled to mexico twice in and once in on these trips he carried cash which he gave to his relatives during the years in issue in addition to other employment petitioner delivered pizzas on a part-time basis for father son pizza petitioner was required to provide his own car for use in delivering pizzas father son pizza recommended that drivers carry cellular phones because the safety of the neighborhoods on the delivery routes was uncertain in petitioner borrowed a cellular phone for this use in petitioner purchased a cellular phone petitioner did not maintain any records with respect to his automobile or cellular phone usage or expense on their joint federal_income_tax returns filed for and petitioners claimed dependency_exemption deductions with respect to their two daughters and with respect to petitioner's mother and his sister zulma olvera on schedule c of their return petitioners reported gross_receipts of dollar_figure from petitioner's pizza deliveries and claimed deductions for car expense and utilities expense in the amounts of dollar_figure and dollar_figure respectively on schedule c of their return petitioners reported gross_receipts of dollar_figure from petitioner's pizza deliveries and claimed deductions for car expense of dollar_figure and for utilities expense of dollar_figure in the notice_of_deficiency respondent disallowed petitioners' claimed dependency_exemption deductions in and with respect to petitioner's mother and sister with respect to the tax_year respondent also disallowed a portion of petitioners' deductions for car expense in the amount of dollar_figure and for phone expense in the amount of dollar_figure respondent disallowed a portion of petitioners' claimed schedule c deductions in the amount of dollar_figure for from the record it appears that this entire disallowance was attributable to the claimed car expense respondent determined self-employment_tax in each of the years as a computational result of the adjustments to petitioners' schedule c deductions respondent allowed petitioners a deduction with respect to this tax for each of the years in issue respondent's determinations are presumed correct and petitioners have the burden of proving them erroneous rule a 290_us_111 deductions are a matter of legislative grace and petitioners must prove entitlement to any deductions claimed 292_us_435 taxpayers must maintain adequate_records to establish the amount of any deductions claimed sec_6001 sec_1_6001-1 income_tax regs dependency_exemption deductions as relevant here sec_151 allows a taxpayer to deduct an exemption_amount for each dependent as defined in sec_152 whose gross_income for the calendar_year is less than the exemption_amount the term dependent is defined to include a sister or mother of the taxpayer over half of whose support for the calendar_year is received from the taxpayer respondent contends that petitioners have not established that they provided over one-half of the support for either petitioner's mother or his sister in thus respondent argues these individuals were not petitioners' dependents under sec_152 in although we sympathize with petitioners and acknowledge that they clearly provided some support for petitioner's mother and sister we cannot find on the basis of the record that they provided over half of the support for either we found petitioner to be a credible witness petitioner testified that in addition to dollar_figure wired to various relatives in mexico in he took somewhere between dollar_figure and dollar_figure in cash with him on his trip to mexico and that he gave cash to cousins to take to mexico as well however some of this money must have been used to support mrs olvera and petitioners' daughters as they had no other identified means of support petitioner testified that mrs olvera's parents were unwilling to help support them thus we cannot infer from the evidence how much of the funds actually was used to support petitioner's mother and sister as opposed to mrs olvera and petitioners' daughters furthermore petitioner testified that his sister who may have worked received money from another source he also acknowledged that his nine siblings helped provide support at times although he stated that his parents did not receive any governmental support or insurance thus petitioners have failed to establish the total amount of support provided for petitioner's mother and sister from all sources a prerequisite to finding that petitioners provided one-half of either individual's support see 56_tc_512 respondent is sustained on this issue schedule c deductions petitioners contend that they are entitled to schedule c deductions in the amounts disallowed by respondent sec_162 allows a deduction for all ordinary and necessary expenses paid_or_incurred in carrying_on_a_trade_or_business generally when evidence shows that the taxpayers paid a deductible expense but the exact amount cannot be determined the court may approximate the amount 39_f2d_540 2d cir an exception to the cohan_rule is sec_274 which requires strict substantiation of certain expenses including those paid_or_incurred with respect to certain listed_property sec_274 listed_property includes automobiles and cellular telephones sec_280f sec_274 requires substantiation of these expenses either by adequate_records or by sufficient evidence corroborating the taxpayer's own statement petitioner testified that his business mileage was based on an estimate he also testified that his telephone expense represented amounts paid to a friend from whom he borrowed a cellular phone petitioners presented no records or corroborating evidence with respect to these expenses and they have failed to substantiate any amount in excess of that allowed by respondent respondent is sustained on this issue to reflect the foregoing decision will be entered under rule


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi plr-120679-03 date date x trust trust trust trust a b c d plr-120679-03 state m n d1 d2 d3 d4 d5 d6 dear this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code facts the information submitted provides that x was incorporated on d1 in state and elected to be an s_corporation effective d2 x represents that its four shareholders trust trust trust and trust qualify as qualified subchapter_s trusts qssts a b c and d are the income beneficiaries of trust trust trust and trust respectively on d3 a new trustee was appointed for trust trust trust and trust subsequently the new trustee discovered that the original trustee of trust trust trust and trust and not the beneficiaries or their legal representatives signed the s_corporation_election and the qsst elections and that consequently x’s s_corporation_election was ineffective x represents that since d2 x trust trust trust and trust have filed their income_tax returns as if x was an s_corporation however on d4 c and d the beneficiaries of trust and trust respectively amended their individual income_tax returns for the d5 taxable_year to treat trust and trust in a manner inconsistent with the qsst elections as a result of the amended returns c received a refund of m and plr-120679-03 d received a refund of n on d6 c and d filed second amended individual income_tax returns for the d5 taxable_year and treated trust and trust in a manner consistent with the qsst elections as part of the second amended returns c paid an income_tax in the amount of m and d paid an income_tax in the amount of n x represents that its ineffective s_corporation_election was inadvertent unintended and not the result of tax_avoidance or retroactive tax planning x further represents that at all times subsequent to d2 x has treated trust trust trust and trust as qssts in addition x represents that except for the filing of the amended returns on d4 the beneficiaries of trust trust trust and trust have treated the trusts as qssts x and all its shareholders who were shareholders since d2 agree to make any necessary adjustments consistent with the treatment of x as an s_corporation as the secretary may require law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides in part that the term small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for the purposes of sec_1361 a_trust all of which is treated under subpart e of part i subchapter_j of chapter of the internal_revenue_code as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder in an s_corporation sec_1361 provides that in the case of a qsst with respect to which a beneficiary makes an election under sec_1361 a the trust is treated as a_trust described in sec_1361 and b for purposes of sec_678 the beneficiary of the trust is treated as the owner of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1361 provides that a beneficiary of a qsst or his legal_representative may elect to have sec_1361 apply sec_1_1361-1 of the income_tax regulations provides that the current income_beneficiary of the trust must make the qsst election under sec_1361 by signing and filing with the service_center with which the corporation files its income_tax return the applicable form or a statement including the information listed in sec_1 j ii sec_1_1361-1 provides that any_action required by sec_1_1361-1 to be plr-120679-03 taken by a person who is under a legal disability by reason of age may be taken by that person's guardian or other legal_representative or if there be none by that person's natural or adoptive parent sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 shall be valid only if all persons who are shareholders in such corporation on the day on which the election is made consent to the election sec_1_1362-6 provides that except as provided in sec_1_1362-6 the election of the corporation is not valid if any required consent is not filed in accordance with the rules contained in sec_1_1362-6 sec_1_1362-6 provides that in the case of a_trust described in sec_1361 including a_trust treated under sec_1361 as a_trust described in sec_1361 only the person treated as the shareholder for purposes of sec_1361 must consent to the election sec_1_1362-6 provides that the consent of a minor must be made by the minor or by the legal_representative of the minor or by a natural or an adoptive parent of the minor if no legal_representative has been appointed sec_1362 provides that if an election under sec_1362 by any corporation was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or was terminated under sec_1362 or the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken so that the corporation is a small_business_corporation or to acquire the required shareholder consents and the corporation and each person who was a shareholder in the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination such corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election was ineffective for the taxable_year beginning d2 we also conclude that the ineffectiveness of x’s s_corporation_election was an inadvertent invalid election within the meaning of sec_1362 plr-120679-03 we further conclude that under sec_1362 x will be treated as an s_corporation from d2 and thereafter provided that apart from the amended returns described above x’s s_corporation_election is otherwise valid and is not otherwise terminated under sec_1362 in addition trust trust trust and trust will be treated as trusts described in sec_1361 and a b c and d will be treated for purposes of sec_678 as the owners of the portion of trust trust trust and trust respectively that consists of x stock from d2 and thereafter provided that the trusts satisfy the qsst requirements accordingly the shareholders of x must include their pro_rata share of the separately and nonseparately computed items of x as provided in sec_1366 make any adjustments to stock basis as provided in sec_1367 and take into account any distributions made by x to shareholders as provided in sec_1368 this ruling is conditioned on x within days of the date of this letter filing a new form_2553 election of a small_business_corporation that contains the proper signatures with the appropriate service_center with an effective date of d2 furthermore a b c and d must make a qsst election that contains the proper signature for trust trust trust and trust respectively effective d2 with the appropriate service_center within days of the date of this letter a copy of this letter should be attached to the new form_2553 and the new qsst elections except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed on whether x is otherwise eligible to be an s_corporation or whether trust trust trust and trust are valid qssts this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to x sincerely yours mary beth collins senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures a copy of this letter a copy for sec_6110 purposes cc


t c summary opinion united_states tax_court wallace f and mi-ja h smith petitioners v commissioner of internal revenue respondent docket no 10017-o0s filed date wallace f and mi-ja h smith pro_se daniel j parent for respondent couvillion special_trial_judge this case was heard pursuant to sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year at issue all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax for and an accuracy-related_penalty under sec_6662 of dollar_figure the issues for decision are whether petitioners failed to include in income distributions from various employee retirement plans of wallace f smith petitioner during the year at issue whether petitioners are entitled to a deduction for a casualty or theft_loss of dollar_figure and whether petitioners are liable for the accuracy-related_penalty under sec_6662 a some of the facts were stipulated and those facts with the annexed exhibits are so found and are incorporated herein by reference at the time the petition was filed petitioners' legal residence was walnut creek california petitioner has a bachelor's degree in economics from yale university a master's degree in economics from the university of connecticut and a ph d in economics from the university of washington he began teaching economics at the university of california at berkeley berkeley in and continued teaching there in the haas school of business until date at that time petitioner was dismissed from berkeley after declining the opportunity to resign or retire voluntarily although the circumstances surrounding petitioner's dismissal from berkeley are unclear the fact of his dismissal in date is not in dispute ’ following his dismissal from berkeley through the end of the year at issue petitioner received the following distributions from various retirement plans held for his benefit at berkeley u of california benefits program distribution pension_plan dollar_figure defined_contribution_plan dollar_figure capital accumulation provision account dollar_figure total dollar_figure petitioner also received a distribution of dollar_figure from an ira at bank of america during on their federal_income_tax return for petitioners reported in pertinent part total pension and annuity income of dollar_figure with dollar_figure being taxable total ira_distributions of dollar_figure with zero being taxable and other income as liquidated savings of dollar_figure with zero being taxable petitioners also reported wages of dollar_figure taxable interest of dollar_figure a taxable state_income_tax refund of dollar_figure and taxable social_security_benefits of dollar_figure thus petitioner sec_2 berkeley contends petitioner was dismissed for intentionally and without justification failing to teach two assigned courses during the academic year petitioner contends he was dismissed for exposing various acts of fraud by faculty members and administrators within the university reported adjusted_gross_income of dollar_figure for among other itemized_deductions not at issue herein petitioners claimed a deduction for a casualty or theft_loss of dollar_figure in connection with the loss at the time of petitioner's dismissal from berkeley of his employer-sponsored term life_insurance_policy having a face value of dollar_figure thus petitioners reported a zero tax_liability for a withholding credit of dollar_figure and an overpayment of dollar_figure in the notice_of_deficiency respondent determined that petitioners failed to include in income dollar_figure in taxable retirement distributions from berkeley and that the dollar_figure distribution from petitioner's bank of america ira was taxable respondent determined further that petitioners were not entitled to a deduction for the dollar_figure casualty or theft_loss claimed on their return and that petitioners were liable for the accuracy- related penalty under sec_6662 for a substantial_understatement in tax or for negligence or disregard of rules or regulations in the amount of dollar_figure the first issue is whether petitioners failed to include in income dollar_figure in taxable retirement_plan distributions for the year at issue identified above as the u of california benefits program beginning in date petitioner began receiving monthly pension checks of dollar_figure from the university of california totaling dollar_figure for the year the pension distribution of the total pension distribution for dollar_figure of this amount ie dollar_figure per month for months was attributable to after-tax employee contributions and thus was nontaxable the portion of petitioner's total pension distribution that was includable in petitioners' income was dollar_figure in date the defined contribution retirement_plan of the university of california benefits program distributed dollar_figure to petitioner the defined_contribution_plan distribution of this amount petitioner actually received dollar_figure with dollar_figure withheld for federal income taxes and dollar_figure withheld for state income taxes also in date the university of california benefits program distributed to petitioner dollar_figure from his capital accumulation provision cap retirement account the cap distribution of this amount petitioner received dollar_figure with dollar_figure withheld for federal income taxes and dollar_figure withheld for state income taxes as stated previously petitioners reported on their return total pension and annuity income of dollar_figure with dollar_figure being taxable and other income as liquidated savings of dollar_figure with zero being taxable thus in connection with the three distributions from berkeley ie the pension distribution the defined_contribution_plan distribution and the cap distribution petitioners included dollar_figure in gross_income petitioner actually received total distributions from berkeley during that were not attributable to after tax employee contributions of dollar_figure which exceeds the amount petitioners included in income by dollar_figure in the notice_of_deficiency respondent determined that petitioners failed to report dollar_figure in u c berkeley 1099r income in other words petitioners failed to include in income a total of dollar_figure from the three separate retirement distributions from berkeley sec_61 provides that gross_income includes all income from whatever source derived unless otherwise provided more specifically sec_61 and respectively provides that gross_income includes compensation_for services including fees commissions fringe_benefits and similar items annuities and pensions a fundamental principle of tax law is that income is taxed to the person who earns it when he earns it or derives it from property he owns 337_us_733 281_us_111 moreover determining the ownership of property is a guestion of fact on which the taxpayer generally has the burden_of_proof rule a 95_tc_74 the dollar_figure difference between the dollar_figure petitioner received but failed to include in income and the dollar_figure determined by respondent is not explained in the record the actual control_over the property and the enjoyment of profits from such property are of paramount importance in establishing ownership 27_tc_361 affd 258_f2d_89 2d cir petitioners admitted receiving the stated distributions from berkeley however petitioners object to the pension distribution the defined_contribution_plan distribution and the cap distribution being characterized as retirement pensions or retirement distributions petitioners contend that the distributed amounts over those that were included in income should not be included in their income for various reasons such as in the university of california --- illegally -- cancelled our life_insurance including irreplaceable term life cancelled my lifetime employment contract said our savings held the internal_revenue_service restructuring reform act of publaw_105_206 sec 112_stat_726 added sec_7491 which under certain circumstances places the burden_of_proof on the secretary with respect to factual issues relevant to a taxpayer's liability for taxes and the burden of production on the secretary with respect to a taxpayer’s liability for penalties and additions to tax in court proceedings arising in connection with examinations commencing after date the examination of petitioners return commenced after date nevertheless the burden_of_proof with respect to the items of deficiency did not shift to respondent because petitioner did not provide substantiation and credible_evidence in connection therewith 116_tc_438 moreover respondent has satisfied the burden of production with respect to the accuracy-related_penalty under sec_6662 by uc would be lost and savings were liguidated for safety as involuntary conversion' and so forth petitioners further contend that petitioner's dismissal from berkeley was an illegal retaliatory act carried out by officials at berkeley to punish petitioner for reporting various fraudulent acts of berkeley officials petitioners also claim that administrative officials at berkeley along with generous benefactors of berkeley plotted to have petitioner killed for reporting fraudulent activity finally petitioners contend that the issuance of the notice_of_deficiency resulted from a conspiracy between berkeley and the internal_revenue_service to harass petitioner for his whistle-blowing petitioners did not assert a valid position or present any evidence or authority to support their contention that the dollar_figure in retirement distributions from berkeley was not includable in gross_income the arguments they advanced are completely lacking in factual and legal foundation and in essence constitute a protest of the federal tax laws similar types of arguments have been heard on numerous occasions by this court as well as other courts and have been consistently and vehemently rejected the court here sees no need to further respond to such arguments with somber reasoning and copious citations of precedent as to do so might suggest that petitioners' arguments possess some measure of colorable merit see 737_f2d_1417 5th cir in short petitioners are taxpayers subject_to the income_tax laws and to the jurisdiction of this court see 82_tc_403 on this record the court holds that petitioners failed to include in income dollar_figure in retirement_plan distributions from berkeley for respondent is therefore sustained on this issue with respect to the dollar_figure ira distribution from bank of america to petitioner during petitioners reported the distribution on their return but reported the taxable_amount as zero petitioners appear to argue that the distribution should not be included in income for the year at issue because the liquidation of the ira constituted an involuntary_conversion forced upon them by petitioner's dismissal from employment with berkeley in that due to the fact that petitioner was no longer employed after date petitioners were forced to use accumulated savings to pay their living_expenses including the subject ira in general any amount_paid or distributed out of an individual_retirement_account is includable in gross_income of the payee or distributee in accordance with sec_72 sec_408 d sec_1_408-4 income_tax regs 111_tc_250 sec_408 d -- - provides an exception to the general_rule where the entire amount received is rolled over into an ira or individual_retirement_annuity for the benefit of the distributee within days after the receipt of the distribution additionally distributions are not includable in a distributee's income to the extent that any distribution or any portion of any distribution is allocable to the distributee's investment_in_the_contract sec_72 generally however the basis of an ira is zero sec_1 a income_tax regs costanza v commissioner tcmemo_1985_317 petitioners admitted receipt of the dollar_figure distribution from petitioner's bank of america ira in and reported the distribution on their return for that year even though they failed to include the distribution in gross_income petitioners do not qualify for the rollover exception provided in sec_408 d because petitioners did not roll over any portion of the distribution into another ira or other retirement account moreover petitioners failed to show that they made any nondeductible or excess_contributions to the ira that would have increased their basis therein and thus petitioners' tax basis in the ira was zero patrick v commissioner tcmemo_1998_ affd 181_f3d_103 6th cir petitioners do not claim and nothing in the record suggests that petitioners should otherwise be given credit for any investment in the ira within the meaning of sec_72 a and e consequently the entire amount of the ira distribution of dollar_figure is includable in petitioners' income sec_72 a the court rejects petitioners’ involuntary_conversion argument respondent is sustained on this issue the next issue is whether petitioners are entitled to a deduction for a dollar_figure casualty or theft_loss for on their federal_income_tax return for petitioners on form_4684 casualties and thefts reported a casualty or theft_loss of personal_use_property in the amount of dollar_figure after application of the dollar_figure limitation and the percent adjusted_gross_income floor as required by statute the remaining amount of the loss dollar_figure was claimed on schedule a itemized_deductions as a casualty or theft_loss deduction petitioners contend they sustained the casualty or theft_loss as a result of the cancellation of petitioner's employer- sponsored term life_insurance_policy when his employment with berkeley was terminated in petitioners claimed the dollar_figure loss because the face value of the life_insurance_policy at the time of cancellation was estimated at dollar_figure on form_4686 petitioners described the lost property as insurance coverage wrongfully cancelled respondent determined that petitioners were not entitled to a casualty or theft_loss deduction because petitioners had no basis in the relevant term life_insurance_policy sec_165 allows a taxpayer to deduct any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise in particular sec_165 allows a deduction to an individual for loss of property not connected with a trade_or_business or a transaction entered into for profit if such loss arises from fire storm shipwreck or other_casualty or from theft personal casualty or theft losses are deductible only to the extent that the loss exceeds dollar_figure and percent of adjusted_gross_income sec_165 and moreover such losses are deductible as itemized_deductions on schedule a of a taxpayer's return the measure of a casualty or theft_loss is determined by sec_1_165-7 income_tax regs generally the loss shall be the lesser_of the fair_market_value of the property immediately before the casualty reduced by the fair_market_value of the property immediately after the casualty or the amount of the adjusted_basis prescribed in sec_1_1011-1 income_tax regs for determining loss from the sale_or_other_disposition of the property under sec_1_1011-1 income_tax regs adjusted_basis is the cost or other basis_of_property under sec_1012 adjusted to reflect allowable deductions for depreciation under sec_1016 the claimed loss was a term life_insurance_policy that had no cash_surrender_value upon termination as distinguished from a whole_life_insurance policy that generally has a cash_surrender_value over time as premiums are paid petitioners admit that their term_insurance policy had no cash_surrender_value and that any obligations under the policy simply terminated upon the cessation of premium payments petitioners produced no evidence of a basis in the subject term_insurance policy thus petitioners are not entitled to a deduction for a casualty or theft_loss in respondent is sustained on this issue the final issue is whether petitioners are liable for the accuracy-related_penalty under sec_6662 for a substantial_understatement in tax or for negligence or disregard of rules or regulations sec_6662 provides that if it is applicable accordingly the court need not address the question of whether petitioners actually suffered a casualty or theft within the meaning of sec_165 the notice_of_deficiency stated that dollar_figure of the understatement_of_tax required to be shown on the return for constituted a substantial_understatement_of_income_tax within the meaning of sec_6662 or was due to negligence or disregard of rules or regulations within the meaning of sec_6662 b additionally respondent's trial memorandum asserts that the underpayment was both substantial and due to negligence or disregard of rules or regulations neither the notice_of_deficiency nor the trial memorandum explains why the sec_6662 a penalty was applied to an underpayment of only dollar_figure rather than to the entire deficiency of dollar_figure the maximum accuracy-related_penalty imposed on an continued to any portion of an underpayment in taxes there shall be added to the tax an amount equal to percent of the portion of the underpayment to which sec_6662 applies under sec_6664 however no penalty shall be imposed under sec_6662 with respect to any portion of an underpayment if it is shown that there was a reasonable_cause for the portion and that the taxpayer acted in good_faith with respect to the portion of the underpayment under sec_6662 there is a substantial_understatement_of_income_tax if the amount of the understatement exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 a for purposes of sec_6662 understatement is defined as the excess of tax required to be shown on the return over the amount of tax that is shown on the return reduced by any rebates sec_6662 a continued underpayment_of_tax may not exceed percent of the underpayment notwithstanding that the portion is attributable to more than one of the types of misconduct described in sec_6662 a sec_1_6662-2 income_tax regs therefore although the underpayment_of_tax required to be shown on petitioners' income_tax return may have been attributable to both a substantial_understatement_of_income_tax and negligence the maximum accuracy-related_penalty petitioners would be liable for is percent thus the court considers the sec_6662 a penalty only as to the substantial_understatement allegation and not as to the negligence or disregard of rules or regulations allegation -- - sec_6662 d b provides that the amount of the understatement shall be reduced by that portion of the understatement that is attributable to the tax treatment of any item by the taxpayer if there is or was substantial_authority for the treatment or any item with respect to which the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return and there is reasonable basis for such treatment the tax that was required to be shown on petitioners' return based on respondent's adjustments was dollar_figure petitioners’ return showed a tax of zero despite respondent's lack of explanation the court surmises that respondent determined dollar_figure of this difference to have been adequately disclosed and therefore dollar_figure was considered the understatement_of_tax for purposes of sec_6662 a in any event the dollar_figure clearly exceeds the greater of dollar_figure or percent of the tax required to be shown on the return 6e dollar_figure it follows that petitioners' understatement_of_tax was substantial for purposes of sec_6662 d a the determination of whether a taxpayer acted with reasonable_cause and in good_faith depends upon the facts and circumstances of each particular case sec_1_6664-4 income_tax regs relevant factors include the taxpayer's efforts to assess his or her proper tax_liability the knowledge and experience of the taxpayer and reliance on the advice of a -- - professional such as an accountant drummond v commissioner tcmemo_1997_71 the most important factor is the extent of the taxpayer's effort to determine the taxpayer's proper tax_liability sec_1_6664-4 income_tax regs an honest misunderstanding of fact or law that is reasonable in light of the experience knowledge and education of the taxpayer may indicate reasonable_cause and good_faith remy v commissioner tcmemo_1997_72 while the court sympathizes with petitioners and understands the difficulties financial and otherwise they encountered from the termination of petitioner's employment with berkeley such difficulties do not constitute reasonable_cause for an understatement of federal_income_tax within the meaning of sec_6664 the record reflects that petitioners failed to make a sufficient effort to determine their proper tax_liability for they failed to include several retirement account distributions in their income and claimed a dollar_figure casualty or theft_loss for termination of an employer-sponsored term life_insurance_policy despite the fact that there existed no precedent for any such tax treatment even assuming that petitioners acted in good_faith the requirements of the internal_revenue_code have not been met in this case because petitioners failed to make a showing that there was a reasonable_cause for their understatement of income as required by sec_6664 although petitioners may perceive the accuracy-related_penalty under sec_6662 to be unfair the applicable statutory language is clear and unambiguous and this court has no power to expand the explicit terminology of the statute 68_tc_632 the court must apply the law as written accordingly respondent is sustained on the imposition of the accuracy-related_penalty under sec_6662 a reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent


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 b03 plr-104635-11 date date company ------------------------------------------------------------------------------------------------- ----------------------- legend state date ------------- ----------------- dear -------------- this letter responds to a letter dated date submitted on behalf of company requesting a ruling under sec_1362 of the internal_revenue_code facts company was incorporated under the laws of state on date company’s shareholders intended that company be treated as an s_corporation as of date however a form_2553 election by a small_business_corporation was not timely filed company requests a ruling that it will be recognized as an s_corporation effective date law and analysis sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation plr-104635-11 sec_1362 provides that an election under sec_1362 may be made by a small_business_corporation for any taxable_year a at any time during the preceding_taxable_year or b at any time during the taxable_year and on or before the 15th day of the third month of the taxable_year sec_1362 provides that if a a small_business_corporation makes an election under sec_1362 for any taxable_year and b the election is made after the 15th day of the third month of the taxable_year and on or before the 15th day of the third month of the following taxable_year then such election shall be treated as made for the following taxable_year sec_1362 provides that if a an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat the election as timely made for the taxable_year and sec_1362 shall not apply conclusion based solely on the facts submitted and representations made we conclude that company has established reasonable_cause for failing to make a timely election to be an s_corporation provided that company otherwise qualifies as an s_corporation we conclude that company will be recognized as an s_corporation effective date and thereafter if company files a completed form_2553 effective date with the appropriate service_center within days following the date of this letter a copy of this letter should be attached to form_2553 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 specifically we express or imply no opinion as to whether company is otherwise eligible to be an s_corporation for federal tax purposes 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 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 plr-104635-11 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely s james a quinn james a quinn senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy of this letter for sec_6110 purposes cc


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date number release date conex-135969-16 uil the honorable marco rubio south orange avenue suite orlando fl --------------- attention dear senator rubio i am responding to your inquiry dated date on behalf of your constituent -------------------------------------- she received from payments are subject_to self-employment_tax she asked about the taxation of post-retirement payments and was particularly concerned with whether these ------------------- under current law the post-retirement payments she receives from subject_to self-employment_tax because the payments resulted from her services on behalf of the company -------------- are the analysis of current applicable law begins with sec_1402 of the internal_revenue_code the code which states that payments are subject_to self-employment_tax if they are net_earnings_from_self-employment derived by an individual during any taxable_year the net_earnings this definition refers to are the gross_income derived by an individual from any trade_or_business carried on by such individual interpreting this provision of the code a number of courts-including the united_states tax_court in a case titled 76_tc_441 -have concluded that self-employment_tax applies when there is a nexus between the income received and a trade_or_business that is or was actually carried on the tax_court in newberry indicated that the income must arise from some actual whether present past or future income-producing activity of the taxpayer before such income becomes subject_to self-employment taxes conex-135969-16 ------------- a federal court_of_appeals considered the application of this general principle to payments such as those received just this past may the united_states court_of_appeals for the eleventh circuit in a case titled 827_f3d_968 11th cir addressed whether mary kay retirement payments are subject_to self-employment_tax the taxpayer in the case was a long-serving mary kay national sales director who retired from mary kay and began receiving post-retirement payments the court concluded these payments were subject_to self-employment_tax because they resulted from her association with mary kay ------------- correctly observed sec_1402 provides that certain payments finally as are not subject_to self-employment_tax this exclusion however is a narrow one applying only to certain payments made to former insurance_company salesmen and even then only if those payments meet a series of specific requirements sec_1402 therefore does encompass the payments she receives from broadening of the scope of this provision would require amending the code in fact the request from that you forwarded to us included an attachment that indicated we are asking for legislation to add an exemption similar to that provided in sec_1402 to sec_1402 to exempt retired ---------------------- concur that such a change would require legislation from self-employment_tax on their post-retirement payments we --------------------------- -------------- ------------- any i am sorry my response is not favorable but i hope this information is helpful if you would like to discuss this further please contact me at -------------- ---------------------- ---------------------- of my staff at ----------------- or or ----------------- sincerely victoria a judson associate chief_counsel tax exempt government entities


department of the treasury internal_revenue_service washington d c oct number release date cc tege eoeg et1 - cor-137337-01 uilc memorandum for director internal_revenue_service center kansas city mo attn entity control from subject office of division counsel associate chief_counsel tax exempt and government entities cc tege eoeg et1 - cor-137337-01 railroad retirement act tax status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that the following business ceased to be an employer under the railroad retirement act and the railroad unemployment insurance act effective date we have reviewed the opinion of the rrb and based upon the information submitted to the rrb we also conclude that ceased to be an employer under the railroad_retirement_tax_act effective date please take the appropriate action regarding this business will e mcleod cc


internal_revenue_service number release date index number ----------------------- ---------------------------------- ---------------------------------------- in re ----------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------- id no ------------------ telephone number ---------------------- refer reply to cc psi b04 plr-135599-18 date date legend date settlor spouse trust child child child child child child trust trust trust trust trust trust state grandfather grandmother x y year --------------------------- ------------------------------------------------------ ----------------------------------------------------- ----------------------------------------------------------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------------- -------------------------------------------------------------------- ------------------------ ----------------------------------------------------------------- ------------------------ ------------------------------------------------------------------- ------------------------ -------------------------------------------------------------------- ------------------------ ----------------------------------------------------------------- ------------------------ ------------------------------------------------------------------- ------------------------ ------------- -------------------------------------------------------- ------------------------------------------------------ ---------- -------- ------- plr-135599-18 year year year attorney date date court statute statute ------- ------- ------- ------------------------- ----------------------- ------------------- ------------------------------------------------------------ ----------------------------------------- ----------------------------------------- dear ------------------ this letter responds to the letter dated date and subsequent correspondence submitted by your authorized representative requesting rulings on the gift estate and generation-skipping_transfer gst tax consequences of the proposed reformation of an irrevocable_trust facts the facts submitted and the representations made are as follows on date a date after date settlor executed an irrevocable_trust trust with spouse as trustee for the benefit of their six children child child child child child and child and their descendants pursuant to the terms of trust six separate trusts trust trust trust trust trust and trust were established one to benefit each child collectively the children’s trusts individually a child’s trust the children’s trusts are governed by the laws of state under paragraphs dollar_figure and of trust each child is the primary beneficiary of his or her child’s trust property transferred to trustee shall be allocated among the children’s trusts equally between all of such trusts paragraph provides that during each primary beneficiary’s life the trustee shall distribute all of the income of such beneficiary’s child trust to the primary beneficiary and may distribute such portion or all of the principal of such child’s trust to or for the support maintenance medical_expenses health and education of the primary beneficiary as the trustee in her sole and absolute judgment and discretion determines under paragraph at the time of death of the primary beneficiary such child’s trust shall continue in separate trust shares per stirpes for his or her lineal_descendants and upon the death of each of such respective lineal_descendants then plr-135599-18 for such respective deceased lineal descendant’s lineal_descendants in separate trust shares per stirpes for their respective lives and so forth until such trusts terminate under paragraph paragraph dollar_figure provides that any trust created under trust if not otherwise fully terminated shall terminate fully and all principal and undistributed_income shall be distributed to the respective income_beneficiary at the end of twenty-one years after the death of the last to die of settlor and all primary beneficiaries of the trusts created under trust paragraph dollar_figure provides generally that the trustee may receive property from the settlor or any other person or persons by lifetime_gift under a will or trust or from any other source with respect to additions during any calendar_year from any donor each beneficiary may demand for a period of thirty days immediately after each such initial contribution and any additions during any calendar_year from each donor up to the maximum amount allowable with respect to such donor as an annual exclusion for gift_tax purposes within sec_2503 and sec_2513 payable in cash or in_kind immediately upon receipt by the trustee of the demand in writing such payment shall be made from the gift of that donor for that year or from property purchased with such gift if any such beneficiary is a minor at the time of such gift of any donor for that year or if any such beneficiary fails in legal capacity for any reason at such time then such beneficiary’s guardian may make such demand on behalf of said beneficiary and the property received pursuant to such demand shall be held by the guardian for the benefit of said beneficiary the trustee shall give written notice of the receipt of any property by the trustee to be held in trust hereunder to all beneficiaries of the trust or to the guardian of any minor beneficiary or any other beneficiary who fails in legal capacity within thirty days of the receipt of such property settlor transferred dollar_figurex to each child’s trust in year year year and year settlor timely filed form sec_709 united_states gift and generation-skipping_transfer_tax returns for year year year and year on each form_709 settlor and spouse signified consent to treat all gifts made by settlor in year year year and year as having been made one-half by each spouse under sec_2513 on each form_709 for year year and year the transfers of dollar_figurex to each child’s trust were incorrectly reported on form sec_709 schedule a part 1-gifts subject only to gift_tax instead of schedule a part 3-indirect skips no affirmative allocation of gst_exemption was made to the transfers to each child’s trust furthermore the automatic allocation of the gst_exemption was not reported on schedule c computation of generation-skipping_transfer_tax grandfather transferred dollar_figurey to each child’s trust in year and year grandfather and grandmother timely filed form sec_709 for year and year on each form_709 grandfather and grandmother signified consent to treat all gifts made by grandfather in year and year as having been made one-half by each spouse under sec_2513 on plr-135599-18 each form_709 for year and year the transfers of dollar_figurey to each child’s trust were incorrectly reported as an outright gift to each of child through child on schedule a part 1-gifts subject only to gift_tax instead of a gift to each child’s trust on schedule a part 2-direct skips no affirmative allocation of gst_exemption was made to the transfers to each child’s trust furthermore accountant left blank schedule c of form sec_709 for both grandfather and grandmother for year and year attorney drafted trust settlor created and funded trust relying on the advice of attorney based on affidavits of settlor and attorney settlor created trust to provide for his descendants of all generations and to reduce the overall transfer_taxes payable on trust assets by ensuring that the assets held in trust would not be includible in a primary beneficiary’s gross_estate upon his or her death and to minimize the amount subject_to gst tax by utilizing settlor’s and spouse’s gst_exemption settlor also intended to ensure that the primary beneficiary would avoid incurring federal gift and estate_tax in connection with a transfer to trust the withdrawal provision in paragraph dollar_figure contains a drafting error each primary beneficiary’s withdrawal right over the assets contributed to a child’s trust in any given year is not limited to the greater of dollar_figure or percent of the value of the trust assets accordingly any lapse of a primary beneficiary’s withdrawal right would be treated as a taxable transfer by that primary beneficiary under sec_2514 to the extent that the property that could have been withdrawn exceeds in value the greater of dollar_figure or percent of the aggregate value of the assets subject_to withdrawal moreover each primary beneficiary would become a transferor to his or her child’s trust for gst tax purposes with respect to the portion of the child’s trust constituting a gift by the child thereby preventing i an effective deemed_allocation of gst_exemption under sec_2632 by settlor and spouse with respect to settlor’s transfers to that child’s trust for each of year year year and year and ii an effective deemed_allocation of gst_exemption under sec_2632 by grandfather and grandmother with respect to grandfather’s transfer to that child’s trust for each of year and year in addition the portion of each child’s trust relating to the lapsed withdrawal right in excess of dollar_figure or percent of the value of the trust assets would be included in the primary beneficiary’s gross_estate for estate_tax purposes the error was discovered when settlor engaged new estate_planning counsel who reviewed settlor’s current estate plan including trust settlor was informed of the drafting error that defeated the intent of the settlor in establishing trust on date trustee filed a petition in state court requesting judicial reformation of the erroneous provision of paragraph effective as of the date trust was originally created on date state court issued an order reforming trust to eliminate the scrivener’s error retroactive to the date of trust’s creation the order is contingent upon the issuance of a favorable private_letter_ruling by the internal_revenue_service plr-135599-18 as reformed trust limits the annual lapse of each primary beneficiary’s withdrawal right to the greater of dollar_figure or percent of the value of the trust assets you have requested the following rulings as a result of the reformation no child will be deemed to have released a general_power_of_appointment within the meaning of sec_2514 and sec_2041 by reason of the lapse of any right of withdrawal held by the child with respect to any transfers to his or her child’s trust accordingly no child will be deemed to have made a taxable gift under sec_2514 to his or her child’s trust and no part of his or her child’s trust will be included in his or her gross_estate under sec_2041 as a result of the reformation the only transferors to each child’s trust for gst tax purposes are settlor spouse grandfather and grandmother as a result of the reformation each of settlor’s and spouse’s gst_exemption is automatically allocated to one-half of the transfers by settlor to each child’s trust and each of grandfather’s and grandmother’s gst_exemption is automatically allocated to one-half of the transfers by grandfather to each child’s trust law and analysis ruling sec_2001 provides that a tax is imposed on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2033 provides generally that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death sec_2041 provides that the value of the gross_estate includes the value of all property to the extent of any property with respect to which the decedent has at the time of his death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power_of_appointment by a disposition which is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent’s gross_estate under sec_2035 to inclusive for purposes of sec_2041 the power_of_appointment shall be considered to exist on the date of the decedent’s death even though the exercise of the power is subject_to a precedent giving of notice or even though the exercise of the power takes effect only on the expiration of a stated period after its exercise whether or not on or before the date of the decedent’s death notice has been given or the power has been exercised plr-135599-18 sec_2041 provides that for purposes of sec_2041 the term general_power_of_appointment means a power which is exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_2041 provides that the lapse of a power_of_appointment created after date during the life of the individual possessing the power shall be considered a release of such power the preceding sentence shall apply with respect to the lapse of powers during any calendar_year only to the extent that the property which could have been appointed by exercise of such lapsed powers exceeded in value at the time of such lapse the greater of the following amounts a dollar_figure or b percent of the aggregate value at the time of such lapse of the assets out of which or the proceeds of which the exercise of the lapsed powers could have been satisfied sec_2501 provides generally that a tax is imposed for each calendar_year on the transfer of property by gift by any individual resident or nonresident sec_2511 provides that the gift_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_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power sec_2514 provides that for purposes of sec_2514 the term general_power_of_appointment means a power which is exercisable in favor of the individual possessing the power his estate his creditors or the creditors of his estate sec_2514 provides that the lapse of a power_of_appointment created after date during the life of the individual possessing the power shall be considered a release of such power the rule_of the preceding sentence shall apply with respect to the lapse of powers during any calendar_year only to the extent that the property which could have been appointed by exercise of such lapsed powers exceeds in value the greater of the following amounts dollar_figure or percent of the aggregate value of the assets out of which or the proceeds of which the exercise of the lapsed powers could be satisfied in 387_us_456 the court considered whether a state trial court’s characterization of property rights conclusively binds a federal court or agency in a federal estate_tax controversy the court concluded that the decision of a state trial_court as to an underlying issue of state law should not be controlling when applied to a federal statute rather the highest court of the state is the best authority on the underlying substantive rule_of state law to be applied in the federal matter if there is no decision by that court then the federal authority must apply what it plr-135599-18 finds to be state law after giving proper regard to the state trial court’s determination and to relevant rulings of other courts of the state in this respect the federal_agency may be said in effect to be sitting as a state court state statute provides in part that a proceeding to approve or disapprove a proposed modification or termination of a_trust may be commenced by a trustee or a beneficiary state statute provides in part that the court may reform the terms of a_trust even if unambiguous to conform the terms to the settlor’s intention if it is proved by clear_and_convincing evidence that the settlor’s intent or the terms of the trust were affected by a mistake of fact or law in this case an examination of the relevant trust instruments affidavits and representations of the parties indicate that the original terms of paragraph resulting from a scrivener’s error were contrary to the intent of settlor the purpose of the reformation is to correct the scrivener’s error not to alter or modify the trust instrument accordingly based on the facts presented and the representations made we conclude that as a result of the reformation of trust each of settlor’s children child through child does not possess general powers of appointment over the assets of his or her respective child’s trust except to the extent of each child’s withdrawal right under the reformed trust instrument as a result of the reformation no child will be deemed to have released a general_power_of_appointment within the meaning of sec_2514 and sec_2041 by reason of the lapse of any right of withdrawal held by the child with respect to any transfers to his or her child’s trust accordingly no child will be deemed to have made a taxable gift under sec_2514 to his or her child’s trust and no part of his or her child’s trust will be included in his or her gross_estate under sec_2041 ruling sec_2 and sec_2513 provides generally that a gift made by one spouse to any person other than the donor’s spouse is considered for purposes of the gift_tax as made one-half by the donor and one-half by the donor’s spouse but only if at the time of the gift each spouse is a citizen or resident_of_the_united_states sec_25_2513-1 of the gift_tax regulations provides that the consent is effective only if both spouses signify their consent to treat all gifts made to third parties during that calendar_period by both spouses while married to each other as having been made one-half by each spouse such consent if signified with respect to any calendar_period is effective with respect to all gifts made to third parties during such calendar_period except in part if one spouse transferred property in part to his or her spouse and in part to third parties the consent is effective with respect to the interest transferred to third parties only insofar as such interest is ascertainable at the time of the gift and severable from the interest transferred to his spouse plr-135599-18 sec_25_2513-1 provides that the consent applies alike to gifts made by one spouse alone and to gifts made partly by each spouse provided such gifts were to third parties and do not fall within any of the exceptions set forth in sec_25_2513-1 through b the consent may not be applied only to a portion of the property interest constituting such gifts if the consent is effectively signified on either the husband’s return or the wife’s return all gifts made by the spouses to third parties except as described in subparagraphs through of this paragraph during the calendar_period will be treated as having been made one-half by each spouse sec_2601 imposes a tax on every generation-skipping_transfer which is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate sec_2641 provides that the term applicable_rate means with respect to any gst the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under sec_2642 the inclusion_ratio with respect to any property transferred in a gst is the excess if any of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of the gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip reduced by the sum of any federal estate_tax or state death_tax actually recovered from the trust attributable to such property and any charitable deduction allowed under sec_2055 or sec_2522 with respect to such property sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption amount which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2652 provides in part that the term transferor means in the case of any property subject_to the tax imposed by chapter the donor sec_26_2652-1 of the generation-skipping_transfer_tax regulations provides that 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 under sec_26_2652-1 example t transfers dollar_figure to a new trust providing that the trust income is to be paid to t’s child c for c’s life and on the death of c the trust principal is to be paid to t’s grandchild gc the trustee has discretion to distribute plr-135599-18 principal for gc’s benefit during c’s lifetime c has a right to withdraw dollar_figure from the trust for a 60-day period following the transfer thereafter the power lapses c does not exercise the withdrawal right the transfer by t is subject_to federal gift_tax because a gift_tax is imposed under sec_2501 without regard to exemptions exclusions deductions and credits and thus t is treated as having transferred the entire dollar_figure to the trust on the lapse of the withdrawal right c becomes a transferor to the extent c is treated as having made a completed_transfer for purposes of chapter therefore except to the extent that the amount with respect to which the power_of_withdrawal lapses exceeds the greater of dollar_figure or percent of the value of the trust property t remains the transferor of the trust property for purposes of chapter sec_2652 provides that if under sec_2513 one-half of a gift is treated as made by an individual and one-half of such gift is treated as made by the spouse of such individual such gift shall be so treated for purposes of this chapter sec_26_2652-1 provides that in the case of a transfer with respect to which the donor’s spouse makes an election under sec_2513 to treat the gift as made one-half by the spouse the electing spouse is treated as the transferor of one-half of the entire value of the property transferred by the donor regardless of the interest the electing spouse is actually deemed to have transferred under sec_2513 the donor is treated as the transferor of one-half of the value of the entire property sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed under sec_2632 if an individual makes a direct_skip transfer during his or her lifetime any unused portion of such individual’s gst_exemption is automatically allocated to the property transferred to the extent necessary to make the inclusion_ratio zero under sec_2612 the term direct_skip means a transfer subject_to tax imposed by chapter or of an interest in property to a skip_person sec_26_2632-1 provides in part that an automatic allocation of gst_exemption is effective as of the date of the transfer to which it relates a form_709 need not be filed to report an automatic allocation sec_2632 provides that if any individual makes an indirect_skip during such individual’s lifetime any unused portion of such individual’s gst_exemption shall be allocated to the property transferred to the extent necessary to make the inclusion_ratio for such property zero sec_2632 provides that for purposes of sec_2632 the term indirect_skip means any transfer of property other than a direct_skip subject_to the tax imposed by plr-135599-18 chapter made to a gst_trust sec_2632 provides in part that the term gst_trust means a_trust that could have a generation-skipping_transfer with respect to the transferor unless the exceptions enumerated in i through vi apply sec_2642 provides in part that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer or is deemed to be made under sec_2632 or c the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 in this case each child’s trust is a gst_trust for purposes of sec_2632 settlor and spouse timely filed form sec_709 for year year year and year signifying their consent to treat the gifts made in each of year year year and year to each child’s trust as having been made one-half by each spouse under sec_2513 accordingly under sec_2652 settlor and spouse will be treated as the transferor of one-half of the value of the entire property transferred to each child’s trust in year year year and year based on the facts presented and the representations made we rule that the automatic allocation rules under sec_2632 apply to allocate settlor’s and spouse’s gst_exemption to one-half of the transfers of property made to each child’s trust in each of year year year and year grandfather and grandmother timely filed form sec_709 for year and year signifying their consent to treat the gifts made in each of year and year to each child’s trust as having been made one-half by each spouse under sec_2513 accordingly under sec_2652 grandfather and grandmother will be treated as the transferor of one-half of the value of the entire property transferred to each child’s trust in year and year based on the facts presented and the representations made we rule that the automatic allocation rules under sec_2632 apply to allocate grandfather’s and grandmother’s gst_exemption to one-half of the transfers of property made to each child’s trust in each of year and year in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives 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 plr-135599-18 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 sincerely lorraine e gardner lorraine e gardner senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter cc