number release date id office uilc cca_2010100715033637 ---------- from -------------------- sent thursday october pm to ------------------- cc ------------ subject re tefra question the designation of a tmp remains in effect until a terminating event occurs under sec_301_6231_a_7_-1 it does not appear that a terminating event has occurred under the regulations the courts however have held that in some circumstances where the tmp has an irreconcilable conflict of interest that the service is aware of the tmp may not bind the partners see eg trans-pac fed cir and river city ranches 9th cir all of the above is likely irrelevant in any case since a generic tmp fpaa that does not name the tmp specifically is valid sec_301_6223_a_-1 chomp v commissioner seneca v commissioner ------ --------------------------------------------------------------------------------------------------------------------------------------------


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 pa plr-103304-15 date date internal_revenue_service number release date 6050p -------------------------- ------------------------------ --------------------------- ----------------------------------- legend entity -------------------------- state x -------------- asset ------------------- collection remedy ---------------------------------------------------------------------------------------- ----------- state law x ------------------------------------------------------------------------------------------------- ------------------- notices ----------------------------------------------------------------- month ---------- year ------- dear ------------------- this letter responds to the letter dated date submitted on behalf of entity requesting a ruling that entity is not required to file forms 1099-c to report the write-off of certain balances under a settlement agreement and court order approving the settlement agreement because the discharge was not the result of an identifiable plr-103304-15 event listed in sec_1_6050p-1 but rather was required by operation of state law for the reasons set forth below we conclude that entity is required to report the discharge_of_indebtedness because of the occurrence of an identifiable_event listed in sec_1_6050p-1 facts entity is a financial_institution chartered in state x engaged in among other things purchasing conditional sales contracts entered into in state x by buyers and sellers of assets that are subject_to state law x some of these contracts went into default and entity pursued collection remedy plaintiff filed a class action lawsuit against entity alleging entity’s notices violated state law x and seeking statutory damages and an injunction prohibiting entity from collecting the outstanding deficiency balances from the class of debtors who received similar notices entity and plaintiffs signed an agreement in month of year pursuant to a settlement agreement entity will waive and extinguish the balances owed by the class members entity will also acknowledge that the notices sent to class members did not meet statutory standards and admit that state x law bars entity from collecting deficiency balances law analysis sec_6050p of the internal_revenue_code requires that an applicable_entity report any discharge in whole or in part of indebtedness of any person in excess of dollar_figure on a form 1099-c the form 1099-c is to include the name address and taxpayer_identification_number of the person whose indebtedness is discharged the date of the discharge and the amount of indebtedness discharged sec_1_6050p-1 of the treasury regulations provides that for information reporting purposes a discharge_of_indebtedness is deemed to have occurred upon the occurrence of an identifiable_event whether or not an actual discharge_of_indebtedness has occurred on or before the date on which the identifiable_event has occurred sec_1_6050p-1 provides a list of identifiable events there is a reporting requirement upon the occurrence of one of these identifiable events even if the identifiable_event did not cause the discharge of the identifiable events two are particularly relevant to the requested ruling agreement by the parties to discharge the debt for less than full consideration or a decision by the creditor to discontinue collection activity and discharge the debt_discharge by agreement of the parties sec_1_6050p-1 provides that an identifiable_event occurs when the applicable_entity and debtor agree to discharge the indebtedness for less than full consideration here pursuant to the settlement agreement between plr-103304-15 entity and the class members entity will discharge the class members’ remaining indebtedness for less than full consideration entity is required to report the discharges of the class members’ indebtedness because there is an agreement between the creditor and the debtor to discharge indebtedness for less than full consideration discharge by decision of the creditor sec_1_6050p-1 provides that a discharge_of_indebtedness occurs upon a decision by the creditor or the application of a defined policy of the creditor to discontinue collection activity and discharge debt because the identifiable_event listed in sec_1_6050p-1 occurred reporting is required without a need for further analysis conclusion based solely on the information provided and representations made we conclude that entity is required to file forms 1099-c with respect to waiving and extinguishing the class members’ deficiency balances pursuant to the settlement agreement and preliminary order because the identifiable_event described in sec_1_6050p-1 occurred except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives plr-103304-15 the ruling contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely blaise dusenberry senior technician reviewer procedure administration enclosures copy of letter for sec_6110 purposes notice of intention to disclose notice


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 b02 plr-109312-10 date date x a b c d trust ----------------------------------------------------------------------------------------------------- ----------------------- ----------------------------------------------------------------------------------------------------- ------------------------- -------------------- ------------------------- --------------------- ----------------------------------------------------------------------------------------------------- ----------------------- state -------------- date date date date n ---------------------- ---------------------- ------------------ --------------------- --------- dear -------------------- plr-109312-10 this letter responds to a letter dated date and subsequent correspondence submitted on behalf of a and x by their authorized representative requesting rulings under sec_678 and sec_1361 of the internal_revenue_code the information submitted states that x was incorporated in state on date a is the sole shareholder of x x filed an election to be treated as an s_corporation under sec_1362 for its taxable_year beginning date on date b the donor c and d created trust and named a and a’s children as trust’s beneficiaries under the trust agreement the independent_trustee has absolute discretion to distribute part or all of the net_income of trust as the trustee deems appropriate to any one or more then living of the beneficiaries in amounts and proportions as the trustee determines under the trust agreement trust is an irrevocable_trust with b having expressly renounced and relinquished all rights interests and powers in trust property under the trust agreement whenever a gift is made or is deemed to have been made to trust during b’s lifetime a has the power to withdraw out of the assets of trust an amount not to exceed the amount_of_such_gift provided however that the amount that can be withdrawn by a in any one calendar_year is limited to the maximum amount as to which the power_of_withdrawal can lapse without the lapse constituting the release of a general_power_of_appointment under sec_2041 and sec_2514 it is anticipated that all gifts made to trust during b’s lifetime will be subject_to this withdrawal power on date b made a gift of cash in the amount of dollar_figuren to trust on date b made an additional gift of cash in the amount of dollar_figuren to trust dollar_figuren is not greater than the maximum amount as to which the power_of_withdrawal can lapse without the lapse constituting the release of a general_power_of_appointment under sec_2041 and sec_2514 a did not exercise the withdrawal power with respect to either the date or date gift no additional gifts have been made to trust trust contemplates purchasing stock in x based on the above facts and representations a and x request rulings that a will be treated as the owner of trust under sec_678 and that trust is a permitted s_corporation shareholder as described in sec_1361 sec_678 provides that a person other than the grantor shall be treated as the owner of any portion of a_trust with respect to which the person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself or the person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would cause a grantor to be treated as the owner of such portion of the trust within the principles of sec_671 to inclusive sec_677 provides in part that the grantor shall be treated as the owner of any portion of a_trust whether or not the grantor is treated as such owner under sec_674 plr-109312-10 whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a non-adverse party or both may be distributed to the grantor or the grantor's spouse or held or accumulated for future distribution to the grantor or the grantor's spouse sec_678 provides that sec_678 shall not apply with respect to a power over income as originally granted or thereafter modified if the grantor of the trust is otherwise treated as the owner under the provisions of subpart e other than sec_678 in revrul_67_241 1967_2_cb_225 the beneficiary of a_trust held a noncumulative power exercisable solely by the beneficiary to withdraw certain amounts of corpus annually from a_trust revrul_67_241 holds that whether or not the demand power is exercised the beneficiary is treated under sec_678 as the owner of the portion of the trust subject_to the demand power while the power is held 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 that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b 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 c have a nonresident_alien as a shareholder and d have more than class of stock sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter i as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder in an s_corporation the deemed owner of the trust shall be treated as the shareholder under sec_1361 based solely on the information submitted and the representations made we conclude that a will be treated as the owner of trust under sec_678 and that trust is a permitted s_corporation shareholder as described in sec_1361 assuming no gift is made to trust in excess of the amount subject_to a’s withdrawal power except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any of the provisions of the code or regulations specifically no opinion is expressed on whether x is otherwise eligible to be treated as an s_corporation or on the proper treatment of a_trust purchase of x stock plr-109312-10 this ruling is directed only to the taxpayers that requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to a’s and x’s authorized representative sincerely bradford r poston acting chief branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------------------------------------------ ------------ ---------------------- --------------------------- ----------------------------- in re --------------------------------------------------- --------------------- department of the treasury washington dc person to contact --------------- id no ------------- telephone number --------------------- refer reply to cc psi - plr-122776-04 date july -------------------------------------------------------------------------------- legend trust -------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------- trust -------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------- settlor son date date trustees court ----------------------------------------------------------------------------------------------------------------- --------------------------------------------------------- state state statute dear --------------------------------------------- ----------------------------------------------- ------------------------------------------------------- -------------------------- ---------------------- ----------------------------------------------------------- -------------------------------------------------------------------------------- ------------------ ------------------------------------ this is in response to the date letter and subsequent correspondence concerning the generation-skipping_transfer gst tax and income_tax consequences of the proposed merger of two trusts the facts and representations submitted are summarized as follows settlor executed an irrevocable_trust agreement trust dated date which is prior to plr-122776-04 date trust was created for the primary benefit of settlor’s son son the trustees of trust are trustees article one of trust provides in part that the trustees shall hold manage invest and reinvest the trust property shall collect the income therefrom and shall pay the net_income in convenient installments in such proportions and with such exclusions as the trustees shall deem advisable among the following class of persons son a child of settlor the spouse of said child the issue of said child the respective spouses of the issue of said child the brothers and sisters of said child their respective spouses their issue and the respective spouses of such issue or the trustees shall have the right to and are authorized to accumulate any or all of such net_income as they shall deem advisable and add the same to the principal of the trust property further in the event that any payment of income authorized to be made to any individual beneficiary shall be insufficient in the opinion of the trustees to defray the expenses of any illness accident or other emergency or to provide for the proper maintenance support and education of such beneficiary the trustees are authorized to use from time to time so much of the principal of the trust property as the trustees may deem advisable therefor article two of trust provides in part that this trust shall continue in effect unless sooner terminated as herinafter provided until twenty-one years after the death of the last to die of the four children of the settlor living at the date this agreement or until the earlier failure of all living takers in the class of persons above described in article one hereof the trustees however are authorized to terminate this trust in whole or in part before the time aforesaid whenever they deem it to be in the best interest of the beneficiaries of this trust or for any other reasons advisable to do so upon any termination of trust the trustees shall transfer deliver and pay over the then trust property to the said child of the settlor if such child is then living and if not to the then living issue of the said child per stirpes failing such then living issue the then trust property shall be divided equally among and added to the other three trusts of even date with this agreement established by the settlor for his other children and their families for which trusts there are takers then living and failing all such then living takers the then trust property shall be transferred delivered and paid over to such charitable_organization or organizations as the trustees shall select on date a date prior to date settlor executed a second irrevocable_trust agreement trust for the primary benefit of settlor’s son son the trustees of trust are trustees the terms of trust are virtually identical to the terms of trust trust and trust have identical dispositive provisions and identical beneficiaries the only significant variation between trust and trust is contained in the fiduciary powers provision of trust article nine specifically trust permits the trustees of trust to plr-122776-04 delegate to each other their rights power and duties thereunder any of the trustees shall have full power and authority to delegate from time to time to any one or more of the other trustees by an instrument in writing any or all of such trustee’s rights power and duties hereunder since the establishment of trust and trust the trusts have been separately administered under state law it is represented that this separate administration has proved to be costly and cumbersome resulting in frequent duplication in connection with investment oversight court filing_requirements annual accounting statements and tax reporting matters state statute provides that the court for cause shown may authorize the trustees propose to file a petition to state court to seek the court’s permission to combination of separate trusts with substantially_similar provisions upon such terms and conditions and with such notice as the court shall direct notwithstanding that the trusts may have been created by separate instruments and by different persons combine the assets of trust with trust and to seek state court authority to administer the combined assets under the provisions of trust the petition will further provide that the merger of trust and trust is contingent upon the issuance of a ruling by the internal_revenue_service that the merger will not result in a forfeiture of trust 2’s exempt status from gst tax trust and trust were irrevocable on date it is represented you have requested the following rulings the proposed merger of trust into trust with the combined corpus thereof that no actual or constructive additions have been made to trust and trust after that date being administered in accordance with trust will not give rise to a constructive_addition to trust nor otherwise cause trust to lose its grandfathered exempt status under gst tax provisions of sec_2601 to recognize gain_or_loss for purposes of sec_1001 and the basis of the assets of trust and trust as well as the holding_period of those assets will remain the same after the proposed merger issue sec_2601 imposes a tax on each generation-skipping_transfer gst which includes under sec_2611 a taxable_distribution a taxable_termination and a direct_skip the proposed merger of trust into trust will not cause either of trust sec_1 or plr-122776-04 under section a of the tax_reform_act_of_1986 act the gst tax is generally applicable to generation-skipping transfers made after date however under section b a of the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer from a_trust if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date see sec_26_2601-1 regarding constructive additions sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax will not cause the trust to lose its exempt status sec_26_2601-1 provides that a modification will not cause an exempt trust to be subject_to the gst tax if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a generation-skipping_transfer or the creation of a new generation-skipping_transfer a modification that is administrative in nature that only indirectly increases the amount transferred will not be considered to shift a beneficial_interest in the trust sec_26_2601-1 example considers a situation where in grantor established an irrevocable_trust for grantor's child and the child's issue in grantor's spouse also established a separate irrevocable_trust for the benefit of the same child and issue the terms of the spouse's trust and grantor's trust are identical in the appropriate local court approved the merger of the two trusts into one trust to save administrative costs and enhance the management of the investments the merger of the two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the merger in addition the merger does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust therefore the trust that resulted from the merger will not be subject_to the provisions of chapter in the present case trust and trust were irrevocable on date it is represented that no additions actual or constructive were made to trust or trust after that date the merger of trust into trust is substantially_similar to the situation described in example of sec_26_2601-1 the merger of trust into trust will not result in a shift of any beneficial_interest in the trust assets to any beneficiary who occupies a generation lower than the persons holding the beneficial plr-122776-04 interests prior to the merger trust will terminate on the same date that trust was required to terminate thus the merger will not extend the time for vesting of any beneficial_interest in the surviving trust beyond the period provided for in trust and trust accordingly we conclude that based on the facts submitted and the sec_1001 provides that the gain from the sale_or_other_disposition of sec_61 provides that gross_income includes gains derived from dealings sec_1_1001-1 of the income_tax regulations provides as a general_rule representations made the proposed merger of trust into trust with the combined corpus thereof being administered in accordance with trust will not give rise to a constructive_addition to trust nor otherwise cause trust to lose its grandfathered exempt status under gst tax provisions of sec_2601 issue in property property is the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss is the excess of the adjusted_basis provided in sec_1011 over the amount_realized sec_1001 provides that except as otherwise provided the entire amount of the gain_or_loss on the sale_or_exchange of property is recognized that except as otherwise provided in subtitle a the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially in either kind or in extent is treated as income or as loss sustained exchange gives up a property interest in return for a new or additional property interest such an exchange of property is a disposition under sec_1001 see sec_1_1001-1 property is not a sale_or_other_disposition of property where the co-owners of the joint property sever their joint_interests in order to extinguish their survivorship interests the properties exchanged are materially different 499_us_554 a material difference exists when the exchanged properties embody legal entitlements different in_kind or extent or if they confer different rights and powers id pincite identical dispositive provisions and identical beneficiaries the proposed merger of an exchange of property results in the realization of gain under sec_1001 if for purposes of sec_1001 in an exchange of property each party to the trust and trust have substantially_similar provisions the trusts have revrul_56_437 1956_2_cb_507 holds that a partition of jointly owned based on the information submitted and the representations made in the ruling sec_1011 provides that the adjusted_basis for determining gain_or_loss from a plr-122776-04 trust into trust will not result in any change in the beneficial interests of any beneficiary request the proposed merger of trust into trust will not result in a material difference in the beneficial interests of any beneficiary the beneficiaries will hold the same interests before and after the merger accordingly the proposed merger will not cause any of the trusts to recognize any gain_or_loss from the sale_or_other_disposition of property under sec_61 or sec_1001 sale_or_other_disposition of property whenever acquired is the basis as determined under sec_1012 or other applicable sections sec_1012 provides that the basis_of_property is the cost of the property except as otherwise provided in subchapter_o in the present case the basis of the assets in trust and trust are determined under sec_1012 and other sections in subchapter_o as the proposed merger of the two separate trusts will not constitute a sale_or_other_disposition of property for purposes of sec_1001 no gain_or_loss will be realized under sec_1_1001-1 accordingly the basis of the assets in the surviving trust after the proposed merger will remain the same as the basis of those assets in the current trusts before the merger held property however acquired there shall be included the period for which such property was held by any other person if under chapter of the code such property has for the purpose of determining gain_or_loss from a sale_or_exchange the same basis in whole or in part in the taxpayer’s hands as it would have in the hands of such other person proposed merger will remain the same as the basis of those assets in the current trusts before the merger accordingly the holding periods of the assets in the surviving trust after the proposed merger will include the holding periods of the assets in the current trusts before the merger sec_1223 provides that in determining the period for which a taxpayer has as mentioned above the basis of the assets in the surviving trust after the except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayers requesting it sec_6110 provides that it may not be used or cited as precedent the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination plr-122776-04 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 lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter cc


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-156462-06 date date x trust legend ----------------------------------------------------------------------------------------------- ----------------------- decedent beneficiary ----------------------------------------------------------------------------------------------- ------------------------- -------------------------- ----------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------- ------------------------ ---------- -------------------------- ------------------ ---------------------- --------------------------- ---------------------- state d1 d2 d3 d4 d5 dear ---------------- plr-156462-06 we received the letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code this letter responds to that request facts x was incorporated under the laws of state on d1 x elected to be treated as an s_corporation under sec_1362 effective d1 decedent x’s majority shareholder died on d2 on d3 pursuant to decedent’s last will and testament all of decedent’s shares of x stock were transferred to trust_beneficiary was the sole income_beneficiary of trust x represents that at all times trust satisfied the requirements to be treated as a qualified_subchapter_s_trust qsst under sec_1361 however no election under sec_1361 to treat trust as a qsst was filed therefore x’s s_corporation_election terminated two years after d3 on d4 beneficiary reported beneficiary’s allocable share of trust’s income consistent with the treatment of trust as a qsst on all affected returns on d5 trust was dissolved and the trust assets were conveyed in their entirety to beneficiary at this time x’s professional advisors discovered that a qsst election had not been filed x represents that the failure_to_file a qsst election for trust was not motivated by tax_avoidance or retroactive tax planning x and all of its shareholders consent and agree to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary under sec_1362 law 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 which is not an ineligible_corporation and which 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 purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder plr-156462-06 sec_1361 provides that for purposes of sec_1361 a_trust with respect to stock transferred to it pursuant to the terms of a will may be a shareholder but only for the 2-year period beginning on the day on which such stock is transferred to it sec_1361 provides that in the case of a qsst with respect to which a beneficiary makes an election under sec_1361 the trust is treated as a_trust described in sec_1361 and 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 qualified_subchapter_s_trust or his legal_representative may elect to have sec_1361 apply sec_1361 provides that an election under sec_1361 shall be effective up to days and months before the date of the election sec_1_1361-1 of the income_tax regulations provides that the current income_beneficiary of the trust must make the election under sec_1361 by signing and filing with the service_center with which the corporation files its income_tax returns the applicable form or a statement including the information listed in sec_1_1361-1 sec_1361 provides that the term qualified_subchapter_s_trust means a_trust a the terms of which require that - i during the life of the current income_beneficiary there shall be only one income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of the beneficiary’s death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assts to that beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to one individual who is a citizen or resident_of_the_united_states sec_1362 provides in part that a small_business_corporation may elect to be an s_corporation sec_1362 provides that a in general an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation and b any termination under sec_1362 shall be effective on and after the date of cessation sec_1362 provides in part that if an election under sec_1362 by any corporation was terminated under sec_1362 the secretary determines that the circumstances resulting in such termination were inadvertent no later than a plr-156462-06 reasonable period of time after discovery of the circumstances resulting in such termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder 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 the termination the corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based on the information submitted and representations made we conclude that x’s s_corporation_election terminated under sec_1362 on d4 when trust became an ineligible shareholder we further conclude that this termination was inadvertent within the meaning of sec_1362 accordingly pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d4 and thereafter provided that x’s s_corporation_election was valid and was not otherwise terminated under sec_1362 trust will be treated as a qsst from d4 until its termination all of x’s shareholders in determining their respective income_tax liabilities during the termination period and thereafter must include their pro_rata share of the separately and non-separately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided by sec_1368 this ruling is contingent upon beneficiary filing a qsst election for trust with an effective date of d4 with the appropriate service_center within days following the date of this letter a copy of this letter should be attached to the qsst election if x or its shareholders fail to treat themselves as described above this ruling shall be null and void except as specifically ruled above 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 we express or imply no opinion concerning whether x is otherwise eligible to be treated as an s_corporation or whether trust is eligible to be a qsst under sec_1361 plr-156462-06 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 pursuant to a power_of_attorney on file with this office we are sending a copy of this letter to x’s authorized representative sincerely s tara p volungis senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes


t c summary opinion united_states tax_court shawn a finnegan petitioner v commissioner of internal revenue respondent docket no 23643-05s filed date shawn a finnegan pro_se mark j miller and eric pearson specially recognized for respondent goldberg 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 pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency in petitioner’s federal_income_tax for the year in the amount of dollar_figure the issue for decision is whether petitioner is entitled to claim a dependency_exemption and a child_tax_credit for the taxable_year pursuant to sec_151 and sec_24 respectively background the stipulation of facts and the attached exhibits are incorporated herein by reference at the time the petition was filed petitioner resided in reedsburg wisconsin petitioner is employed as a police officer with the sauk county wisconsin sheriff’s office petitioner was involved in a relationship with jessica k dykstra for an unspecified period of time prior to they were never married in ms dykstra gave birth to a male child m f in ms dykstra initiated a paternity action against petitioner in the circuit_court family court branch columbia county wisconsin family court as part of that action the family court adjudged petitioner to be the father of m f according to his admission of paternity in open court pursuant to a judgment on default judgment entered against ms dykstra the court uses initials when referring to a minor child the family court ordered that with respect to the issue of the dependency_exemption for m f petitioner be awarded the tax dependency_exemption for m f provided that he was in compliance with his obligation to maintain health insurance for the child and current in his child_support payments as provided under the judgment during all taxable years since the child’s birth including the taxable_year in issue m f has resided with ms dykstra petitioner resides approximately hour away from m f and has parenting time with him approximately once or twice a month petitioner paid dollar_figure in child_support to ms dykstra in this total comports with the amount that petitioner was ordered to pay in the underlying judgment on his federal_income_tax return petitioner claimed the dependency_exemption deduction and a child_tax_credit with respect to and for m f in the notice_of_deficiency respondent explained that he was disallowing petitioner’s claimed exemption for m f on the grounds that another taxpayer had also claimed the dependency_exemption for m f for the taxable_year accordingly respondent disallowed the exemption with respect to m f and correspondingly disallowed petitioner’s claimed child_tax_credit subsequent to his receiving the notice_of_deficiency petitioner was made aware of form_8332 release of claim to exemption for child of divorced or separated parents and of the fact that this form allows custodial parents to release a claim of dependency_exemption for a child petitioner sent a copy of form_8332 to ms dykstra asking her to complete and sign it at that time petitioner believed that because he was in compliance with the terms of the aforementioned judgment during the year in issue and because he believed that he had contributed over one- half of m f ’s total support for he should be entitled to claim the deduction when ms dykstra did not comply with petitioner’s first request he brought an enforcement action against ms dykstra on date and obtained a court order for her to sign the form_8332 for the taxable_year ms dykstra ultimately signed a form_8332 on date thereby agreeing not to claim an exemption for m f for the taxable_year discussion in general the commissioner’s determination set forth in a notice_of_deficiency is presumed correct 290_us_111 in pertinent part rule a provides the general_rule that the burden_of_proof shall be upon the taxpayer in certain circumstances however if the taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining the proper tax_liability sec_7491 shifts the burden_of_proof to the commissioner sec_7491 rule a petitioner did not argue that sec_7491 is applicable in this case nor did he establish that the burden_of_proof should shift to the respondent petitioner therefore bears the burden of proving that respondent’s determination in the notice_of_deficiency is erroneous see rule a welch v helvering supra pincite sec_151 allows deductions for personal exemptions including exemptions for dependents of the taxpayers see sec_151 sec_152 defines the term dependent in pertinent part to include a son or daughter of the taxpayer over half of whose support for the calendar_year was received from the taxpayer s upport includes food shelter clothing medical and dental care education and the like sec_1 a i income_tax regs in determining whether an individual received more than one-half of his or her support from a taxpayer there shall be taken into account the amount of support received from the taxpayer as compared to the entire amount of support which the individual received from all sources id sec_152 carves out a special exception to the aforementioned in the case of parents who are divorced or separated this exception has been held to apply in cases where the parents were never married 121_tc_245 simply put sec_152 provides that if a child receives over half of his support from his parents and is in the custody of one or both of them for more than one-half of the calendar_year then the parent having custody of the child for a greater portion of the year at issue a k a the custodial_parent is entitled to claim the dependency_exemption deduction for that child unless the noncustodial_parent is shown entitled to the deduction under sec_151 including sec_152 or the custodial_parent has validly executed a written release of his or her right to claim the deduction as the custodial_parent of record the parties agree and the record is clear that petitioner was not the custodial_parent of m f during the year in issue petitioner maintains his entitlement to the exemption deduction with respect to m f because of the terms of the aforementioned judgment which gave him the right to claim m f as a dependent so long as he is current in his child_support and health insurance obligations the record is silent as to any evidence contrary to the fact that during the year in issue petitioner was compliant with these obligations however although the judgment provides that petitioner would be entitled to claim a dependency_exemption in for m f is it well settled that state courts by their decisions cannot determine issues of federal tax law see 327_us_280 114_tc_184 petitioner also argues his entitlement to claim the dependency_deduction by reason of ms dykstra’s releasing her claim to an exemption for m f for taxable_year on a form_8332 that she signed on date petitioner contends that ms dysktra’s action comports with the previously discussed exemption under sec_152 thus entitling him to claim the dependency_exemption for m f for taxable_year when a custodial_parent releases his or her exemption for more than year the noncustodial_parent must attach the original release to his tax_return for the immediate year and attach a copy of the release to each succeeding year on which he claims the dependency_deduction chamberlain v commissioner tcmemo_2007_178 respondent urges that we disregard the form_8332 submitted by petitioner on the grounds that he did not attach a completed form_8332 or its equivalent to his federal_income_tax return as required by sec_152 and sec_1_152-4t a temporary income_tax regs fed reg date petitioner admits that he did not attach a form_8332 to his timely filed federal_income_tax return for failure to attach a valid form_8332 or an equivalent written declaration to the return at the time of filing disqualifies a noncustodial taxpayer from claiming a dependency_exemption for his minor child see presley v commissioner tcmemo_1996_553 sec_152 is clear it grants the dependency_exemption to a noncustodial_parent only when he or she attaches a valid form_8332 or its equivalent to a federal_income_tax return for the taxable_year on which he or she claims the exemption unfortunately irrespective of what is contained in the judgment as to petitioner’s right to claim a dependency_exemption for m f the law is clear that a taxpayer is entitled to a dependency_exemption in the taxable_year if and only if he is in compliance with sec_152 as previously stated petitioner has failed to meet this requirement accordingly the court concludes with respect to sec_152 petitioner is not entitled to claim a dependency_exemption with respect to m f for taxable_year accordingly and because petitioner failed to comply with this requirement we sustain respondent’s disallowance of the dependency_exemption claimed by petitioner finally and with respect to the child_tax_credit petitioner claimed for m f in sec_24 authorizes a child_tax_credit with respect to each qualifying_child of the taxpayer the term qualifying_child is defined in sec_24 a qualifying_child means an individual with respect to whom the taxpayer is allowed a deduction under sec_151 who has not attained the age of as of the close of the taxable_year and who bears a relationship to the taxpayer as prescribed by sec_32 sec_24 since petitioner was not allowed a deduction with respect to m f under sec_151 it follows that for the year in issue m f is not a qualifying_child consequently irrespective of language in the judgment to the contrary petitioner is not entitled to claim a child_tax_credit for m f in decision will be entered for respondent


department of the treasury internal_revenue_service washington d c employer_identification_number person to contact and id number contact telephone number fax number tax_exempt_and_government_entities_division release number release date date date uil legend year year dear this ruling revokes and supersedes our prior ruling that was issued to m as plr on date the ruling was issued in response to m's letter dated date regarding whether any gain realized by m on the sale of certain property would cause m to lose its tax exempt status and would be considered unrelated_business_taxable_income under sec_512 of the internal_revenue_code the date request indicated that m was incorporated in year under the nonprofit statute of the state in which in conducted its activities determination_letter from the internal_revenue_service service recognizing it as tax exempt under sec_501 of the code as an organization described in sec_501 m’s purposes as outlined in its constitution were to promote boating and social recreation to encourage members to become proficient in navigation and all matters pertaining to seamanship and to advance the cause of boating in its broadest sense in year it received a m charged dues and annual assessments to its members in order to cover the costs of maintaining its facilities making any necessary improvements and for the retirement of debt m also required members to meet certain work crew requirements to maintain the club premises in addition m stated that it operated a members’ bar on the premises for the benefit and enjoyment of its members despite the foregoing m found it increasingly difficult to maintain its existence as its membership had aged new membership had dwindled primarily attributed to the various work requirements and the costs of operation had increased for these reasons club members approved the sale and liquidation of m’s assets to its members complete cessation of operations and the dissolution of the corporation the membership was not considering any improvements to the property to facilitate a sale at the time of m’s ruling_request it had a contract to sell the property based on the information furnished by m we ruled in our date letter that any gain which m realizes on the sale of its assets will not cause it to lose its tax exempt status under sec_501 any gain which m realizes on the sale of its assets will not be treated as unrelated_business_taxable_income under sec_512 law sec_501 of the code provides for the exemption of clubs organized and operated for pleasure recreation and other nonprofitable purposes substantially_all the activities of which are for such purposes and no part of the net_earnings of which inures to the benefit of any private shareholder sec_511 imposes a tax on the unrelated_business_taxable_income as defined in sec_512 of organizations exempt from tax under sec_501 of the code including those described in sec_501 sec_512 provides in part that with respect to an organization described in sec_501 the term unrelated_business_taxable_income means the gross_income excluding any exempt_function_income less the deductions allowed by this chapter which are directly connected with the production of the gross_income excluding exempt_function_income both computed with certain modifications provided in sec_512 sec_512 defines exempt_function_income to mean the gross_income from dues fees charges or similar amounts paid_by members of the organization as consideration for providing such members of their dependents or guests goods facilities or services in furtherance of the purposes constituting the basis for the exemption of the organization to which income is paid sec_512 provides in part that if property used directly in the performance of an exempt_function of a organization described in sec_501 is sold by the organization and within a period beginning one year before the date of the sale and ending three years after it other_property is purchased and used by such organization directly in the performance of its exempt_function gain if any from such sale shall be recognized only to the extent that such organization’s sales_price of the old property exceeds the organization’s cost of purchasing the other_property sec_512 in part excludes from the term unrelated_business_taxable_income all gains or losses from the sale exchange or other_disposition of property other than property_held_primarily_for_sale to customers in the ordinary course of trade_or_business sec_1_501_c_7_-1 of the income_tax regulations states that the exemption provided to organizations described in sec_501 applies only to clubs which are organized and operated exclusively for pleasure recreation and other nonprofitable purposes but does not apply to any club if its net_earnings inures to the benefit of any private shareholder the regulation also states that in general this exemption extends to social and recreation clubs which are supported solely by membership fees dues and assessments however a club otherwise entitled to exemption will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities sec_1_501_c_7_-1 provides that a club which engages in business such as making its social and recreational facilities available to the general_public or by selling real_estate timber or other products is not organized and operated exclusively for pleasure recreation and other nonprofitable purposes and is not tax exempt solicitation by advertisement or otherwise for public patronage of its facilities is prima facie evidence that the club is engaging in business and is not being operated exclusively for pleasure recreation or social purposes however an incidental sale of property will not deprive a club of its exemption revrul_58_501 1958_2_cb_262 holds that where a social_club described in sec_501 finds it impracticable to continue to conduct its exempt_activities and sells its property and liquidates such a sale is incidental to its exempt purposes the revenue_ruling states that the club is still considered to be operating exclusively for pleasure recreation and similar purposes up through the date of the sale and distribution of the liquidated asserts to its active members the revenue_ruling concludes that profit from the sale by the club of all its property in conjunction with the termination of its activities and liquidation does not deprive the club of the exemption provided by sec_501 section dollar_figure of revproc_2011_4 2011_1_irb_123 states in part that a letter_ruling found to be in error or not in accord with the current views of the service may be revoked or modified a letter may be revoked or modified due to a notice to the taxpayer to whom the letter_ruling was issued 84_tc_756 involved an organization exempt under sec_501 that used realized gain from a property sale to purchase other_property for an amount less than the consideration it received from the land sale taking into account selling_expenses both sold and purchased properties were used directly in the performance of the organization’s exempt_function activity the court found that sec_512 requires that gain realized on the sale of property used directly in the performance of the exempt_function of a sec_501 organization be recognized to the extent that the consideration for the sale less selling_expenses and expenses for work performed to assist in the sale of the property exceeds the cost of other_property purchased by the organization and used directly in the performance of its exempt_function this case was the first judicial consideration of the tax reform act provision sec_512 which sheltered gain on the sale of property by a social_club the court held that the amount of gain reinvested by a club in new property for its exempt_purpose was sheltered from tax but the amount of gain distributed to the members was subject_to tax in 980_f2d_1409 the court held that a gain on the sale of land that was fully reinvested in other exempt_property qualified for non- recognition of gain under sec_512 even though it had not been in continuous or direct use before the sale in deer park country club v commissioner 70_tcm_1445 the court held that the sale of land that was never actually used for club purposes was not qualified for non- recognition of gain under sec_512 regardless of the fact that the organization originally purchased the land with the intent of using it for its exempt_function public law extended sec_501 of the code the senate report 1969_3_cb_423 pincite stated where the organization receives income from sources outside the membership such as income from investments upon which no tax is paid the membership receives a benefit not contemplated by the exemption the extension of the exemption to such investment_income is therefore a distortion of its purpose however congress afforded social clubs a special exception for revenue earned by the if the proceeds are used within a specified period to purchase other_property used sale of exempt_function property that had been used directly in the performance of its exempt_function in the performance of its exempt_function no tax is assessed sec_512 the legislative_history discusses the reason to protect proceeds that are reinvested in the exempt_purpose proceeds that are reinvested in the exempt_function of the club are not being withdrawn for gain by the members of the organization for example where a social_club sells its clubhouse and uses the entire proceeds to build or purchase a larger clubhouse the gain on the sale will not be taxed if the proceeds are reinvested in the new clubhouse within three years senate report 1969_3_cb_423 pincite analysis organizations exempt under sec_501 are subject_to a particular unrelated_business_income_tax regime which treats gain on sale of their property differently from gain received by other types of sec_501 organizations sec_512 provides the general_rule for unrelated_business_income_tax which applies to sec_501 organizations and is defined narrowly as gross_income derived by any organization from any unrelated_trade_or_business that is regularly carried on the statute further states that the modifications under sec_512 apply in contrast sec_512 which provides the unrelated_trade_or_business income_tax rule for taxing organizations exempt under sec_501 as well as sec_501 c and c entities defines gross_income broadly by not referencing the more narrow unrelated_trade_or_business regularly carried on standard rather than isolating the actual unrelated_business_income and taxing it sec_512 instead isolates exempt_function_income for exemption and taxes all other income it does so by negatively defining unrelated_business_taxable_income for social organization to mean all income that is not exempt_function_income irrespective of whether the income generating activity meets the trade_or_business regularly carried on standard that is generally applicable under the unrelated_business_income_tax regime hence the only sec_501 income excluded from tax is exempt_function_income and the only applicable modifications are specifically listed as sec_512 and this list explicitly does not include sec_512 which excludes from unrelated_business_income_tax all gains or losses from the sale exchange or other_disposition of property excluding stock or other_property held primarily_for_sale_to_customers in the ordinary course of trade_or_business and gains and losses from investment activities and which in this case would have allowed m an entity level exemption for its dissolution proceeds several courts have ruled on the application of the unrelated_business_income_tax to the sale of property by a social_club club did owe tax on the portion of the proceeds from sale of its property that exceeded the amount used to purchase new exempt_property because it was not reinvested but withdrawn for gain by the members of the organization the court applied the principle that revenue from the sale of property will be taxed except if in 84_tc_756 the court ruled that the it is reinvested in exempt_function property in atlanta athletic club f 2d the property did qualify for non-recognition of gain because the property was used in exempt functions and reinvested in other_property used in exempt functions within three years after the sale the property had never been used for exempt functions and so was not eligible for the non-recognition of gain in deer park country club t c m cch the facts surrounding the proposed sale of m’s assets show that its property has been used to carry out m’s exempt_activities but circumstances have changed specifically the aging of the club membership inability to attract a sufficient number of new members and increased costs of operation thus m now wishes to sell its assets in conjunction with the dissolution of the club as in the case of the sale of club property by the organization described in revrul_58_501 supra the purpose of the sale of m’s assets is to facilitate the club’s dissolution rather than to make a profit as noted in sec_1 c -1 b an incidental sale of property will not adversely affect a social club’s tax exempt status furthermore the distribution of liquidated assets to m’s members will not result in the revocation of the club’s tax exempt status however revrul_58_501 supra does not address unrelated_business_income_tax also it was issued prior to the act’s enactment of the special unrelated_business_income_tax rules codified in sec_512 since m’s property was intended to be sold and the income not used to purchase other_property to be used by m directly in the performance of its exempt_function the gain from the sale must be recognized as unrelated_business_taxable_income sec_512 thus the conclusion regarding unrelated_business_income that was expressed in our ruling issued to m as plr on date is in error pursuant to revproc_2011_4 supra plr should be revoked conclusion based on the foregoing we rule as follows any gain which m realizes on the sale of its assets will not cause it to lose its tax exempt status under s sec_501 the gain on the sale of m’s property is considered to be unrelated_business_taxable_income under sec_512 this ruling revokes and supersedes our prior ruling that was issued to m as plr on date this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described above if m or its authorized representative has any questions about this letter contact the person whose name and telephone number are shown in the heading we understand based on a phone conversation with m’s authorized representative on december that m has not acted in reliance on the letter_ruling dated date if however you m believe that you are entitled to relief under sec_7805 of the code from the retroactive revocation of the letter you may request sec_7805 relief pursuant to section dollar_figure of revproc_2011_4 ilr b _ this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours michael seto acting manager exempt_organizations technical cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 1-plr-133007-01 date date legend x y d1 d2 this responds to a letter dated date submitted on behalf of x requesting that x be given an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be disregarded as an entity separate from its owner for federal tax purposes facts according to the information submitted y is a domestic_corporation y formed x a domestic eligible_entity on d1 x elected to be treated as an association_taxable_as_a_corporation for federal tax purposes effective on d1 on d2 x intended to elect to be disregarded as an entity separate from its owner for federal tax purposes however the form_8832 entity classification election was not timely filed law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the code sec_301 a an eligible_entity with a single owner can elect either to be classified as an association and thus a corporation under sec_301 b or to be disregarded as an entity separate from its owner an eligible_entity may elect to change its classification by filing a form_8832 with the designated service_center sec_301_7701-3 an election can be effective on the date specified on the form_8832 or on the date filed if no such date is specified the effective date specified on the form_8832 cannot be more than days prior to the date the election is filed sec_301_7701-3 plr-133007-01 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election sec_301_9100-1 defines a regulatory election to mean an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301 a conclusion based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly x is granted an extension of time of sixty days from the date of this letter to elect to be treated as disregarded as an entity separate from its owner for federal tax purposes effective d2 the election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the election except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer sincerely paul f kugler associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court albert r cujas jr susan w cujas petitioners v commissioner of internal revenue respondent docket no filed date albert r cujas jr pro_se j craig young for respondent memorandum findings_of_fact and opinion foley judge respondent determined the following deficiencies in and additions to petitioners' federal income taxes albert r cujas jr year deficiency sec_6651 sec_6654 additions to tax year dollar_figure big_number dollar_figure big_number dollar_figure susan w cujas deficiency sec_6651 sec_6654 additions to tax dollar_figure big_number dollar_figure big_number dollar_figure 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 the issues for decision are as follows whether petitioners failed to report income we hold that they did to the extent provided below whether petitioners pursuant to sec_72 are liable for a 10-percent additional tax on early distributions they received in from their individual_retirement_accounts ira's we hold that they are liable whether petitioners pursuant to sec_1401 are liable for self-employment_tax we hold that they are liable to the extent provided below whether petitioners pursuant to sec_6651 are liable for additions to tax for failure_to_file timely federal_income_tax returns we hold that they are liable to the extent provided below whether petitioners pursuant to sec_6654 are liable for additions to tax for failure to make estimated_tax payments we hold that they are liable to the extent provided below whether petitioners have asserted frivolous and groundless arguments that warrant the imposition of a penalty pursuant to sec_6673 we hold that a penalty is not warranted findings_of_fact some of the facts have been stipulated and are so found at the time their joint petition was filed petitioners' mailing address was in kernersville north carolina during the years in issue albert cujas was married to susan cujas and was self-employed as a physical therapist petitioners filed a joint federal_income_tax return for but did not file returns for or the internal_revenue_service audited petitioners' return and agent jerry gardner was assigned to the case he notified petitioners in writing that their return was being audited in this correspondence he asked petitioners to meet with him and to provide records relating to their income and expenses petitioners did not comply with agent gardner's requests after agent gardner had completed his audit of petitioners' return he began an audit relating to petitioners' and tax years he did not however notify petitioners that they were being audited for and and did not request records from them relating to these years during the audit he obtained information returns ie forms indicating that petitioners had received income in as follows albert r cujas jr payor maultsby orthopedic clinic pa st john neuromuscular therapy seminars matol botanical international ltd state of n c health plan hartford life_insurance co state employees credit_union state employees credit_union susan w cujas payor northwest child development council inc the investment_company of america state employees credit_union state employees credit_union capital guardian trust co type of payment compensation compensation compensation compensation compensation ira distribution interest type of payment compensation dividends interest ira distribution ira distribution amount dollar_figure big_number big_number big_number amount dollar_figure big_number big_number after receiving this information agent gardner contacted some of the payors and obtained written verification of the items agent gardner did not obtain any evidence that petitioners received income relating to he proceeded to reconstruct petitioners' income for that year using data published by the bureau of labor statistics bls and determined that each petitioner incurred personal living_expenses and received self- employment income of dollar_figure he also determined that for petitioners were each liable for a 10-percent additional tax on early distributions they received from their ira's and for and petitioners were each liable for self- employment_tax additions to tax for failure_to_file timely federal_income_tax returns and additions to tax for failure to make estimated_tax payments based on the results of agent gardner's audit respondent on date issued a separate notice_of_deficiency to each petitioner i unreported income opinion generally the commissioner's determination is presumed to be correct and the taxpayer bears the burden of proving that it is erroneous rule a 290_us_111 some courts however have declined to accord a presumption of correctness to the commissioner's determination of unreported income where the commissioner simply relies on the presumption without introducing sufficient evidence linking the taxpayer to an income generating activity 999_f2d_760 4th cir affg tcmemo_1992_153 794_f2d_884 3d cir vacating and remanding tcmemo_1985_101 73_tc_394 the commissioner need only provide a minimal amount of evidence williams v commissioner supra pincite 596_f2d_358 9th cir revg 67_tc_672 if the commissioner fails to provide sufficient evidence the deficiency determination is arbitrary and the commissioner will bear the burden of coming forward with evidence to establish the existence and amount of any deficiency jackson v commissioner supra based on information reported on forms respondent determined that in petitioners received income from several sources based on bls data respondent determined that in petitioners received self-employment_income we now address the validity of each of these determinations a tax_year respondent determined that during each petitioner received income from ira_distributions self-employment and interest and that mrs cujas received dividend income these determinations were based on information reported on forms issued by the payors mrs cujas conceded that during she received funds from the sources and in the amounts determined by respondent she has failed to establish that these funds are excludable from her gross_income accordingly we hold that these funds are includable in her gross_income see sec_61 sec_72 sec_408 in his brief mr cujas conceded that during he received dollar_figure from his ira at the state employees credit_union dollar_figure from blue cross blue shield of north carolina and dollar_figure from the maultsby clinic he has failed to establish that these funds are excludable from his gross_income accordingly we hold that these funds are includable in his gross_income see sec_61 sec_72 sec_408 the remainder of respondent's determinations relating to mr cujas for were supported by evidence respondent obtained forms indicating that mr cujas received dollar_figure from st john neuromuscular therapy seminars dollar_figure from matol botanical international ltd dollar_figure from hartford life_insurance co and dollar_figure from the state employees credit_union therefore we conclude that respondent obtained sufficient evidence to link mr cujas to these funds as a result mr cujas bears the burden of proving that respondent's determinations relating to these funds are erroneous he has failed to provide any credible_evidence to carry his burden_of_proof accordingly we hold that these funds are includable in his gross_income see sec_61 b tax_year respondent determined using bls data that during each petitioner had gross_income of dollar_figure every taxpayer is required to maintain adequate_records of taxable_income sec_6001 if the taxpayer fails to maintain such records the commissioner may reconstruct income in accordance with a method that clearly reflects income sec_446 43_tc_824 when the commissioner has evidence of taxable_income but does not have information available to ascertain the amount of such income the commissioner may use bls data to determine that the taxpayer had income at least equal to the normal_cost of living 54_tc_1530 prior to issuing notices of deficiency respondent did not contact petitioners and did not obtain any evidence linking petitioners to an income generating activity relating to nevertheless respondent proceeded to use bls data to reconstruct petitioners' income therefore respondent's determinations relating to petitioners' tax years are arbitrary and respondent bears the burden of coming forward with evidence to establish the existence and amount of any deficiency jackson v commissioner supra pincite cf giddio v commissioner supra holding that it is not arbitrary for the commissioner to use bls data to reconstruct a taxpayer's income when the commissioner has evidence of taxable_income respondent has failed to present sufficient evidence to establish the existence and amount of the deficiencies relating to although mr cujas testified that he was self-employed as a physical therapist during respondent has failed to establish the amount of funds that mr cujas may have received during for such services therefore respondent has failed to meet his burden_of_proof accordingly we hold that petitioners are not liable for the deficiencies relating to ii respondent's other determinations respondent determined that for petitioners were each liable for a 10-percent additional tax on early distributions they received from their ira's and for and petitioners were each liable for self-employment_tax additions to tax for failure_to_file timely federal_income_tax returns and additions to tax for failure to make estimated_tax payments we have held for that petitioners are not liable for deficiencies relating to respondent's determination that they received income as a result petitioners are not liable for the self-employment_tax and additions to tax relating to petitioners bear the burden of proving that the determinations relating to are erroneous rule a petitioners introduced no evidence relating to these determinations therefore they are liable for the taxes and additions to tax relating to iii respondent's motion for a sec_6673 penalty respondent submitted a motion for the imposition of a penalty under sec_6673 sec_6673 authorizes this court to impose a penalty in favor of the united_states in an amount not to exceed dollar_figure whenever it appears that the taxpayer's position in a proceeding is frivolous groundless or instituted primarily for delay we conclude that such a penalty is inappropriate in the present case and deny respondent's motion all other arguments made by the parties are either irrelevant or without merit to reflect the foregoing an order denying respondent's motion for a penalty will be issued and decision will be entered under rule


department of the treasury internal_revenue_service washington d c date uilc number release date internal_revenue_service national_office field_service_advice memorandum for district_counsel from subject acting associate chief_counsel employee_benefits and exempt_organizations cc ebeo this field_service_advice responds to your original memorandum dated date including additional information provided in your supplemental memoranda of date and date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend b c d e f g h q r s t u v w x w x issue s does the irs have sufficient evidence to determine whether c’s guaranty of the assets of a blind trust confer an impermissible private benefit or inurement on the beneficiary of the blind trust you have characterized this issue as comprising the following two sub-issues were the premiums received by c reasonable payment for the risks it assumed is the agreement between c and the blind trust a common means of protecting assets in a blind trust conclusion your statement that the irs must learn whether the premiums_paid by f through the blind trust to c were reasonable in light of the risks c assumed in order to determine whether the transaction between c and f’s blind trust conferred a prohibited benefit on f we agree with facts in the following summary and for purposes of this memorandum we assume the accuracy and validity of the facts described in and materials and information accompanying your request for field_service_advice the of b created c b’s required c’s trustees to use the income to maintain the devoting a portion of each year’s income to support and educate orphans and other indigents c has been recognized by the irs as an organization described in sec_501 e is an firm c through a for-profit subsidiary holds an r percent interest in e and has a total investment of dollar_figures in e f was a general_partner of e consequently e paid f for of f’s interest in cash and executed a for the remainder of f’s interest the terms of the were that e promised to pay f the principal_amount of f’s remaining interest in e valued at dollar_figuret plus interest at a fixed rate over a stated period of time the ensured that f did not share in any future profits of e e approved g as the trustee of a_trust established for the benefit of f or f’s spouse or children which then held the issued by e at some point around the time the was executed a trustee of c was contacted about entering into a arrangement between c f and g c’s only previous relationship with f was by virtue of f’s position as general_partner of e c through a for-profit subsidiary held an equity_interest in e and had other dealings with e such as using e for and related_services c f and g subsequently entered into a agreement whereby certain exercise events obligated c to purchase the from f or g at a price equal to the sum of percent of the principal_amount of the on the date of the purchase and accrued but unpaid interest to the date of purchase the only events triggering such a purchase were failure of e to make any payments of principal or interest under the terms of the or acceleration of the maturity of the this arrangement also states that f or g has the obligation to pay to c an annual fee equal to u percent of the principal_amount as of the end of e’s preceding fiscal_year records of c show that g made payments as scheduled in the years included in c’s examination by the irs if f or g fails to make the required_payments then c is relieved of any obligation under the arrangement during the course of c’s examination by the irs f’s counsel also provided the irs with statements that c was selected as of the for the following reasons because of c’s sound financial condition and creditworthiness and because c had recently conducted an in- depth due diligence review of e in connection with its initial investment through its for-profit subsidiary it was willing to enter into the without another such review of e f’s counsel also stated that the fee sought by c for serving as was competitive with those being sought by alternative c has characterized the agreement as a credit enhancement arrangement analogous to a standby_letter_of_credit c states that it arrived at the annual fees charged by contacting several banks to gather comparability data for this type of transaction however c has not provided the irs with records to substantiate this comparability data and has alleged that certain documents are protected by attorney client privilege c states that it compared the cost of standby letters of credit charged by several banks for obligors with a credit rating similar to that of e at the time period of the transactions to calculate a range of v to w basis points c then added a premium of x basis points to the high end of that range and charged a fee of w x basis points c stated that the added premium was similar to what other commercial banks would have charged under similar circumstances law and analysis to qualify for recognition as a tax-exempt_organization under the requirements of sec_501 an organization must be organized and operated so that no part of its net_earnings inures to the benefit of any private_shareholder_or_individual under sec_1_501_a_-1 a private_shareholder_or_individual is a person with a personal and private interest in the organization’s activities these private shareholders or individuals so called insiders are those persons who have an opportunity to control or influence an organization’s activities because of their particular relationship with the organization in most circumstances an unrelated third party is not a private_shareholder_or_individual for purposes of the sec_501 inurement prohibition 75_tc_127 pincite the recent case of 109_tc_326 appeal docketed nos 7th cir date analyzed whether an unrelated third party was an insider for purposes of inurement under sec_501 when that third party negotiated a contract with the exempt_organization at arm’s length in the united cancer council case the five year noncancellable contract gave the contractually-related person a professional fundraising company extensive control_over the organization’s primary source_of_income the extent of that control and influence over the organization’s activities and income as well as the organization’s impaired financial condition at the time of negotiating the contract were critical elements of the court’s finding of insider status under the specific facts of that case the court did hold the professional fundraiser to be an insider additionally the court found that the contract was not a reasonable contingent_compensation arrangement and the insider’s compensation under the contract exceeded reasonable_compensation therefore the court held that there was impermissible inurement of net_earnings to the insider that justified retroactive revocation of the sec_501 organization’s tax exemption sec_1_501_c_3_-1 provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest in this case the guaranty of the assets of the blind trust must be evaluated based on whether it conferred an impermissible private benefit on the beneficiary of the trust private benefit is not clearly defined in the code or regulations the concept has been developed in case law along with the regulatory concept cited above to require a balancing of the public interest served by the organization’s activities against the private interests served similar to the basic inurement analysis the threshold question is whether the benefit a sec_501 organization provides to an unrelated third party is a fair_market_value exchange for the consideration provided by the third party only if the party is provided with greater than fair_market_value or the organization receives less than fair market consideration for the benefit provided is private benefit to the third party present we believe several recent cases evaluating fair_market_value questions in an inurement context are relevant here in anclote psychiatric center inc v commissioner t c memo appeal docketed 11th cir date the court ultimately decided that petitioner’s sale of its hospital for less than fair_market_value resulted in prohibited inurement within the meaning of sec_501 in evaluating the sale price the court viewed its task as merely determining whether that sale price was within a reasonable range of what could be considered fair market values the court did not find it necessary to determine a precise amount representing the fair_market_value of the property transferred in that case in the united cancer council case discussed earlier the court used expert witness comparisons of similar contracts in the direct mail fundraising industry to determine whether there was unreasonable_compensation under the fundraising contract even where private benefit is present in a transaction with a sec_501 organization more than incidental private benefit is required before the organization’s exemption is jeopardized revrul_70_186 1970_1_cb_128 revrul_75_196 1975_1_cb_155 however if an organization operates for the benefit of a private interest a nonexempt purpose to the extent that more than an insubstantial part of the organization’s activities further that nonexempt purpose the organization is not entitled to exemption from tax under sec_501 92_tc_1053 if private benefit exists there is a two-step process to determine if it is sufficient to affect the exempt status of the organization the first step is to determine the amount of private benefit in this case the amount of private benefit would consist of any underpayment of the premium for the guaranty below its fair_market_value the second step would be to determine whether that private benefit plus any other private benefits are substantial when compared to the public benefit served by the organization case development hazards and other considerations -9- by acting associate chief_counsel cc


uniform issue list department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division mar fs fe 2k 2k ok ik fe kc fe afc afc ae fe aie ake fe ie f sec_2s fe pincite of ok legend taxpayer a bc h sec_38 ke fe oft ot of of ok ok ai oe ae or fe fs fe fe ke ke ae fs f sec_2c 2k ie fe fe 2c 2c fe ke 2k oc oie ok kc a ok ake oe fe ok ho heo a a ok ae a a ira x amount a dear this is in response to your correspondence dated date as supplemented by additional correspondence dated and information that you provided during a telephone conference in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code code the following facts and representation have been submitted under penalties of perjury to support the ruling_request you entered into a contract to sell certain you owned a real_estate partnership_interest which owned investment real_estate on august investment real_estate owned by you on august binding contract to purchase land to build a personal_residence on january me you took a distribution of amount a from ira x to purchase land to build your personal_residence you intended to repay amount a to ira x with a portion of the proceeds from the sale of real_estate investment_property within the 60-day rollover period of the distribution from ira x _ you entered into a page the land purchase contract for your personal_residence was completed on january amount a distributed from ira x was used to close on this land purchase subsequent to the ira x distribution on january your real_estate partnership_interest indicated that the closing would be deferred until april period expired for the distribution from ira x which is after the required 60-day rollover the purchaser of on april days after the original distribution from ira x you deposited amount a into ira x approximately prior to the distribution of amount x you had never rolled over any amounts that were excluded under sec_408 of the code based on the above facts you request a ruling that the service waive the day rollover requirement with respect to the distribution of amount a from ira x because the failure to waive such requirement would be against equity or good conscience under the provisions of sec_408 of the code sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributec as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if- i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or page ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 d of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution mability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred page the information presented does not demonstrate circumstances that would justify a waiver of the 60-day rollover period under sec_408 of the code the committee report describing legislative intent indicates that congress enacted the rollover provisions to allow portability between eligible plans including iras you entered into a binding contract and used amount a distributed from ira x to purchase land to build your personal_residence under these circumstances the failure to waive the 60-day requirement would not be against equity or good conscience as that term is used in sec_408 d therefore pursuant to sec_408 of the code the service declines to waive the 60-day rollover requirement with respect to the distribution of amount a thus amount a will not be considered a valid rollover because the 60-day requirement under sec_408 of the code with respect to such contribution will not be satisfied no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent if you have any questions please contact td ppc af 2h ee ae sincerely yours s cray che donzell littlejohn manager employee_plans technical group the tor enclosures deleted copy of this letter notice of intention to disclose notice