internal_revenue_service technical_advice_memorandum number release date uil t eo b3 taxpayer’s name taxpayer’s ssn date earliest year under examination taxable years under examination date of conference date ------------------------ ---------- legend x a b c d e f q issues whether x is an applicable_tax-exempt_organization whether e is a disqualified_person as defined by sec_4958 of the internal whether the use of an x asset by e is an excess_benefit_transaction as defined by revenue code code with respect to x sec_4958 what is the taxable_period for the excess_benefit transactions of whether e is liable for the excise_tax imposed by sec_4958 of the code that is equal to percent of the excess_benefit whether e is liable for the excise_tax imposed by sec_4958 of the code that is equal to percent of the excess_benefit_transaction if the transaction is not corrected within the taxable_period facts x was granted tax-exempt status under sec_501 on december ------- it was subsequently ruled that x qualified as an organization described in sec_170 as a church x received a revised determination_letter from chief exempt_organizations rulings branch on date q maintaining its sec_501 status and modifying its foundation status to one under sec_509 and sec_170 effective august ------- as of january ------- these rulings were still in effect and had not been revoked or modified on september ------- x adopted restated bylaws article iii the founder sec_1 identifies the founder of x to be a directors are appointed by the founder and will serve until their death disability resignation or removal by the founder a is x’s founder and has always been its president and a director b wife of a is x’s secretary-treasurer and a director f daughter of a and b is x’s assistant secretary and a director e is f’s husband information_document_request idr no asked x to provide a copy of its policy statement regarding personal_use of x-owned vehicles in response x stated that x’s policy regarding personal_use of any vehicles owned by x is that vehicles are to be used only for x business and not for any personal_use in the event of any personal_use any person utilizing the vehicle would be obligated to reimburse x at the current irs approved rate per mile there are no employee expense accounts or reimbursements other than described herein all employees and ministers have their own vehicles for their personal_use and consequently have little or no reason to drive an x owned vehicle for personal_use all vehicles owned by x are to be used for x business exclusively during the years -------------- x made loan payments on a ----------------------- in the amount of dollar_figure----------monthly in response to another idr request x indicated that e had exclusive use of the truck the values of the use of the truck are as follows ------- ------- ------- dollar_figure ------------ dollar_figure ------------ dollar_figure ------------ total for all years dollar_figure------------- in a letter dated date e’s counsel stated the normal scope and duties of his work at job location owned by x require a truck which x provides to him e has his own personal vehicles and had his own personal vehicles throughout the entire examination period ------ of ------- ------ and ------ personally he had no need or use of a pick-up truck the pick-up truck is used exclusively in performance of e’s duties for the job further e did not assume the duties of management at the job location until after the examination the counsel’s letter was not substantiated by a penalties of perjury statement from e or anyone else there was no documentation or other substantiating evidence showing how the truck was used in the examination years or when e began his management duties at the job location legal principles sec_501 of the internal_revenue_code code exempts from federal_income_tax organizations organized and operated exclusively for religious charitable scientific or educational_purposes where no part of the net_earnings inures to the benefit of any private_shareholder_or_individual sec_4958 imposes an excise_tax on each excess business transaction between an applicable_tax-exempt_organization and a disqualified_person sec_4958 was added to the internal_revenue_code by sec_1311 of the taxpayer bill of right sec_2 p l 110_stat_1452 enacted date the sec_4958 excise_taxes generally apply to excess_benefit transactions occurring on or after date the report from the committee on ways and means on the taxpayer bill of right sec_2 h_r was submitted date h_rep_no 104th congress 2d sess final regulations under sec_4958 which apply as of date represent a fair and reasonable interpretation of sec_4958 based on the intent of congress as expressed in the report from the ways_and_means_committee submitted date sec_4958 of the code imposes on each excess_benefit_transaction a tax equal to percent of the excess_benefit the tax imposed shall be paid_by any disqualified_person referred to in subsection f with respect to such transaction sec_4958 of the code imposes an additional tax on the disqualified_person in any case in which an initial tax is imposed by subsection a on an excess_benefit_transaction and the excess_benefit involved in such transaction if not corrected within the taxable_period a tax equal to percent of the excess_benefit involved the tax imposed by this subsection shall be paid_by any disqualified_person referred to in subsection f with respect to such transaction sec_4958 of the code defines an excess_benefit_transaction in general as any transaction in which an economic benefit is provided by an applicable_tax-exempt_organization directly or indirectly to or for_the_use_of any disqualified_person if the value of the economic benefit provided exceeds the value of the consideration including the performance of services received for providing such benefit an economic benefit shall not be treated as consideration for the performance of services unless such organization clearly indicated its intent to so treat such benefit sec_4958 of the code defines excess_benefit as the excess referred to in subparagraph a of sec_4958 of the code provides if more than one person is liable for any_tax imposed by subsection a or subsection b all persons shall be jointly and severally liable for such tax sec_4958 of the code defines ‘applicable tax-exempt organization’ as any organization which without regard to any excess_benefit would be described in paragraph or of sec_501 and exempt from tax under sec_501 sec_4958 of the code includes any organization which was described in paragraph at any time during the 5-year period ending on the date of the transaction sec_4958 of the code defines ‘disqualified person’ with respect to any transaction as-- i any person who was at any time during the year period ending on the date of such transaction in a position to exercise substantial influence over the affairs of the organization ii a member_of_the_family of an individual described in subparagraph a or iii a 35-percent_controlled_entity sec_4958 of the code provides that the members of an individual’s family shall be determined under sec_4946 except that such members also shall include the brothers and sisters whether by the whole or half blood of the individual and their spouses sec_4946 of the code includes spouses ancestors children and spouses of children in the definition of disqualified_person sec_4958 of the code defines taxable_period with respect to any excess_benefit_transaction the period beginning with the date on which the transaction occurs and ending on the earliest of-- a the date of mailing a notice_of_deficiency under sec_6212 with respect to the tax imposed by subsection a or b the date on which the tax imposed by subsection a is assessed sec_4958 of the code defines ‘correction’ and ‘correct’ with respect to any excess_benefit_transaction as undoing the excess_benefit to the extent possible and taking any additional measures necessary to place the organization in a financial position not worse than that in which it would be if the disqualified_person were dealing under the highest fiduciary standards sec_53_4958-4 of the federal_income_tax regulations provides that certain economic benefits are disregarded for purposes of sec_4958 including benefits excluded from income under sec_132 of the code and expense reimbursement payments pursuant to an accountable_plan that meets the requirements of sec_1_62-2 and sec_53 a i and ii of the regulations sec_1_62-2 of the regulations provides that an accountable_plan must meet the business connection substantiation and returning-excess-payments provisions of the regulation of sec_1_62-2 of the regulations provides that expenses reimbursable under an accountable_plan must constitute deductible business_expenses under sec_162 or other business deduction statutes sec_1_62-2 provides that expense reimbursements under an accountable_plan must satisfy the substantiation rules of sec_1_162-17 or sec_1_274-5t of the regulations sec_162 of the code provides in part that there shall be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business including a reasonable allowance for salaries or other compensation_for_personal_services rendered traveling expenses including amounts expended for meals_and_lodging other than amounts which are lavish_or_extravagant under the circumstances while away from home in the pursuit of a trade_or_business sec_1_162-1 of the regulations states in general that business_expenses deductible from gross_income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade_or_business except items which are used as the basis for a deduction or a credit under provisions of law other than sec_162 sec_274 of the code provides that no deduction or credit shall be allowed under sec_162 or sec_212 for any traveling expense for any item with respect to an activity which is of a type generally considered to constitute entertainment amusement or recreation or with respect to a facility used in connection with such an activity for any expense for gifts or with respect to any listed_property as defined in sec_280f unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement regarding amount time and place business_purpose and business relationship sec_1_274-5t of the regulations requires each employee to provide substantiation of the business_purpose of each expense generally in writing sec_1_274-5t of the regulations provides that no deduction or credit shall be allowed for travel unless the taxpayer substantiates the following elements amount - amount of each separate expenditure for traveling away from home time - dates of departure and return for each trip away from home and number of days away from home spent on business places - destinations or locality of travel and business_purpose - business reason for travel or nature of the business benefit derived as a result of the travel sec_1_274-5t of the regulations provides the elements that must be proved with respect to an expenditure for listed_property to include the amount of each separate expenditure the amount of business investment use the date of the expenditure or use and the business or investment purpose sec_1_274-5t of the regulations states that a taxpayer to meet the adequate_records requirements of sec_274 shall maintain an account book diary statement of expense or similar record and documentary_evidence which in combination are sufficient to establish each element of an expenditure sec_1_274-5t of the regulations states that the account book diary statement of expense or similar record must be prepared or maintained in such manner that each recording of an element of an expenditure is made at or near the time of the expenditure of sec_1_274-5t and for periods after date sec_1 c ii of the regulations requires the employee to maintain documentary_evidence such as receipts paid bills or similar evidence sec_1_274-5t of the regulations provides that if an employee fails to establish to the satisfaction of the service that the employee has substantially complied with the adequate_records requirements of the regulations the employee may satisfy such requirement by providing i the employee’s own statement whether written or oral containing specific information in detail as to each element plus ii other corroborative evidence sufficient to establish each element sec_1_274-5t of the regulations indicates that an independent_contractor shall substantiate with respect to his reimbursements each element of an expenditure in accordance with the requirements of paragraph c of this section and to the extent he does not so substantiate he shall include such reimbursements in income an independent_contractor shall so substantiate a reimbursement for entertainment regardless of whether he accounts for such entertainment sec_280f of the code defines listed_property as any passenger_automobile other_property used as a means of transportation any computer_or_peripheral_equipment and any cellular telephone or other similar telecommunications equipment sec_53_4958-4 of the foundation and similar excise_taxes regulations provides that an economic benefit is not treated as consideration for the performance of services ie compensation unless the organization providing the benefit clearly indicates its intent to treat the benefit as compensation when the benefit is paid if an organization fails to provide contemporaneous substantiation of such intent any services provided by the disqualified_person will not be treated as provided in consideration for the economic benefit for purposes of determining the reasonableness of the transaction if the substantiation requirement is not satisfied then the value of the benefit will be treated as an automatic excess_benefit taxable under code sec_4958 sec_53_4958-4 of the regulations provides that a benefit may be contemporaneously substantiated as compensation i if the organization reports the benefit as compensation on a federal tax information_return or ii if the disqualified_person timely reports the value of the benefit as income on the person’s federal_income_tax return or iii if the benefit is described as compensation to the disqualified_person in a contemporaneous employment contract board_of directors minutes or other documents indicating that an authorized body of the organization approved the benefit as compensation in john marshall law school v united_states ct_cl the law school and the college paid for the founding family’s automobiles education travel_expenses insurance policies and personal equipment the court determined that the expenditures_for the founding family were not ordinary and necessary expenses in the course of the law school’s and the college’s operations the court also held that the payment of such personal expenses for the founder’s children by the law school provided direct and substantial benefit to the founder of the law school and his brother the court held that these payments constituted prohibited of inurement of the law school’s earnings to the founder and his brother parents of the children receiving the benefits analysis before the enactment of sec_4958 of the code in inurement violations resulted only in adverse consequences to the exempt_organization sec_4958 now imposes intermediate_sanctions excise_taxes on each excess_benefit_transaction between an applicable_tax-exempt_organization and a disqualified_person the sanction is assessed against the disqualified_person if a disqualified_person has received excess_benefits within the meaning of sec_4958 issue applicable_tax-exempt_organization x is an applicable tax exempt_organization as defined under sec_4958 of the code and sec_53_4958-2 of the regulations since it was recognized as an organization described in sec_501 and was exempt from tax under sec_501 but was not a private_foundation as defined in sec_509 for the years under examination issue disqualified_person e is a disqualified_person as defined by sec_4958 of the code sec_4958 defines a disqualified_person as any person who was at any time during the 5-year period ending on the date of such transaction in a position to exercise substantial influence over the affairs of the organization sec_4958 defines a disqualified_person as a member_of_the_family of an individual described in sec_4958 of the regulations sec_4958 defines a family_member as the family of any individual to include his spouse ancestors children grandchildren great grandchildren and the spouses of children grandchildren and great grandchildren brothers and sisters and their spouses are also part of the family a is the founder and president of x b is a’s wife e is the spouse of f the daughter of issue excess_benefit transactions an excess_benefit_transaction is a transaction in which an economic benefit is provided by an applicable_tax-exempt_organization directly or indirectly to or for_the_use_of any disqualified_person and the value of the economic benefit provided by the organization exceeds the value of the consideration including the performance of services received for providing such benefit a and b of expenditures of organization funds that satisfy the deductions requirements under sec_162 and to the extent relevant including the substantiation requirements of those provisions and the regulations thereunder do not constitute excess_benefits under sec_4958 any reimbursement of expenses by the organization or direct expenditures of organization funds are automatic excess_benefits to the extent that they do not satisfy the requirements of sec_1_62-2 per sec_53_4958-4 or sec_162 and to the extent relevant of the code and the regulations thereunder unless they are substantiated as compensation pursuant to sec_53_4958-4 of the regulations in response to an idr request x stated that e had exclusive use of the gmc truck e’s attorney subsequently provided a letter stating that e used the truck exclusively in connection with his management duties at the job location an x-owned investment_property and that he did not assume those duties until after the examination years the response of e’s attorney does not comply with revproc_2003_2 2003_1_cb_76 sec which requires that the taxpayer’s facts must be provided under penalties of perjury where there is a disagreement as to facts although it should be relatively easy to provide documentation as to when e’s duties at the job location began and when he began driving the truck no such substantiating documents were furnished nor was any documentation or other evidence furnished as to how the truck was used in the examination years when he used the truck it was his duty to maintain records evidencing that the use was for x business-not personal business or business on behalf of other clients of his employer which managed the property for x on the present record the only evidence is that in the x response to the idr which states that e used the truck in the examination years for undescribed purposes in the instant case e and members of his wife f’s family expended funds of x and used x assets in a variety of ways described below and in separate technical_advice memoranda e does not contend that these expenditures and uses were intended as compensation to himself as he was not an x employee in any event there is no evidence in the record that would satisfy the contemporaneous substantiation rules of section c of the regulations e did not seek reimbursement for the expenditures therefore the rules concerning accountable plans do not apply accordingly the expenditures and use of x funds described below must be treated as automatic excess_benefits the excess_benefit_transaction amounts for_the_use_of the vehicle are as follows ------- ------- ------- dollar_figure ------------dollar_figure ------------dollar_figure ------------ total for all years dollar_figure------------- of issue taxable_period the excess_benefit transactions occurred in the years under audit the taxable periods are determined to begin on ---------------------- ---------------------- and ---------------------- issue initial tax on the disqualified persons an excise_tax as provided by sec_4958 of the code equal to percent of the excess_benefit amount should be imposed on e e is the son-in-law of a x’s founder and as such constitutes a disqualified_person under the applicable regulations in addition we note that a was founder president and chief executive of x as a practical matter he had total control of all x expenditures he either approved of the excess_benefit transactions by his son-in-law or he acquiesced in them if a had withdrawn funds from x and given them to his family members there would have been no question that such gifts would be taxable_excess benefits to him by authorizing or allowing his son-in-law and other relatives- the natural objects of his bounty-to make unlimited expenditures of x funds for personal purposes without any substantiation or evidence of an x business_purpose he in effect improperly removed charitable assets from x and gave them to his relatives accordingly a not only is liable for the excess_benefit transactions from which he personally benefited but also is jointly and severally liable for all the excess_benefits outlined in technical_advice memoranda of today regarding d b c and e see john marshall law school v united_states supra code sec_4958 issue second_tier_tax on the disqualified_person it is proposed that an excise_tax as provided by sec_4958 of the code equal to percent of the excess_benefit be imposed in this case in which a sec_4958 tax is imposed on an excess_benefit_transaction and the transaction is not corrected within the taxable_period the taxable_period means the period beginning with the date on which the transaction occurs and ending on the earlier of the date of mailing a notice_of_deficiency or the date on which the tax imposed by sec_4958 is assessed because the transactions were not corrected within the taxable_period pursuant to sec_4958 of the code the percent tax should be included in the statutory_notice_of_deficiency of


cri-leslie llc donald w wallace tax_matters_partner petitioner v commissioner of internal revenue respondent docket no filed date p the tax_matters_partner for a limited_liability_company treated as a tefra partnership for federal_income_tax pur- poses asserts that the partnership is entitled to capital_gain treatment under sec_1234a for its right to retain for- feited deposits of dollar_figure from a canceled sale of real prop- erty used in its trade_or_business in the tax_year the real_property was not a capital_asset as defined in sec_1221 but was sec_1231 property held the partner- ship is not entitled to capital_gain treatment on the forfeited deposit sec_1234a applies only to capital assets not to sec_1231 property leslie joel barnett david l koche micah g fogarty and christopher r dingman for petitioner timothy a sloane andrew michael tiktin and lauren epstein for respondent opinion laro judge this case is a partnership-level proceeding subject_to the unified_audit and litigation procedures of the tax equity and fiscal responsibility act of tefra pub_l_no sec_402 stat pincite petitioner donald w wallace the tax_matters_partner tmp asserts that respondent’s notice of final_partnership_administrative_adjustment fpaa issued to cri-leslie llc cri-leslie for the tax_year improperly recharacterized an item of capital_gain as ordinary_income respondent determined an adjustment to cri-leslie’s federal_income_tax return by increasing its ordinary_income by dollar_figure and decreasing net_long-term_capital_gain by the same amount this case upon joint motion of the parties was submitted fully stipu- lated for decision without trial see rule in the fpaa respondent had made a further adjustment by increasing cri-leslie’s net_earnings_from_self-employment by dollar_figure however respondent has since conceded this adjustment and we do not address it here unless otherwise indicated section references are to the internal rev- enue code code in effect for the year in issue rule references are to the continued united_states tax_court reports the issue before us which is one of first impression is whether cri-leslie is entitled to capital_gain treatment under sec_1234a for its right to retain forfeited deposits of dollar_figure from a canceled sale of real_property used in its trade_or_business in the tax_year we hold that it is not i overview background upon the parties’ joint motion the case is deemed fully stipulated under rule the stipulations of fact and the facts drawn from stipulated exhibits are incorporated herein petitioner is the tmp of cri-leslie this case is appealable to the court_of_appeals for the eleventh circuit absent stipu- lation of the parties to the contrary ii cri-leslie cri-leslie was a florida limited_liability_company during the tax_year for federal_income_tax purposes it was a tefra partnership its principal_place_of_business was in florida at the time the petition in this case was filed and it has been on the accrual_method of accounting at all rel- evant times during cri-causeway llc a florida limited_liability_company cri-causeway and leslie hawk llc owned of the capital profits and loss interests in cri- leslie capital realty investors llc a florida limited_liability_company capital realty owned of cri- causeway and treated cri-causeway as a disregarded_entity for federal_income_tax purposes donald w wallace and ben wacksman each owned a capital profits and loss interest in capital realty cri-leslie had filed a form_1065 u s return of partner- ship income for the taxable_year ended date on date respondent mailed the fpaa for the tax_year to the partners of cri-leslie including indirect_partner donald w wallace tax_court rules_of_practice and procedure although wallace was never a direct member of cri-leslie this court has appointed him cri-leslie’s tmp under rule for purposes of this cri-leslie llc v commissioner iii the radisson bay harbor hotel on date cri-leslie acquired for dollar_figure mil- lion the radisson bay harbor hotel in tampa florida the property consisted of both land and improvements thereon the improvements included the hotel crabby bill’s res- taurant a swimming pool a parking lot and landscaping after purchasing the property cri-leslie hired a third party to manage the operations of the hotel and restaurant on the property on date cri-leslie entered into an agreement of purchase and sale with rps llc under this agreement cri-leslie agreed to sell the property to rps llc for dollar_figure million the agreement was revised and amended several times over the next two years including an increase in the property’s purchase_price to dollar_figure million rps llc did not close the purchase of the property from cri-leslie and the agreement terminated in by its terms cri-leslie claimed deductions under sec_162 on its partnership return for expenses related to the operation of the hotel cri-leslie also claimed a deduction for deprecia- tion under sec_167 with respect to the hotel on its partnership return iv forfeited deposits cri-leslie received dollar_figure of deposits from rps llc in connection with the agreement these deposits would have been applied to the property’s purchase_price if the sale had closed rps llc defaulted on the agreement in and forfeited the total sum of deposits equal to dollar_figure paid to cri-leslie in that year cri-leslie reported the dollar_figure of deposits as net long- term capital_gain on schedule k line 9a partner’s distribu- tive share items of its partnership income_tax return the parties have stipulated that this amount is includible in cri-leslie’s income for taxable_year the parties have further stipulated that from the date that cri-leslie acquired the property in and through date the property was real_property used in cri-leslie’s hotel and restaurant business within the meaning of section case united_states tax_court reports a the parties have also stipulated that the property constitutes property used in a trade_or_business as defined by sec_1231 of cri-leslie for the tax_year and the parties stipulate that had cri-leslie sold the prop- erty in pursuant to the agreement’s terms the gain from the sale would have resulted in net sec_1231 gain reportable by cri-leslie on schedule k of its income_tax return i overview discussion the code generally provides for more favorable tax_rates on net_capital_gain than it does on ordinary_income see sec_1 net_capital_gain is the excess of the net_long-term_capital_gain for the taxable_year over the net short-term cap- ital loss for such year sec_1222 long-term_capital_gain in turn is gain from the sale_or_exchange of a capital_asset held for more than year sec_1222 sec_1221 defines capital assets generally under sec_1221 specifically a capital_asset is property held by the taxpayer whether or not connected with his trade_or_business but does not include property used in his trade_or_business of a character which is subject_to the allowance for deprecia- tion provided in sec_167 or real_property used in his trade_or_business in a given tax_year if there is net gain from the sale_or_exchange of depreciable property-or real property-used in a trade_or_business and held for more than one year see sec_1231 the code provides that such gain shall be treated as long-term_capital_gains sec_1231 on the other hand if there is a net_loss from this type of property that loss is treated as an ordinary_loss sec_1231 the code also addresses the treatment of gain and loss from the sale_or_exchange of options thus in the case of a purchaser of an option sec_1234 provides gain_or_loss attributable to the sale_or_exchange of or loss attributable to failure to exercise an option to buy or sell property shall be consid- ered gain_or_loss from the sale_or_exchange of property which has the respondent however does not stipulate that the dollar_figure forfeited deposit is sec_1231 gain cri-leslie llc v commissioner same character as the property to which the option relates has in the hands of the taxpayer or would have in the hands of the taxpayer if acquired by him sec_1234b provides for similar treatment for gains or losses from securities futures contracts for a grantor of an option gain_or_loss from any closing_transaction with respect to and gain on lapse of an option in property shall be treated as a gain_or_loss from the sale_or_exchange of a capital_asset held not more than year sec_1234 there is a separate code section covering gains or losses from terminations of certain contractual rights sec_1234a gains or losses from certain terminations gain_or_loss attributable to the cancellation lapse expiration or other termination of- a right or obligation other than a securities_futures_contract as defined in sec_1234b with respect to property which is or on acquisition would be a capital_asset in the hands of the taxpayer or a sec_1256 contract as defined in sec_1256 not described in paragraph which is a capital_asset in the hands of the taxpayer shall be treated as gain_or_loss from the sale of a capital_asset the pre- ceding sentence shall not apply to the retirement of any debt_instrument whether or not through a_trust or other participation arrangement the internal_revenue_service has not promulgated any final regulations under sec_1234a however under proposed_regulations any gain_or_loss from termination_payments under notional_principal_contracts and settlements of obliga- tions under bullet swaps and forward contracts is treated as gain_or_loss from a termination of the notional principal con- tract bullet swaps or forward_contract respectively sec_1 1234a-1 proposed income_tax regs fed reg date there is no question that sec_1234a extends to rights or obligations relating to property that is described in sec_1221 a -that is to capital assets however as noted above sec_1221 excludes depreciable_property used in the taxpayer’s trade_or_business as well as real_property used in his trade_or_business the parties have stipulated that the property at issue is real_property used in cri-leslie’s hotel and restaurant busi- ness meaning that it falls within sec_1221 and is therefore precluded from classification as a capital_asset under sec_1221 the parties have further stipulated united_states tax_court reports that the property is properly classified under sec_1231 as property_used_in_the_trade_or_business of cri- leslie had cri-leslie sold the property in the gain from the sale would have resulted in sec_1231 gain which would be treated as long-term_capital_gains under sec_1231 we see no reason to challenge the parties’ stipulations the sole issue still in dispute is whether capital_asset as used in sec_1234a extends to property described in sec_1231 ii the parties’ arguments a petitioner’s argument petitioner concedes that the radisson bay harbor hotel is property described in sec_1231 that is sec_1231 prop- erty however petitioner goes on to make a novel argument that no court to date has yet squarely addressed that con- gress clearly intended for sec_1234a to apply not only to payments received from contract terminations relating to capital assets but also to payments from terminations relating to sec_1231 property petitioner points out the unusual status of property subject_to sec_1231 including the fact that some commentators have referred to this property as quasi-capital_assets see eg boris i bittker lawrence lokken federal taxation of income estates and gifts para pincite 3d ed had cri-leslie sold the property in the resulting gain indeed would have been taxed at the same rate as long-term_capital_gain petitioner contends that congress enacted sec_1234a to ensure that taxpayers received the same tax characteriza- tion of gain_or_loss whether the property is sold or the con- tract to which the property is subject is terminated under this reasoning it is inconsistent to treat termination pay- ments on a contract as ordinary_income where a sale of the underlying property would have been taxed at capital_gain rates petitioner searches within the legislative_history of sec_1234a to distill a congressional purpose to tax similar economic transactions similarly see eg s rept no pincite 1997_4_cb_1067 in general the committee believes that present law is deficient cri-leslie llc v commissioner since it taxes similar economic transactions differently effectively provides some but not all taxpayers with an election and its lack of certainty makes the tax laws unnecessarily difficult to administer petitioner concludes that there is an inherent ambiguity in the apparent meaning of sec_1234a and urges us to con- sider congressional intent see 489_us_235 the plain meaning of legislation should be conclusive except in the ‘rare cases in which the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters ’ in such cases the intention of the drafters rather than the strict language controls alteration in original quoting 458_us_564 even if the statute is unambiguous petitioner contends that the legislative_history is clearly con- trary to the statute’s plain meaning petitioner would have us hold that a clear and unambiguous expression of legisla- tive purpose to include sec_1231 property within the ambit of sec_1234a overrides the plain meaning of sec_1234a as extending to capital assets only b respondent’s argument respondent urges us to interpret sec_1234a narrowly and look no further than the statute’s plain and unambig- uous wording according to respondent sec_1234a expressly references a capital_asset in the hands of the tax- payer since the radisson bay harbor hotel was sec_1231 property it by definition was not a capital_asset as defined in sec_1221 and thus cannot fall under sec_1234a respondent points to caselaw requiring federal courts to give effect to congressional intent that is made clear in a statute see 530_us_327 and congressional intent is to be discerned primarily from the statutory text see cts corp v waldburger 573_us_1 respondent further notes that by the time congress enacted sec_1234a in the separate definitions of capital_asset and property used in the taxpayer’s trade_or_business were already firmly established in the code since congress presumably enacts legislation with knowledge of united_states tax_court reports the law a newly-enacted statute is presumed to be harmo- nious with existing law and judicial concepts 437_f3d_1322 fed cir citing 441_us_677 indeed had congress intended to include sec_1231 property within the scope of sec_1234a it might have used wording similar to that in sec_1234 gain_or_loss attributable to the sale_or_exchange of or loss attributable to failure to exercise an option to buy or sell property shall be considered gain_or_loss from the sale_or_exchange of property which has the same character as the property to which the option relates has in the hands of the taxpayer or would have in the hands of the taxpayer if acquired by him since congress wrote sec_1234a to apply only to gain_or_loss from a termination of rights or obligations relating to property that is a capital_asset respondent concludes that the statute should be read nar- rowly to the exclusion of property described in sec_1231 iii applicability of sec_1234a to sec_1231 property a plain meaning of sec_1234a to determine whether sec_1234a extends to sec_1231 property we must first turn to the relevant statutory text 534_us_438 which we interpret according to its plain meaning 110_tc_236 aff ’d without published opinion 198_f3d_248 6th cir we look beyond the plain meaning of the words used in the statute only when their meaning is inescapably ambiguous id quoting 469_us_70 n we therefore interpret a statute with ref- erence to the legislative_history primarily to learn the pur- pose of the statute and to resolve any ambiguity in the words contained in the text 118_tc_1 ultimately o ur task is to give effect to the will of congress and where its will has been expressed in reason- ably plain terms ‘that language must ordinarily be regarded as conclusive ’ griffin u s pincite quoting 447_us_102 cri-leslie llc v commissioner sec_1234a applies to the termination of a right or obligation with respect to property which is or on acquisition would be a capital_asset in the hands of the tax- payer the dispute in this case hinges on the meaning of capital_asset as we delve into statutory interpretation we are reminded of the admonition in 513_us_115 that a mbiguity is a creature not of definitional possibilities but of statutory context regardless of the myriad ways in which the term capital_asset may be understood in various contexts sec_1234a is a provision of this country’s tax code therefore we look to the code for the appropriate definition and specifically to sec_1221 as we observed above sec_1221 defines capital_asset as any property held by a taxpayer unless specifically excluded sec_1221 the exclusion relevant here is the second one removing from the definition of capital_asset property used in a taxpayer’s trade_or_business of a character which is subject_to the allowance for depreciation provided in sec_167 or real_property used in his trade_or_business sec_1221 petitioner concedes that the hotel property falls within this exclusion and so is not a capital_asset as defined in sec_1221 notwithstanding the exclusion of depreciable_property and real_property used in a trade_or_business from the definition of capital_asset sec_1231 does cover certain such prop- erty specifically it extends to property_used_in_the_trade_or_business of a character which is subject_to the allowance for depreciation provided in sec_167 held for more than year and real_property used_in_the_trade_or_business held for more than year sec_1231 the interplay between sec_1221 and sec_1231 has been described well by bittker and lokken taken in combination sec_1221 and sec_1231 have the following effects on depreciable_property and real_property used in a trade or busi- ness for example to the mind of a non-tax lawyer a capital_asset can be a long-term asset used in the operation of a business or used to produce goods or services such as equipment land or an industrial plant black’s law dictionary 10th ed first definition a definition that taken at face value would seem to include sec_1231 property united_states tax_court reports by virtue of sec_1221 these items are not capital assets with the result that a disposition produces ordinary_income or ordinary_loss except as provided by sec_1231 under sec_1231 if the asset has been held for more than one year it usually produces capital_gain if sales of such property during the year result in a net gain but ordinary_loss if these sales yield a net_loss bittker lokken supra para pincite the parties have stipulated that the hotel property is indeed a sec_1231 asset since sec_1234a expressly refers to property that is a capital_asset in the hands of the taxpayer and no other type of property and since property described in sec_1231 is excluded explicitly from the definition of capital_asset in sec_1221 we must conclude that the plain meaning of capital_asset as used in sec_1234a does not extend to sec_1231 property we therefore are not convinced by petitioner’s argument that the statute is inherently ambig- uous if one looks to the plain meaning of sec_1234a it is true that the treatment of gains and losses from termi- nations of rights or obligations relating to property will depend on whether that property is a capital_asset or is described in sec_1231 forfeited deposits from the termi- nation of a contract to sell a hotel are taxed at capital_gain rates if the hotel is held as a passive investment the same forfeited deposits are taxed as ordinary_income if the hotel is used in a trade_or_business but regardless of any potential intellectual inconsistency in this disparate treatment the plain meaning of sec_1234a remains inescapable we do not see any ambiguity in the apparent meaning of the statute while petitioner seeks to adduce the legislative_history of sec_1234a to impeach the statute’s plain meaning where a statute is clear on its face we require unequivocal evidence of legislative purpose before construing the statute so as to override the plain meaning of the words used therein 101_tc_196 citing 96_tc_895 and 83_tc_742 we are unable find anything in the legisla- tive history of sec_1234a to support petitioner’s assertion that congress intended to include sec_1231 property cri-leslie llc v commissioner within its ambit we certainly find no evidence of a clear and unambiguous expression of legislative purpose to do so indeed we have not seen any reference to the application of sec_1234a to sec_1231 property outside of isolated mentions by some legal commentators if congress wished to extend sec_1234a to sec_1231 property it has had years in which to amend the statute sec_1234a applies to property which is or on acquisition would be a capital_asset in the hands of the taxpayer we find it telling that the statute does not read property which has the same character as the property to which the right or obligation relates has in the hands of the taxpayer or would have in the hands of the taxpayer if acquired by him see sec_1234 see also sec_1234b had congress intended to cover sec_1231 property under sec_1234a congress could have and likely would have used wording parallel to that in sec_1234 and sec_1234b the clarity of congressional purpose in restricting the reach of the statute to capital assets is ineluctable accordingly we hold that the plain meaning of the statute must govern here b caselaw interpreting sec_1234a we have found the plain meaning of sec_1234a to exclude sec_1231 property from the statute’s scope with no contradictory interpretation suggested by any legislative_history for the sake of thoroughness however we conclude the statute was originally enacted as part of the economic_recovery_tax_act_of_1981 pub_l_no sec_507 stat pincite and was aimed at tax_straddles which allowed taxpayers to effectively select the most favorable tax treatment in disposing of capital assets by strategically canceling forward currency or security contracts and thereby getting either ordinary losses or capital_gains s rept no pincite 1981_2_cb_412 the only substantive amendment to sec_1234a po- tentially relevant here was by the taxpayer_relief_act_of_1997 pub_l_no sec a stat pincite which expanded the statute’s scope from certain types of personal_property to all property including in- terests in real_property and non-actively traded personal_property this change was aimed at the same tax-straddle-type strategy which by that time was being applied to various property interests besides personal prop- erty actively_traded on established exchanges to which sec_1234a was limited when originally enacted see h_r rept no pincite 1997_4_cb_319 united_states tax_court reports with an examination of the caselaw interpreting sec_1234a sec_1234a has not received extensive treatment in the caselaw in past cases we have not even entertained the possibility that the statute would extend to sec_1231 property see eg 141_tc_533 in our view congress extended the application of sec_1234a to terminations of all rights and obligations with respect to property that is a capital_asset in the hands of the taxpayer or would be if acquired by the taxpayer rev’d 779_f3d_311 5th cir neither have other courts see eg 686_f3d_791 9th cir noting that sec_1234a applies only to such ‘ g ain or loss with respect to prop- erty which is a capital_asset in the hands of the taxpayer’ and finding that a right to a relator’s share was not a cap- ital asset alteration in original a series of cases addresses whether sec_1234a changed the law in on the characterization of certain trans- actions or merely removed doubt as to their treatment see 108_tc_208 rev’d and remanded on an unrelated issue 159_f3d_593 d c cir and rev’d and remanded sub nom 148_f3d_186 2d cir 80_tc_394 stoller v commissioner tcmemo_1990_659 wl at aff ’d in part rev’d in part 994_f2d_855 d c cir these cases rule on the tax consequences of certain transactions in tax years preceding and so do not inform our decision in this matter our most thorough examination of sec_1234a was in pilgrim’s pride corp v commissioner t c pincite in pilgrim’s pride we ruled on whether a loss resulting from the abandonment of certain securities was ordinary or cap- ital we reviewed the statute’s legislative_history to deter- mine whether sec_1234a applies to inherent property rights of ownership such as the right to dispose_of property as well as to derivative contractual rights and obligations and concluded that it does id pincite although in pil- grim’s pride we dealt with an issue different from that with which we deal here our analysis of the statute’s purpose remains unchanged congress originally enacted section cri-leslie llc v commissioner 1234a to combat straddles and other transactions exploited by tax_shelter promoters and in extended the statute’s application to all types of property that are or on acquisi- tion would be capital assets in the hands of the taxpayer id pincite the court_of_appeals for the fifth circuit reversed our ultimate decision in pilgrim’s pride and held that sec_1234a applies to the abandonment of rights or obligations with respect to capital assets but not to the abandonment of the assets themselves pilgrim’s pride corp v commissioner f 3d pincite however the court_of_appeals did not dispute our interpretation of the legislative purpose underlying the enactment of sec_1234a see id pincite the court_of_appeals further reiterated the understanding underlying the entire body of sec_1234a jurisprudence that b y its plain terms sec_1234a applies to the termination of rights or obligations with respect to capital assets eg derivative or contractual rights to buy or sell capital assets id pincite iv conclusion we have examined the plain meaning of sec_1234a and relevant caselaw we find no support for petitioner’s argu- ment that sec_1234a extends to sec_1231 property or that congress intended that it do so in effect petitioner has invited us to expand the statute’s scope by applying an interpretation contrary to its plain meaning and the plain intent of congress since i t is emphatically the province and duty_of the judicial department to say what the law is marbury v madison u s cranch we cannot and will not apply a contrary interpretation where the law is otherwise valid and clear we therefore decline petitioner’s invitation to extend sec_1234a to sec_1231 property and so defer to the will of congress as manifested in the text of the statute we have considered all of the parties’ arguments and to the extent not discussed above conclude that those argu- ments are irrelevant moot or without merit to reflect the foregoing decision will be entered for respondent f


department of the treasury masonncron cme tax_exempt_and_government_entities_division feb date arews live unthem gf nl f0 dollar_figure ov 03-zo geyyy of ysu oy -od y suz ve 0g 4furbey-09 contact person identification_number telephone number g0 by employer_identification_number ' legend dear sir or madam we have considered the ruling requests dated date and date submitted on behalf of m a private_foundation its three independent directors d e and f the independent directors and c the fourth director these parties request rulings under sec_501 sec_4941 and sec_4945 of the internal_revenue_code in connection with the proposed settlement the settlement of a lawsuit brought against the estate of b the estate by c facts m was formed in exempt from federal_income_tax as an organization described in sec_501 of the code and is also classified as a private_foundation under sec_509 m carries out its exempt purposes by making grants to public_charities under the nonprofit corporation statute of the state of n mis the independent directors are all residents of n and were business colleagues and friends of b the founder of m who died in in b executed his last will and testament the will after b died the will was admitted to probate in a court of the state of n the probate_court consistent with b’s direction the probate_court appointed a certain bank as the personal representative and executor of the estate the personal representative in the will b made specific bequests to numerous individuals ranging in amount from dollar_figure x to dollar_figurex c received a bequest of dollar_figurex and no other_property b left the residue of his estate estimated to total over dollar_figurex to m __ aside from being b’s long-time friend and employee c served for many years as an employee and as the assistant secretary and assistant treasurer of o another ronoperating private_foundation which was established by b's parents and his served as directors of o for many years and in c timely filed a claim and accompanying complaint the claim against the estate in the probate_court alleging among other things that b had breached a promise to provide retirement benefits to her through his will and that b had failed to compensate her for services which she rendered to him during his lifetime in the claim c seeks compensatory_damages of dollar_figurex from the estate plus punitive and treble_damages interest attorneys’ fees and costs a few days later the personal representative denied c's claim in total and in the estate filed an answer in the probate_court denying liability for the claim after extended negotiations conducted with the assistance of a neutral mediator c and the estate have executed a conditional settlement agreement the settlement agreement’ the estate and m through the independent directors have carefully evaluated and considered the assertions by c and evidence submitted during discovery in support of her claim and have determined that the amount that the estate proposes to pay c in connection with the settlement is fair adequate and reasonable the grounds thereof are explained below a neutral mediator has stated in his report to the probate_court that in his opinion the settlement is a fair and reasonable compromise of a genuinely disputed action the mediator devotes nearly one-third of his legal practice to the mediation and compromise of lawsuits serving as mediator in over big_number cases he has never acted as counsel for the estate c m or any of the independent directors for over vears c provided personal and business services to both b and o in b hired c to serve as financial assistant and bookkeeper to manage his business investments and affairs over the years c's duties steadily increased she served as program and office manager assistant secretary and assistant treasurer for o she managed the organization's day-to-day operations consulted with its board and other officers and provided oversight with respect to investment funds after over years_of_service c retired from o in in these capacities aside from the above business functions c performed a variety of personal services for b she managed his household and personal finances this included the hiring and supervision of household employees- including housekeepers cooks and gardeners- and the payment of b's bills further when b became ill which was frequent during his final years c would employ and assist b's home nursing staff she continued to serve b’s business and personal needs even after her retirement from o during several periods when b was severely ill over the years c resided at his home to be available hours a day seven days a week this included b's final illness from through in addition c has served as a director and as the secretary of m since in these capacities she has conducted most of the day-to-day work of m including evatuating grant proposals communicating with applicants and grantees balancing the checkbook and maintaining corporate records she did not receive any compensation from m for these services although c continues to serve as an m director and as its secretary she has not participated in any of m's discussions of the fawsuit or of the settlement and she has not participated in m's decision to consent to the settlement over the years that c worked for b and o her annual salary gradually increased to the point where shortly before she retired from o at the end of approximately dollar_figurex at that time c received certain health benefits which were paid for partially by o and partially by b premiums after c retired from o b assumed responsibility for providing all of her health insurance benefits and continued to pay for her long-term care insurance b also paid the entire cost of c’s long-term care insurance her annual salary was during her employment c received small gifts from b from time to time along with his other employees the total value of such gifts did not exceed dollar_figurex twice in the _c purchased used cars from b at prices that the parties determined to be fair and reasonable because of her unique familiarity with b’s business affairs particularly his investments in oil and mineral_interests the personal representative hired c to assist in the administration of the estate after b's death for these services the estate is paying her the annua equivalent of dollar_figurex which was roughly her annual salary from b at the time of his death over the course of her long employment b and c developed a close personal relationship c accompanied b to numerous civic social and charitable functions over the years the two also traveled together and spent annually at the to of b's family during these vacations c continued to perform her professional responsibilities as financial assistant and bookkeeper and she also managed the daily activities of the family household c asserts that in attomey to prepare a prenuptial agreement although they did not marry the personal relationship between c and b remained close and c continued to perform a broad variety of personal services for b accepted and relied upon b's representations that he would provide for her retirement in his will in her claim c has alleged that because of this relationship she b proposed marriage to her and directed his c expected that her total retirement package would include a stipend equal to her annual salary less social_security payments as well as continued health benefits according to the claim and supporting materials b made numerous personal assurances to c that he would provide for her retirement through his will over the years c retained a financial planner who met with her and with b to discuss her retirement among other issues b met with the financial planner and c on two separate occasions and assured him that c need not concern herself with p2- a separate retirement_plan because b had personally established a fund that upon his death would supply sufficient funds to provide c income for the rest of her life accordingly c did not plan or establish any individual_retirement_plan for herself relying upon b's representations through the years in recognition of c's longstanding service and dedication to o its board_of directors approved a partial retirement benefit for her in her total salary upon her retirement o agreed to pay c a monthly stipend of dollar_figurex or approximately dollar_figure annually that stipend has been paid since her retirement from o at the end of according to her claim c did not question this arrangement or seek a greater retirement benefit because she understood that b personally would substantially supplement the monthly payment from o with a retirement fund that he had implemented or planned to implement on her behalf that represented a relatively small portion of since c filed her claim with the probate_court the parties have engaged in discovery and extensive arm's length negotiations regarding the lawsuit both the personal representative and m's independent directors have carefully evatuated the merits of c’s allegations and the evidence she has supplied in support thereof ultimately to avoid the expense delay and uncertainty of protracted litigation the possibility of distracting publicity about m and b’s personal life and the potential for a significant adverse judgment the estate and m have determined that it is in m’s best interests for the estate to compromise and settle the tawsuit accordingly on mediator the parties reached the settlement which has been memorialized in the settlement agreement this agreement includes the following key provisions under the direction and guidance of a neutral i di ii the estate will pay to c a total net amount of dollar_figurex net of her attorneys’ fees which the estate will pay subject_to a cap of dollar_figurex and net of taxes which the estate will calculate and pay in addition to the dollar_figurex as of the effective date of the settlement agreement c will provide a full and complete release in favor of b the estate the personal representative m and the ndependent directors and c’s claim will be dismissed with prejudice the settlement is conditioned on the approval of the probate_court which was obtained on and a favorable ruling from the irs that the settlement will not affect m’s exempt status under code sec_501 result in self-dealing under sec_4941 or constitute a taxable_expenditure under sec_4945 independent of the settlement agreement the personal representative has decided to continue to employ c through present rate of compensation c will continue on a part-time basis at a reduced_rate of pay until the personal representative has determined that c's continued services are necessary for the administration and winding up of b's various financial and business interests tn particular c has extensive experience with b's oil and mineral holdings which span several states she is also familiar with b's other real_estate as a full-time_employee of the estate at her interests and loans made by b that are secured_by real_estate interests in the western united_states the personal representative presently is attempting to collect on these debts or attach new properties as security and c's assistance has been and will remain vital in these endeavors in addition b’s business office remains open and c has continued to manage certain interests such as properties b had leased to various tenants on the estate’s behalf in a meeting on the independent directors of m unanimously agreed that the settlement is fair and reasonable and that the settlement is in the best interests of m c did not attend or participate in the meeting the independent directors have been guided in the evaluation of the settlement by m's legal counsel who has served as attorney for both m and the estate and has recommended that the estate and m agree to the settlement further m and the estate have taken into account the guidance of the neutral mediator who also recommended that all of the parties agree to the settlement rulings requested m and the independent directors request the following rulings the settlement and its implementation will not adversely affect m’s exemption from federal_income_tax under sec_501 c of the code the settlement and its implementation will not constitute self-dealing by m under sec_4941 of the code the settlement and its implementation will not constitute self-dealing by m that would result in personal liability to the independent directors under sec_4941 of the code the settlement and its implementation will not constitute taxable_expenditures by m under sec_4945 of the code and the settlement and its implementation will not constitute taxable_expenditures by m that would result in personal liability to the independent directors under sec_4945 of the code law sec_501 of the code provides for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable educational scientific or other specified exempt purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual and which does not engage in proscribed fegislative or political activities sec_1_501_c_3_-1 of the income_tax regulations states that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of the purposes specified in code section c an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1 c -1 c of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_a_-1 defines the words private_shareholder_or_individual in code sec_501 as referring to persons having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 of the regulations provides that an organization is not organized or operated exclusively for one or more exempt purposes under code sec_501 unless it serves a public rather a private interest thus it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests revrul_69_383 1969_2_cb_113 holds that the sec_501 tax exempt status of a hospital will not be jeopardized where after arm's length negotiations it enters into an agreement with a hospital-based radiologist to compensate him on the basis of a fixed percentage of the department's income the rationale for the ruling is as follows the parties had negotiated the agreement on an arm’s length basis the radiologist had no control_over the hospital itself the amount of compensation was reasonable in terms of the responsibilities and activities assumed and further the amount was not excessive when compared to the amounts received by other radiologists in comparable circumstances sec_4941 and sec_4941 of the code impose excise_taxes upon any act of self-dealing between a private_foundation and any of its disqualified persons the taxes are to be paid_by any disqualified_person other than a foundation_manager acting only as such who participates in the act of self-dealing sec_4941 and sec_4941 of the code impose excise_taxes on a foundation_manager who participates in an act of self-dealing between the private_foundation and a disqualified_person where the foundation_manager knows that such act is an act of self-dealing under sec_4941 sec_4946 of the code states that the term disqualified_person includes a foundation_manager within the meaning of subsection b sec_4946 provides that the term foundation_manager means with respect to a private_foundation an officer director or trustee of the foundation or an individual having similar powers or responsibilities sec_4941 of the code provides that the term self-dealing means any direct or indirect payment of compensation or payment or reimbursement of expenses by a private_foundation to a disqualified_person sec_4941 provides that self-dealing also means the transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation -7- sec_53 d -1 a of the foundation and similar excise_taxes regulations provides that for purposes of code sec_4941 the term self-dealing includes any direct or indirect transaction described in sec_53_4941_d_-1 of the regulations sec_53 d -1 b of the regulations provides that the term indirect self-dealing shall not include a transaction with respect to a private foundation’s interest or expectancy in property whether or not encumbered held by an estate or revocable_trust including a_trust which has become irrevocable on a grantor's death regardless of when title to the property vests under local law if - i the administrator or executor of an estate or trustee of a revocable_trust either- a possesses a power of sale with respect to the property b has the power to reallocate the property to another beneficiary or ii iti iv c is required to sell the property under the terms of any option subject_to which the property was acquired by the estate or revocable_trust such transaction is approved by the probate_court having jurisdiction over the estate or by another court having jurisdiction over the estate_or_trust or over the private_foundation such transaction occurs before the estate is considered terminated for federal_income_tax purposes pursuant to paragraph a of sec_1_641_b_-3 of this chapter or in the case of a revocable_trust before it is considered subject_to code sec_4947 the estate_or_trust receives an amount which equals or exceeds the fair_market_value of the foundation's interest or expectancy in such property at the time of the transaction taking into account the terms of any option subject_to which the property was acquired by the estate_or_trust and v with respect to transactions occurring after date the transaction either a results in the foundation receiving an interest or expectancy at least as liquid as the one it gave up b results in the foundation receiving an asset related to the active carrying out of its exempt purposes or c is required under the terms of any option which is binding on the estate_or_trust lo sec_4945 and sec_4945 of the code impose excise_taxes to be paid_by a private_foundation that makes a taxable_expenditure as defined in sec_4945 sec_4945 and sec_4945 of the code impose excise_taxes to be paid_by a foundation_manager who agrees to the foundation's making of an expenditure knowing that it is a taxable_expenditure unless such agreement is not willful and is due to reasonable_cause sec_4945 of the code defines the term taxable_expenditure to mean any amount_paid or incurred by a private_foundation for any purpose other than one specified in sec_170 the latter section states purposes that substantially coincide with those stated in sec_501 sec_53_4945-6 of the regulations provides that expenditures to acquire investments and reasonable expenses thereof entered into for the purpose of obtaining income or funds to be used in furtherance of purposes described in sec_170 ordinarily will not be treated as taxable_expenditures under code sec_4945 analysis the settlement helps ensure m’s continued operation in furtherance of exempt purposes under sec_501 of the code as represented by m with respect to the investments described in sec_53_4945-6 of the regulations above as with the compensation arrangement at issue in revrul_69_383 the settlement has been reached after arm’s length negotiations involving c and the personal representative of the estate although c is a director and officer of m she has recused herself from all discussions relating to the lawsuit and the settlement by m and has not participated in m’s approval of the settlement the personal representative m through the independent directors the neutral mediator and the probate_court have all concluded that the settlement is fair and reasonable in light of the potential for an adverse judgment the likelihood of extended and expensive litigation and possible harm to the charitable mission reputation and purposes of m also the amount of the settlement represents a very insignificant sum in comparison to the amount that the estate will still be able to distribute to m therefore it is clear that the settlement will not result in the inurement of m’s net_earnings to the benefit of c we also note that the settlement will allow the estate to convey the residue of b’s assets to m more quickly and will in turn enable m to make significant grants in furtherance of its charitable purposes and to perform other exempt_activities the foregoing demonstrates that the settlement expedites the carrying out of m’s exempt purposes and as such should not jeopardize m’s tax exempt status under sec_501 of the code the estate administration exception’ to the self-dealing rules is described in sec_53 d -1 b of the regulations and includes five specific requirements inasmuch as the settlement satisfies all five requirements based on m's representations neither m nor any of the independent directors will engage in an act of self-dealing under sec_4941 of the code by entering into the settlement and consenting to its implementation by the estate as a director and officer of m c is a foundation_manager of m and is therefore a disqualified_person sec_4941 of the code imposes taxes upon any act of self-dealing between a private_foundation and any of its disqualified persons sec_4941 defines the term self-dealing to include any direct or indirect sale_or_exchange or leasing of property between a private_foundation and a disqualified_person or any direct or indirect transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation neither the code nor regulations specifically define the term indirect self-dealing however the case law and other authorities establish that an estate's assets that will pass to a private_foundation may be treated as assets of the foundation for purposes of sec_4941 therefore any sale exchange or other transfer of such assets to a disqualified_person may constitute indirect self-dealing see 87_tc_1016 and 572_fsupp_9 because m holds a residuary interest in the assets of the estate we must review the settlement herein of c’s lawsuit against the estate to ensure that it does not contravene the self-dealing provisions of the code pursuant to the estate administration exception of sec_53_4941_d_-1 b of the regulations a transaction with respect to a private foundation's interest or expectancy in property held by an estate does not constitute indirect self-dealing if five specific conditions are met in the rockefeller and reis cases cited above the estate administration exception did not apply because one or more of the requisite conditions had not been met in contrast based on m's representations the settlement herein satisfies each of the five conditions as explained below accordingly its implementation will not result in indirect self-dealing under sec_4944 of the code the executor of the estate has the power to reallocate the property of the estate to another beneficiary the executor or personal representative herein of the estate possesses the power under item paragraph d of b’s will to compromise settle and pay or receive payment for any claim for or against the estate without obtaining court approval moreover the relevant n statute grants the personal representative of an unsupervised estate the authority to satisfy and settle claims by virtue of the personal representative's authority to settle all claims- against the estate it has the power to reallocate the property of the estate to another beneficiary thereby satisfying the second of the three alternative tests of sec_53 d -1 b i of the regulations the settlement has been approved by the probate_court with jurisdiction over the estate on the personal representative and c jointly filed a petition with the probate_court seeking approval of the terms of the settlement notice of this petition was provided to the attorney_general of n the attorney_general did not object to the petition on the probate_court held a hearing regarding the petition which was attended by the personal representative and c the probate_court approved the terms of the settlement accordingly the requirement of sec_53 d -1 b ii of the regulations has been met in an order dated g xy the settlement will occur before the estate is considered terminated for federal_income_tax purposes the personal representative has not yet distributed the estate's assets and no tax clearances have been received accordingly the estate has not yet been terminated for federal estate_tax purposes and the requirement of sec_53_4941_d_-1 of the regulations is satisfied the estate is receiving an amount which equals or exceeds the fair_market_value of m's interest or expectancy in such property at the time of the transaction in her lawsuit c has sought over dollar_figurex in damages fees and costs from the estate the estate and m through the independent directors have evaluated her claims carefully and thoroughly aside from analyzing the merits of the action evidence furnished by c and independent investigation and interviews by the estate and its attorneys the estate and m have considered the exorbitant costs substantial delay and overall uncertainty of protracted litigation of the lawsuit the risk of adverse publicity for m and for b personally from such litigation and the potential for a significant adverse judgment that would diminish markedly the assets that m would ultimately receive from the estate after careful consideration of all these factors and arm’s length negotiations with c the estate has approved the settlement similarly m’s independent directors have unanimously concluded that the settlement is in m’s best interests and that the amount to be received by c under the settlement is equal to the fair_market_value of her claims against the estate’s assets the attorney serving as counsel for both m and the estate has assisted in the negotiation of the settlement and based upon the information above has recommended that m and the estate agree to the settlement further the parties have taken their dispute to mediation and the neutral mediator has recommended that the parties agree to the settlement the recommendations of the mediator and counsel as buttressed by the approval of the probate_court reflect their views that the settlement is in the best interests of the estate and m this leads to the conclusion that the fair_market_value of m's interest in the estate following the settlement is at least as great as that it would receive absent this resolution of c’s lawsuit as required by sec_53 d -1 b iv of the regulations se the settlement will result in the foundation receiving an interest at least as liquid as the one it gave up and will result in m receiving an asset related to the active carrying out of its exempt purposes upon entering into the settlement m will receive an interest which is more liquid than until the settlement the possibility that c would prevail on her claim has what it is giving up created a risk that m’s interests in the residue of the estate could be reduced significantly accordingly the precise value of m's interest in the estate has been uncertain if the settlement is approved by the service then m will finally be free to receive the entire residue of the estate approximately dollar_figurex without the risk of substantial loss in litigation this interest will be more liquid than m's present_interest because the assets will be unencumbered by c’s claim and free of the potential for reduction by the costs of litigation or through an adverse judgment ff inasmuch as the assets that b bequeathed to m have to date been held by the estate m has not been able to use those assets to further its exempt purposes service approval of the settlement will enable it to be finalized and m will receive funds which it can use to carry out its exempt purposes consequently the settlement satisfies the first of the three alternative tests of sec_53 d -1 b v of the regulations based on the foregoing analysis the settlement satisfies the requirements of the estate administration exception set forth in sec_53 d -1 b of the regulations and therefore does not constitute an act of self-dealing under sec_4941 of the code sec_4941 of the code imposes taxes upon a foundation_manager of a private_foundation who knowingly participates in an act of self-dealing between the foundation and a disqualified_person as directors of m the independent directors are foundation managers as that term is defined by sec_4946 for the reasons stated above based on m's representations the settlement satisfies the requirements of the estate administration exception of sec_53_4941_d_-1 of the regulations and thus does not constitute an act of self-dealing accordingly the independent directors have not participated in any act of self- dealing by m and are not subject_to taxation under sec_4941 sec_4945 of the code imposes a tax upon any taxable_expenditure which is defined under sec_4945 to mean any amount_paid or incurred by a private_foundation for any of several identified purposes m has not yet received any assets from the estate and the settlement amount will be paid_by the estate and not by m in light of the fact that the settlement has been reached while the estate’s assets are held by the personal representative m is not liable for any taxable_expenditure under sec_4945 sec_4945 of the code defines the term taxable_expenditure to mean an amount_paid or incurred by a private_foundation for other than the exempt purposes set forth in sec_170 sec_53_4945-6 of the regulations provide that expenditures and related expenses to acquire investments entered into for the purpose of obtaining income or funds to be used in furtherance of purposes described in sec_170 ordinarily will not be treated as taxable_expenditures under sec_4945 the exact disposition of the residue of the estate is presently in dispute because of c’s claim in order to resolve that dispute the personal representative has agreed to the settlement as a result of the settlement the estate will avoid incurring substantial additional attorneys’ fees and court costs but more importantly the settlement will allow the residue of the estate to pass to m and will enable m to obtain income and funds which will be used to make grants for charitable purposes as described in sec_170 accordingly the participation by the estate and m in the settlement should be deemed a cost of acquiring income and assets to be used in furtherance of m’s exempt purposes and therefore not a taxable_expenditure sec_4945 of the code imposes excise_taxes to be paid_by a foundation_manager who knowingly agrees to the foundation’s making of a taxable_expenditure based on m’s representations that the settlement costs including estate legal fees are fair and reasonable and for the reasons set forth above the settlement is not a taxable_expenditure by m consequently the independent directors have not agreed to any taxable_expenditure by m and are not subject_to taxation under sec_4945 rulings based on m's representations and the applicabie law we are able to rule as follows the settlement and its implementation wilt not adversely affect m’s exemption from federal_income_tax under sec_501 of the code the settlement and its implementation will not constitute self-dealing under sec_4941 of the code the settlement and its implementation will not constitute self-dealing by m that would result in personal liability to the independent directors under sec_4941 of the code the settlement and its implementation will not constitute taxable_expenditures by m under sec_4945 of the code the settlement and its implementation will not constitute taxable_expenditures by m that would result in personal liability to the independent directors under sec_4945 of the code any changes that may have a bearing upon m's exempt status should be reported to the ohio tax exempt and government entities te_ge customer service office the mailing address is internal_revenue_service te_ge customer service p o box cincinnati oh the telephone number there is a toll free number this ruling is limited to the applicability of the provisions of sec_501 sec_4941 and sec_4945 of the code and does not purport to rule on any facts that were not represented in this ruling further we have not determined whether the methodology you are using to determine fair_market_value or fair and reasonable costs is proper pursuant to a power_of_attorney on file in this office we are sending a copy of this letter to your authorized representative we are also sending a copy of this ruling to the ohio te_ge customer service office because this letter could help resolve any questions about m’s exempt status it should be kept with m’s permanent records if there are any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this fetter this ruling is directed only to m and c d e and f the parties that requested the ruling sec_6110 of the code provides that it may not be used or cited as precedent thank you for your cooperation sincerely reiaetada v sack gerald v sack manager exempt_organizations technical group lol


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 corp b03 plr-137492-12 date september legend distribution agreements ----------------------------------------------------------------------- --------------------------------------------------------------------------------- ---------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- dear --------------- this letter responds to your representative’s letter dated date requesting that we supplement a private_letter_ruling dated date plr-149071-11 the original ruling additional information was submitted in letters dated date date date date date date and date collectively with the letter dated date the supplemental submissions additional information has been submitted in various communications since may 4th the material information submitted for consideration is summarized below capitalized or underlined terms not defined in this letter have the meanings assigned to them in the original ruling the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by penalties of perjury statements executed by the appropriate party this office has not verified any of the materials in the supplemental submissions submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process plr-137492-12 supplemental facts modifications to transactions described in the original ruling the taxpayer executed certain transactions described in the original ruling in modified form and proposes to execute certain others in modified form following is a description of the modifications distribution of distributing modification of distribution reorganization and distribution before distribution distributing distributed all of the issued and outstanding_stock of distributing to distributing in a transaction that qualified under sec_355 distribution a1 and distributed all of the issued and outstanding_stock of controlled to distributing the rulings related to distribution are modified hereby to reflect the fact that distributing rather than distributing owned distributing at the time of distribution the representations and rulings related to reorganization are modified hereby to reflect the fact that distributing rather than distributing owned controlled and controlled at the time of reorganization because distributing owned less than all of the issued and outstanding_stock of controlled at the time of distribution distribution is modified hereby to reflect that distributing distributed all of its stock of controlled to distributing removal of liquidations and the taxpayer will not undertake liquidations and removal of distribution and distribution the taxpayer will not undertake distribution sec_5 and modification of contribution llc was not transferred to controlled in connection with contribution instead i distributing distributed llc to controlled after reorganization ii llc elected pursuant to sec_301_7701-3 to be treated as a corporation iii controlled distributed the interests in llc to distributing and iv distributing contributed the interests in llc to controlled plr-137492-12 modification of contribution distributing distributed to distributing a note receivable from distributing the distributing note distributing will contribute the distributing note to controlled as part of contribution modification of reorganization and reorganization reorganization will occur before reorganization in connection with reorganization distributing will get both i shares of sub stock that will have no more than percent of the total combined voting power of all classes of stock entitled to vote and ii securities of sub the sub securities the representations and rulings related to reorganization are hereby modified to reflect these changes modification of distribution as part of distribution distributing distributed a portion of the controlled stock the exchanged controlled shares to distributing in redemption of distributing stock the representations and rulings related to distribution are hereby modified to reflect this change modification of step iv step iv is modified to reflect that first distributing canceled for no consideration a portion of its shares held by distributing represented by the t interest in distributing in addition to the distributing interest and the s interest in distributing and second immediately thereafter llc distributed the interests in fsub to distributing modification of step lii step lii is modified to reflect that sub distributed the interests in llc to distributing in redemption of an amount of sub stock of equal value modification of step lx step lx is modified to reflect that fsub will elect under sec_301_7701-3 to be treated as a disregarded_entity effective before the distribution of the property by fsub to distributing modification of step lxxii in the second sentence of step lxxii contribution and distribution plr-137492-12 is hereby replaced with contribution and distribution supplemental representations the taxpayer reaffirms all of the facts representations and statements contained in the original ruling as modified herein as modified by the supplemental submissions and as modified by plr-120264-12 reorganization references to distributing in representations b1 b2 b3 b8 b12 and b13 are hereby replaced with distributing reorganization representation sec_2 has been modified as set forth below sec_2 the fair_market_value of the sub stock and sub securities received by distributing in reorganization will be approximately equal to the fair_market_value of the controlled stock surrendered in the exchange distribution representation y24 has been added as set forth below y24 the fair_market_value of the exchanged controlled shares received by distributing was approximately equal to the fair_market_value of the distributing shares surrendered by distributing in the exchange correction of representations for contribution and distribution the representations in the original ruling related to contribution and distribution inadvertently referred to contribution rather than to contribution references to contribution in representations ee1 ee2 ee3 and ee4 are hereby replaced with contribution plr-137492-12 supplemental rulings distribution references to distributing in rulings and in the original ruling are replaced with distributing as modified the rulings related to distribution remain in full force and effect reorganization references to distributing in ruling sec_11 and in the original ruling are replaced with distributing as modified the rulings related to reorganization remain in full force and effect reorganization rulings in the original ruling are modified as follows and references to distributing in rulings in the original ruling are replaced with distributing as modified the rulings related to reorganization remain in full force and effect no gain_or_loss will be recognized by controlled on the transfer of all of its assets to sub in exchange for sub stock sub securities and sub 1’s assumption of controlled 4’s liabilities in reorganization sec_357 and sec_361 sub will not recognize gain_or_loss on the receipt of controlled 4’s assets in exchange for sub stock sub securities and the assumption of controlled 4’s liabilities in reorganization sec_1032 no gain_or_loss will be recognized by controlled on its distribution of the sub stock and sub securities received in reorganization sec_361 distribution rulings in the original ruling are modified as follows as modified the rulings related to distribution remain in full force and effect the basis of the exchanged controlled shares in the hands of distributing after distribution will equal the basis of the distributing stock surrendered by distributing in exchange therefor sec_358 the remaining basis of the stock of distributing and controlled in the hands of distributing after distribution will be the same as the remaining basis of the distributing stock held immediately before distribution sec_358 and sec_1_358-1 plr-137492-12 allocated in proportion to the remaining fair_market_value of each of distributing and controlled in accordance with sec_1_358-2 sec_358 and sec_358 the holding_period of the exchanged controlled shares received by distributing in distribution will include the holding_period of the distributing shares exchanged therefor and the holding_period of the remaining controlled shares received by distributing in distribution will include the holding_period of the remaining distributing shares with respect to which distribution will be made provided that in each case such distributing shares are held as capital assets on the date of distribution sec_1223 ruling is modified as follows miscellaneous payments or other transfers made between any two of the distributing controlled and controlled groups under the distribution agreements for obligations that i have arisen or will arise for a taxable_period ending on or before a distribution or for a taxable_period beginning before and ending after a distribution and ii will not have become fixed and ascertainable until after such distribution will be treated as occurring between the transferor and the transferee immediately before such distribution see 344_us_6 revrul_83_73 c b the supplemental facts submitted shall have no adverse impact on the original ruling which as modified shall remain in full force and effect caveats no opinion is expressed about the tax treatment of the proposed transactions under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transactions that are not specifically covered by the above rulings in particular no opinion is expressed regarding whether any of distribution sec_1 through or any of the transactions described in this letter i satisfies the business_purpose requirement of sec_1_355-2 ii is used principally as a device for the distribution of the earnings_and_profits of any distributing_corporation or controlled_corporation or both see sec_355 and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 plr-137492-12 procedural statements this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent a copy of this ruling letter should be attached to the federal_income_tax return of each taxpayer involved for the taxable_year in which the transaction covered by this ruling letter is consummated alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely _isaac w zimbalist_____ isaac w zimbalist senior technician reviewer branch office of associate chief_counsel corporate