internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc tege eoeg eo2 plr-102703-00 date legend taxpayer ein corporation state state university department year state university medical school state university medical center state statute a state statute b state statute c this is in response to a ruling_request submitted on behalf of taxpayer as amended by taxpayer on date the amended request has been further supplemented by additional documentation and correspondence taxpayer requests a ruling that its income is excludible from gross_income for federal_income_tax purposes under sec_115 of the internal_revenue_code facts taxpayer is a general pathology and testing lab consistent with the authority granted by state statutes a and b and authority delegated by the state board_of regents the president of the state university and certain state university officers the chairman of the department a department of the state university medical school formed taxpayer in year taxpayer was formed as the wholly owned subsidiary of the corporation taxpayer performs laboratory services and blood work in direct support of the state university medical center taxpayer also performs esoteric and highly esoteric laboratory services to third party hospitals and laboratories esoteric and highly esoteric services refer to very specialized types of testing that are not efficiently handled by other laboratories taxpayer provides all faculty laboratories and instructional support for training of medical students graduate students fellows and undergraduates in clinical pathology sciences taxpayer’s facility also houses several state university and state university medical center functions in addition to pathology at below-market rates taxpayer is the principal location and source of instruction in clinical pathology sciences for students in undergraduate degrees such as medical technicians medical laboratory technicians and cytotechnologists it is also the principal location and source of instruction for medical students pathology residents and fellows as well as for continuing education for those working in the pathology field taxpayer also derives income from other educational activities taxpayer represents that its articles of incorporation and bylaws will be amended to meet the requirements of sec_115 specifically to ensure that the corporation or the department will at all times own all stock in taxpayer all operating revenues and surplus of taxpayer are used for the educational mission of the department taxpayer will not admit partners become a partner in any partnership or enter into a revenue sharing or net profit sharing arrangement and upon dissolution of taxpayer all assets of taxpayer will be distributed to the corporation or to the department in addition the taxpayer represents that all profits of taxpayer accrue to the state university state law and taxpayer’s amended bylaws provide that the state constitution statutes and regulations supercede any conflicting provisions in taxpayer’s articles of incorporation or bylaws state statute a authorizes the state university to contract with third parties and to form organizational entities within the state university structure and to engage in enterprise operations that are in support of authorized programs within the educational role of the recipient institution taxpayer is prohibited by a state board_of regents rule from providing services to persons other than members of the campus community unless the service offers a substantial and valuable educational or research experience for registered students and faculty or the service fulfills the institution’s public service requirements taxpayer represents that in accordance with state statute a no portion of the funds or proceeds of taxpayer may be diverted from or used for purposes other than those authorized or undertaken in support of authorized programs within the educational role of the recipient institution the corporation’s and taxpayer’s representative has stated that the corporation’s articles of incorporation will be amended to satisfy the requirements of sec_115 of the code state statute c states that the state board_of regents is the successor to and vested with all power and authority control and management over the state university’s property real and personal tangible and intangible accordingly as has been determined by certain courts state law provides that the state university holds property in trust only the property of the state university belongs to the state law and analysis both taxpayer and the corporation have executed a power_of_attorney with respect to the matters discussed in this ruling sec_115 of the code provides that gross_income does not include income derived from any public_utility or the exercise of an essential_governmental_function and accruing to a state or political_subdivision of a state all the facts and circumstances relating to the organization to determine whether the organization performs an essential_governmental_function and whether the income of the organization accrues to a state or political_subdivision of the state revrul_90_74 1990_2_cb_34 concerns an organization formed operated and funded by political subdivisions to pool their casualty risks and other risks arising from their obligations concerning public liability workers’ compensation or employees’ health obligations the ruling states that the income of such an organization is excluded from gross_income under sec_115 so long as private interests do not participate in the organization or benefit more than incidentally from the organization the benefit to the employees of the insurance coverage obtained by the member political subdivisions was deemed incidental to the public benefit revrul_77_261 1977_1_cb_45 holds that income from a fund established under a written declaration of trust by a state for the temporary investment of positive cash balances of a state and its political subdivisions is excludable from gross_income under sec_115 the ruling reasons that the investment of positive cash balances by a state or political_subdivision in order to receive some yield on the funds until needed to meet expenses is a necessary incident of the power of the state or political_subdivision to collect taxes and raise revenue revrul_71_589 1971_2_cb_94 provides that the income from property held in trust by a city that was to be used by the city for certain charitable purposes is not subject_to federal_income_tax although revrul_71_589 does not explicitly so state the holding in the revenue_ruling means that a determination was made that the income in question was derived from the exercise of an essential_governmental_function and accrued to a political_subdivision within the meaning of sec_115 of the code revrul_71_589 specifically mentions the support of a hospital as one of the functions such trust might perform promotion of public health and the support of medical facilities are well- established functions of state and local governments and are essential governmental functions education is also an essential government function taxpayer’s activities promote health support medical facilities and are educational taxpayer’s income therefore derives from the provision of services that are established functions of state and local governments and are essential governmental functions within the meaning of sec_115 in addition to deriving income from the performance of an essential_governmental_function income of taxpayer must accrue to the state or a political_subdivision of the state all income of taxpayer accrues to the corporation in the event of dissolution all assets after payment of liabilities of the corporation accrue exclusively to the state university for its medical center or if not to the state university accrue to another entity owned by the state that meets the requirements of sec_115 of the internal_revenue_code or that meets the requirements of an integral part of the state accordingly the income of taxpayer accrues to the state based on the information submitted representations made and authorities cited we conclude that taxpayer’s income is excludible from gross_income for federal_income_tax purposes under sec_115 of the internal_revenue_code this ruling is contingent upon taxpayer and the corporation amending their respective articles of incorporation and bylaws as represented because this ruling is dependent on the amendment of these documents the ruling applies only for periods on and after the date s on which the amendments are effective except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely elizabeth purcell chief exempt_organizations branch


internal_revenue_service number release date index number ----------------------- --------------------------------------- --------------------- -------------------------------- ----------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number -------------------- refer reply to cc psi b2 plr-117523-09 date date x state a b c trust1 trust2 trust3 trust4 trust5 d1 d2 d3 d4 d5 ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- 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----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- plr-117523-09 d6 year1 year2 ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- ------------------------------------------------ dear --------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting inadvertent termination relief under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated under the laws of state on d1 and elected to be an s_corporation effective d2 pursuant to an agreement dated d3 a and b established trust1 a revocable_trust treated as a wholly-owned grantor_trust under sec_671 and sec_676 a transferred shares of x stock to trust1 pursuant to agreements dated d4 c established trust2 trust3 trust4 and trust5 one for each of c’s four children c transferred shares of x stock to trust2 trust3 trust4 and trust5 on d4 x’s s_corporation_election terminated under sec_1362 when trust2 trust3 trust4 and trust5 became shareholders of x because the trustees of the trusts failed to make electing_small_business_trust esbt elections for the trusts on d5 a died and trust1 ceased to be a grantor_trust trust1 continued to qualify as an eligible s_corporation shareholder under sec_1361 for the year period beginning on the day of the deemed owner’s death and ending on d6 on d6 x’s s_corporation_election would have terminated under sec_1362 had the election not already terminated on d4 because the trustee of trust1 failed to make an esbt election for the trust x represents that trust1 trust2 trust3 trust4 and trust5 qualified to elect to be treated as electing small_business trusts esbts under sec_1361 x represents that the circumstances resulting in the termination of x’s s_corporation_election were inadvertent and not motivated by tax_avoidance x further represents that x has filed returns consistent with x’s status as an s_corporation x and its shareholders have agreed to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which it was made determined without regard to sec_1362 by reason of a failure to meet the requirements of plr-117523-09 sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the event resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination the corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on d4 because trust2 trust3 trust4 and trust5 were not eligible shareholders of x we also conclude that this termination of x’s s election on d4 was an inadvertent termination within the meaning of sec_1362 moreover had x’s s_corporation_election not already terminated it would have terminated on d6 similarly this termination of x’s s election on d6 would have been an inadvertent termination within the meaning of sec_1362 therefore we conclude that x will continue to be treated as an s_corporation for the period from d4 provided that x’s s_corporation_election was valid and was not otherwise terminated under sec_1362 this ruling is conditioned upon the trustee of trust1 filing an esbt election for trust1 with an effective date of d6 and the trustee for trust2 trust3 trust4 and trust5 filing an esbt election for each trust with an effective date of d4 all elections must be filed with the appropriate service_center within days of the date of this ruling this ruling is also conditioned upon trust1 filing amended returns for year1 and year2 consistent with the treatment of trust1 as an esbt within days following the date of this letter a copy of this letter should be attached to the esbt elections and the amended returns if the trusts do not comply with these conditions this letter is null and void except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed regarding x’s eligibility to be an s_corporation or the validity of its s_corporation_election further no opinion is expressed as to whether trust1 trust2 trust3 trust4 and trust5 qualify as esbts this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent plr-117523-09 pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x's authorized representatives sincerely melissa c liquerman branch chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index numbers ------------------------- -------------------------------------- --------------------------------- ----------------------- ------------------------------- department of the treasury washington dc person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc psi - plr-131449-07 date date legend x y country d1 dear ---------- ------------------------- ---------------------------------- ----------------------- --------------------- ----------------- this letter responds to a letter dated date and subsequent correspondence written on behalf of x requesting a ruling under ' and of the procedure and administration regulations that x be granted an extension of time to file an election to be classified as a disregarded_entity under ' facts according to the information submitted x was formed on d1 under the laws of country x is wholly owned by y x’s default status was as an association_taxable_as_a_corporation for federal tax purposes x intended to elect to be treated as a disregarded_entity for federal tax purposes effective d1 however a form_8832 entity classification election electing to be treated as a disregarded_entity was not timely filed law and analysis plr-131449-07 sec_301_7701-3 provides that a business_entity that is not classified as a corporation under ' b or an eligible_entity can elect its classification for federal tax purposes as provided in ' under sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301 b unless an entity elects otherwise a foreign eligible_entity is an association if all members have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided in ' b or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under ' c i will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register making certain elections not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-2 provides the rules governing automatic extensions of time for sec_301_9100-3 provides extensions of time for regulatory elections that do conclusion plr-131449-07 based on the facts submitted and the representations made we conclude that the requirements of and have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 with the appropriate service_center and elect to be classified as a disregarded_entity for federal tax purposes effective d1 a copy of this letter should be attached to the form_8832 except as specifically set forth above no opinion is expressed or implied concerning the federal tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed or implied as to whether x is otherwise eligible to make the election this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to x s authorized representatives sincerely s william p o'shea associate chief_counsel passthroughs and special industries copy of this letter copy for sec_6110 purposes enclosures cc


t c memo united_states tax_court daniel e and marilyn j fuhrman petitioners v commissioner of internal revenue respondent docket no filed date nicholas i andersen and michael j zaino for petitioners edward lee walter for respondent memorandum findings_of_fact and opinion thornton judge respondent determined deficiencies of dollar_figure and dollar_figure in petitioners’ and federal income taxes respectively and sec_6662 accuracy-related_penalties of dollar_figure and dollar_figure for and respectively 1all section references are to the internal_revenue_code in continued after concessions by petitioners the issues for decision are whether petitioners may deduct in amounts greater than respondent has allowed purported management fees that petitioner daniel fuhrman’s petitioner single-member llc paid to his wholly owned c_corporation and whether petitioners are liable for the sec_6662 accuracy-related_penalty for each year at issue findings_of_fact the parties have stipulated some facts when they filed their petition petitioners resided in ohio during the years at issue petitioner owned a trucking business for liability and other business reasons he had organized this business into five wholly owned corporations including top line express inc top line and top leasing inc top leasing as well as a limited_liability_company grasshopper leasing l l c grasshopper of which he was the sole member grasshopper owned about trucks its sole business was leasing these trucks to affiliated entities mainly top line top line used the trucks in its business of hauling goods primarily auto parts continued effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure dollar amounts have been rounded to the nearest dollar top line employed all the business office personnel for petitioner’s trucking business during the years at issue top line had to employees including petitioner top leasing employed all the truck drivers in petitioner’s trucking business grasshopper had no employees top line’s employees performed management and administrative services for grasshopper but there was no written contract with respect to these services moreover top line maintained no contemporaneous time records for the services its employees provided grasshopper during and top line billed grasshopper generally a flat dollar_figure per month for management services that it allegedly performed for grasshopper in and grasshopper paid top line dollar_figure and dollar_figure respectively with respect to these invoices on their joint federal_income_tax returns petitioners reported income_tax liabilities of dollar_figure for and dollar_figure for on schedules c profit or loss from business sole_proprietorship in reporting their passthrough net business income from grasshopper petitioners claimed other expenses of dollar_figure for and dollar_figure for these other expenses 2for january and date the combined management fee was dollar_figure 3it is unclear from the record why grasshopper’s payments in fell short of the total dollar_figure that top line had invoiced reflected primarily the purported management fees that grasshopper paid top line in the notice_of_deficiency respondent disallowed dollar_figure of these schedule c other expenses for and disallowed dollar_figure for the notice_of_deficiency explains that these amounts were disallowed because petitioners had not established that these amounts were paid for ordinary and necessary business_expenses opinion i ordinary and necessary business_expenses the principal issue is whether in computing grasshopper’s net business income petitioners are entitled to deduct in amounts greater than respondent has allowed purported management fees that grasshopper paid to top line the taxpayer generally bears the burden of proving the commissioner’s determinations erroneous rule a in particular the taxpayer bears the burden of substantiating the 4these other expenses also included relatively small amounts for general supplies professional fees and miscellaneous expenses 5the notice_of_deficiency does not indicate which portion of the disallowed other expenses relates to management fees as opposed to other items on brief petitioners represent that the entire amount of disallowed other expenses relates to the claimed management fees and they do not make any argument with respect to other items of other expenses we deem petitioners to have waived or conceded any argument with respect to these other_amounts amount and purpose of each item claimed as a deduction see 116_tc_438 65_tc_87 affd per curiam 540_f2d_821 5th cir sec_7491 provides that if in any court_proceeding a taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining the taxpayer’s proper tax_liability the commissioner shall have the burden_of_proof with respect to that issue credible_evidence is evidence the court would find sufficient upon which to base a decision on the issue in the taxpayer’s favor absent any contrary evidence see higbee v commissioner supra pincite sec_7491 applies however only if the taxpayer complies with all substantiation and recordkeeping requirements under the code sec_7491 and b on brief petitioners contend that by allowing them to deduct a substantial portion of the management fees respondent has acknowledged that they have met their substantiation burden as discussed below however petitioners have failed to introduce credible_evidence to show that the disallowed expenses represent ordinary and necessary business_expenses of grasshopper the burden_of_proof as to this issue remains with petitioners sec_162 allows as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business whether an expenditure is ordinary and necessary is generally a question of fact 320_us_467 an expense is ordinary if it is customary or usual within a particular trade business or industry or relates to a transaction of common or frequent occurrence in the type of business involved 308_us_488 an expense is necessary if it is appropriate and helpful for the development of the business see commissioner v heininger supra pincite the court_of_appeals for the sixth circuit to which any appeal of this case would lie has held that for expenses to be deductible as ordinary and necessary they must be reasonable because the element of reasonableness is inherent in the phrase ‘ordinary and necessary’ 176_f2d_815 6th cir revg a memorandum opinion of this court only the portion of an expense that is reasonable qualifies for deduction under sec_162 380_f2d_786 9th cir the reasonableness concept has particular significance in determining whether payments between related parties such as commonly controlled business entities represent ordinary and necessary expenses see bittker lokken federal taxation of income estates and gifts par pincite 3d ed for instance in 108_tc_147 this court held that the taxpayer was not entitled to deduct consulting fees it paid to its subsidiary where the taxpayer did not establish how the fees were determined there was no written contract the invoices provided almost no detail and there was no evidence of the service provider’s skills that might warrant the consulting fees see also weekend warrior trailers inc v commissioner tcmemo_2011_105 holding that the taxpayer’s wholly owned s_corporation was not entitled to deduct management fees paid to another of his wholly owned s_corporations where the evidence did not adequately establish the specific services performed and who performed them similarly petitioners have failed to demonstrate how the management fees in question were determined they have presented no contemporaneous documentation the monthly invoices from top line to grasshopper generally consist of a single line item showing a flat dollar_figure management fee with no detail as to the services provided or the derivation of the invoiced amount there was no written contract for the management fees we question whether these amounts were determined at arm’s length since petitioner was the sole owner of both grasshopper leasing and top line express 6although petitioners’ c p a testified that the company continued to have documentation in their files and that schedules were prepared on an ongoing basis to support those expenses no such documentation appears in the record attempting to substantiate the disallowed expenses petitioners rely primarily on petitioner’s testimony petitioner testified that seven of top line’s employees performed services for grasshopper aggregating to hours each month according to petitioner’s testimony the management fees were attributable to these four categories of services consulting--8 to hours per month provided by petitioner accounting--18 to hours per month provided by two of top line’s accounting personnel sales management--24 to hours per month provided by one of top line’s employees who according to petitioner’s testimony would sell to the various 7petitioners also offered into evidence a document the noncontemporaneous analysis that their accountants prepared during the course of the irs audit this document purports to analyze in hindsight the management fees that grasshopper paid top line and suggests that top line’s actual monthly management costs were somewhat higher than the amounts it charged grasshopper in notable respects this document varies from petitioner’s testimony for instance the noncontemporaneous analysis indicates that top line employees spent dollar_figure hours per month performing services for grasshopper rather than the larger number indicated by petitioner’s testimony for a specific example of this type of discrepancy see infra note also the makeup of the management costs as accounted for in the noncontemporaneous analysis differs significantly from that suggested by petitioner’s testimony on brief petitioners do not directly rely on the noncontemporaneous analysis to substantiate the disputed expenses nevertheless the unexplained discrepancies between the noncontemporaneous analysis and petitioner’s testimony call into question the reliability of his testimony 8by contrast the noncontemporaneous analysis indicates that top line employees spent a total of hours per month performing bookkeeping services and financial preparation management for grasshopper customers to make sure that these leased trucks were used and we were able to pay the lease through grasshopper and safety and driver relations--about hours per month provided by three top line employees who performed tasks such as recruiting training testing tracking and dispatching truck drivers according to petitioner’s testimony then over half the hours allegedly worked by top line employees on behalf of grasshopper consisted of services in the categories of sales management safety and driver relations petitioners have not convinced us that it was necessary for grasshopper to incur expenses for such services after all grasshopper’s business consisted of leasing trucks to other entities mainly top line that petitioner owned the sales management services as described by petitioner appear to be services that top line would have performed on its own behalf in maintaining its own customer base since grasshopper had no customers other than top line and other related entities moreover the record establishes no reason why grasshopper would have had any need to recruit train test track or dispatch truck drivers since it 9acknowledging that grasshopper leases exclusively to affiliated entities the noncontemporaneous analysis indicates that substantial components of the management fee represent a cost assigned to the benefit of not having to market the equipment for lease to outside parties and to the benefit of always having of the fleet under lease at all times we are not persuaded that the benefit of not incurring certain types of expenses is properly assignable as an ordinary_and_necessary_expense employed no drivers in addition we are not convinced that consulting services that petitioner allegedly provided to grasshopper were performed in his capacity as an employee of top line rather than in his individual capacity as sole owner of grasshopper indeed because grasshopper had no other owners and no employees it is not apparent with whom at grasshopper petitioner might have consulted other than himself petitioners have not established that any amounts of management fees greater than those respondent has allowed represent ordinary and necessary expenses of grasshopperdollar_figure ii sec_6662 accuracy-related_penalty respondent determined that for each year at issue petitioners are liable for an accuracy-related_penalty pursuant to sec_6662 and b for a substantial_understatement_of_income_tax sec_6662 and b imposes a 20-percent accuracy-related_penalty on any portion of a tax underpayment that is attributable to any substantial_understatement_of_income_tax defined in sec_6662 as an understatement that exceeds the greater of percent of the tax required to be shown on the return or dollar_figure 10in the light of this holding we need not and do not address respondent’s argument raised for the first time on brief that respondent’s disallowance of portions of the management fee deductions reflects a proper allocation under sec_482 respondent bears the burden of production with respect to this penalty sec_7491 to meet this burden respondent must produce evidence establishing that it is appropriate to impose this penalty once respondent has done so the burden_of_proof is upon petitioners to show that they acted with reasonable_cause and in good_faith see higbee v commissioner t c pincite we have sustained respondent’s determination that petitioners have deficiencies of dollar_figure for and dollar_figure for adding these amounts to the total_tax shown on petitioners’ returns the tax required to be shown on their returns was dollar_figure for and dollar_figure for the understatements therefore exceed the greater of percent of the tax required to be shown on the return dollar_figure for and dollar_figure for or dollar_figure and constitute substantial understatements of income_tax within the meaning of sec_6662 respondent has therefore met his burden of production the accuracy-related_penalty does not apply with respect to any portion of an underpayment as to which the taxpayer had reasonable_cause and acted in good_faith sec_6664 petitioners have not established or even expressly alleged that they had reasonable_cause or acted in good_faith petitioners are liable for the sec_6662 accuracy-related_penalty for each year at issue as respondent has determined to reflect the foregoing decision will be entered for respondent


internal_revenue_service number release date index number ------------------------------ ----------------------------- ---------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 plr-116818-14 in re ------------------------ -------------------------------------- ----------------------------- date date legend ------------------------------ ------------------------------------------------------- -------------------- -------------------------------------------------------- ---------------------------------- ------------------------------------------------------------------ grantor spouse grantor trust trust trust ------------------------------------------------------------- date date date date date date date date child taxpayers 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------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ court ---------------------------------------------------------------------------------------- court --------------------------------------------------------------------------------- county ------------------------------------------- --------------------- farm agreement of sale ------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- ------------------------------------------------- ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ plr-116818-14 a v w x y z limited_partnership trustee trustee year dear ---------------------- ------------------ --------- --------- --------------- ----------- ----------- ----------- ------------------------ ------------------------------- ------ this letter responds to your authorized representative’s letter of date requesting rulings on the gift estate and generation-skipping_transfer gst tax consequences of a proposed transaction the facts and representations submitted are summarized as follows on date grantor established an irrevocable_trust trust for the benefit of himself spouse and his lineal_descendants grantor died on date and spouse died on date the corporate trustee of trust is trustee on date grantor established a revocable_trust trust for the benefit of himself on date grantor amended trust so that income was paid in equal shares to his daughter grantor 1’s spouse spouse and his son child for life in addition on date grantor released his right to further amend or revoke trust on date by court order trust as amended was divided into two irrevocable equal trusts one for the benefit of spouse and her descendants trust and one for the benefit of child and his descendants grantor died on date the corporate trustee of trust is trustee trust and trust and the trust beneficiaries of those trusts taxpayers are the parties requesting this ruling currently the beneficiaries of trust and trust are essentially the same trust provides that the trustees are to pay the net_income for the benefit of grantor 1’s issue share and share alike per stirpes trust terminates twenty-one years after the death of the survivor of grantor 1’s three children trust provides that the trustees are to pay the net_income to spouse’s issue per stirpes trust terminates twenty-one years after the death of the last surviving lineal descendant of grantor living at the time of grantor 2’s death trust and trust together own farm in county trust owns y acres and trust owns z acres the acreage in farm owned by trust and trust is generally contiguous however the acreage owned by each trust was acquired at different times so that some of the parcels owned by each trust are land-locked and access to these parcels from a public road is only possible via easements over acreage owned by the plr-116818-14 other trust the trustees of both trusts have decided it is in the best interest of trust and trust to sell the property in a coordinated sale the real_estate owned by each trust is subject_to various zoning and land use restrictions and is not currently serviced by public water and sewer the property is currently zoned for agricultural and residential use and for public land use farm has been on the market for several years since year the purchaser is limited_partnership which is owned by a who is a lineal descendant of both grantor and grantor and is the trustee of a_trust that is a current beneficiary of trust and a contingent beneficiary of trust a is a licensed real_estate broker and is a developer of residential real_estate in the area where farm is located the agreement of sale was negotiated by trustee of trust and trustee of trust with some input from the beneficiaries the trusts and a the purchaser were represented by separate counsel it is represented that the sale price is dollar_figurex which is consistent with two independent appraisals and recent land sales in the area upon completion of all closings trust will receive w percent of the purchase_price and trust will receive v percent of the purchase_price the sellers’ obligations are conditioned on trust and trust receiving approval of the sale from court the beneficiaries of trust and trust performing certain conditions in the event trust terminates prior to the closing of the sale the beneficiaries of trust and trust approving and ratifying the agreement of sale and the taxpayers receiving a favorable private_letter_ruling trust will terminate on date and trust will terminate at a much later date yet to be determined trust and trust were irrevocable prior to date it is represented that no additions have been made to trust or trust after date you have requested the following rulings the execution and or the carrying out of the terms of the agreement of sale and the exercise of any right obligation or remedy hereunder will not constitute an addition to either trust or trust or cause trust or trust to lose its gst tax exempt status under b a of the tax_reform_act_of_1986 or under sec_26_2601-1 of the generation-skipping_transfer_tax regulations and distributions from trust and trust will not be subject_to gst tax under sec_2601 of the internal_revenue_code provided that no additions actual or constructive are otherwise made to trust or trust the entering into the agreement of sale and the carrying out of the terms thereof will not cause any beneficiary of either trust or trust to make or be deemed to have made a taxable gift to any other beneficiary or to a plr-116818-14 the execution and or the carrying out of the terms of the agreement of sale will not cause any beneficiary to be required to include in his or her taxable_estate trust assets owned by trust or trust unless such assets have been distributed to such person prior to his or her death ruling sec_2601 imposes a tax on each generation skipping transfer under a of the tax_reform_act_of_1986 act the gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 the gst tax does not apply to a transfer from a_trust if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 or hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status in general unless specifically provided otherwise the rules contained in this paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes thus unless specifically noted the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy paragraph sec_26_2601-1 b or c of this section by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust sec_26_2601-1 provides that for purposes of this section a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be plr-116818-14 immediately determined it is deemed to shift a beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust trustees will seek court approval of the sale of farm trustees will join with all living beneficiaries of trust and trust in the proposed court proceeding the agreement of sale will only be binding on trust and trust if the trusts receive approval from court as part of the proceedings the trustees will petition the court to appoint a guardian and trustee ad litem to represent the interests of minor unborn and unascertained descendants of grantor and grantor in addition the agreement of sale is binding only if trust and trust receive from all beneficiaries of trust and trust ratification and approval of the agreement of sale as part of the court approval process court must determine that the agreement of sale is fair and reasonable which determination includes the determination that the price reflects a fair_market_value and that the other terms of the sale are reasonable in this case trust and trust were irrevocable prior to date therefore trust and trust are currently exempt from gst tax the agreement of sale and sale of farm is binding on trust and trust only if court approves the sale the execution and or the carrying out of the terms of the agreement of sale and the sale of farm are administrative in nature and will not shift a beneficial_interest in trust or trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to entering into the agreement of sale or the sale of farm further execution of the agreement of sale and the sale of farm does not extend the time for vesting of any beneficial_interest in trust or trust beyond the period provided for in the original trusts based on the facts submitted and the representations made we conclude that the execution and or the carrying out of the terms of the agreement of sale and the exercise of any right obligation or remedy thereunder will not constitute an addition to either trust or trust or cause trust or trust to lose its gst tax exempt status under b a of the tax_reform_act_of_1986 or under sec_26_2601-1 and distributions from trust and trust will not be subject_to gst tax under sec_2601 provided that no additions actual or constructive are otherwise made to trust or trust ruling sec_2501 imposes a tax for each calendar_year on the transfer of property by gift by an individual plr-116818-14 sec_2511 provides that the tax imposed by sec_2501 applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2512 provides that if a gift is made in property the value thereof at the date of the gift shall be considered the amount_of_the_gift sec_2512 provides that where property is transferred for less than adequate_and_full_consideration in money or money’s worth then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift and shall be included in computing the amount of the gifts made during the calendar_year sec_25_2512-8 of the gift_tax regulations provides that transfers reached by the gift_tax are not confined to those only which being without a valuable consideration accord with the common_law concept of gifts but embrace as well sales exchanges and other dispositions of property for a consideration to the extent that the value of the property transferred by the donor exceeds the value in money or money’s worth of the consideration given therefor however a sale exchange or other transfer of property made in the ordinary course of business a transaction which is bona_fide at arm’s length and free from any donative_intent will be considered as made for an adequate_consideration in money or money’s worth trust and propose to sell acreage in farm it is represented that the trustees have obtained two independent appraisals on the value of farm and that the sales_price is consistent with the appraisals and other sales of land in the area the agreement of sale has been negotiated at arm’s length by the corporate trustees of trust and trust the beneficiaries of both trusts must consent to the sale the trusts and a the purchaser were represented by separate counsel to secure approval of court the trustees will have to demonstrate that the agreement of sale is fair reasonable and that the terms are arm’s length the trustees have a fiduciary duty to act in the best interests of all of the beneficiaries based on the facts submitted and the representations made and provided court approves the agreement of sale and finds the agreement of sale is fair reasonable and that the terms are arm’s length we conclude that the entering into the agreement of sale and the carrying out of the terms thereof will not cause any beneficiary of either trust or trust to make or be deemed to have made a taxable gift to any other beneficiary or to a ruling sec_2033 provides that the value of the gross_estate includes the value of all property to the extent of the interest therein of the decedent at the time of his death plr-116818-14 sec_2035 provides that if the decedent transferred by trust or otherwise an interest in property or relinquished a power with respect to any property during the 3-year period ending on the date of the decedent’s death and the value of the property or interest therein would have been included in the gross_estate under sec_2036 sec_2037 sec_2038 or sec_2042 if the transferred interest or relinquished power had been retained by the decedent on the date of death the value of the gross_estate shall include the value of any property or interest therein that would have been so included sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_consideration in money or money’s worth by trust or otherwise under which the decedent has retained for his life or for any period not ascertainable without reference to the decedent's death or for any period which does not in fact end before the decedent’s death - the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2037 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise if the possession or enjoyment thereof can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property and the value of the reversionary_interest immediately before the death of the decedent exceed sec_5 percent of the value of the property sec_2038 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money or money’s worth by trust or otherwise where the enjoyment thereof was subject at the date of the decedent’s death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power to alter amend revoke or terminate or where any such power is relinquished during the 3-year period ending on the date of the decedent’s death in order for sec_2035 through to apply a decedent must have made a transfer of property or any interest therein except in the case of a bona_fide sale for an adequate_and_full_consideration in money or money’s worth under which the decedent retained an interest in or power over the income or corpus of the transferred property in this case the corporate trustees of trust and trust propose to sell farm to limited_partnership owned by a in exchange for dollar_figurex the acreage in farm is an asset plr-116818-14 of each trust the beneficiaries are not transferring assets to trust trust or any other trust accordingly the beneficiaries are not transferors for purposes of sec_2036 sec_2037 or sec_2038 based on the facts submitted and the representations made we conclude that the execution and or the carrying out of the terms of the agreement of sale will not cause any beneficiary to be required to include in his or her taxable_estate trust assets owned by trust or trust unless such assets have been distributed to such person prior to his or her death the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code the rulings in this letter pertaining to the federal estate and or generation-skipping_transfer_tax apply only to the extent that the relevant sections of the internal_revenue_code are in effect during the period at issue this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely _____________________________ lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes cc


e o tax_exempt_and_government_entities_division uics department of the treasury internal_revenue_service washington d c apr gil mat legend taxpayer a taxpayer b company m trust t ira x ira y ira w state z date date date date dear mr page this is in response to the request for letter_ruling submitted on your behalf by your authorized representative as supplemented by correspondence dated telephone conversation in which you request a letter_ruling under sec_401 of the - internal_revenue_code the following facts and representations support your ruling_request anda and taxpayer a whose date of birth was date died on date without having attained age taxpayer a was survived by his spouse taxpayer b at of his date of death taxpayer a was the owner of two individual_retirement_arrangements ira x and ira y maintained with company m taxpayer a had named his spouse taxpayer b as the beneficiary of his ira x and ira y on date taxpayer a executed trust t which was subsequently restated on date taxpayer a also executed his last will and testament article third of taxpayer a’s will provides in short that taxpayer a’s residual trust passes to trust t after the death of taxpayer a taxpayer b rolled over a portion of taxpayer a’s iras x and y into an ira set up and maintained in the name of taxpayer b on date which was within nine months of date taxpayer b executed a partial_disclaimer by means of which taxpayer b disclaimed her remaining interest in taxpayer a’s ira x and ira y the date disclaimer provides in relevant part that the property disclaimed becomes a part of the residuary_estate of taxpayer a and as a result passes under article third of taxpayer a’s will the date disclaimer also provides in relevant part that the disclaimer is intended to be a valid disclaimer within the meaning of code sec_2518 the portions of iras x and y that were not distributed to taxpayer b and not rolled over into an ira in taxpayer b’s name were transferred by means of a trustee-to- trustee transfer s into ira w an ira set up and maintained in the name of taxpayer a deceased for the benefit of trust t your authorized representative has asserted on your behalf that distributions from ira w have been made with respect to calendar_year sec_2001 and sec_2002 based on the life expectancy of taxpayer b the eldest beneficiary of trust t based on the above facts and representations you through your authorized representative request the following letter_ruling page that trust t is the beneficiary for purposes of code sec_401 of ira w furthermore that trust t represents a see-through trust’ as that term is used in the final income_tax regulations promulgated under code sec_401 as such the life expectancy of taxpayer b the eldest beneficiary of trust t may be used to compute distributions required pursuant to code sec_401 which is made applicable to iras pursuant to code sec_408 from said ira w with respect to your ruling_request code sec_408 of the code provides that under regulations prescribed by the secretary rules similar to the rules of sec_401 and the incidental death_benefit requirements of sec_401 shall apply to the distribution of the entire_interest of an individual for whose benefit the ira trust is maintained code sec_401 provides in general that a_trust will not be considered qualified unless the plan provides that the entire_interest of each employee- g will be distributed to such employee not later than the required_beginning_date or ii will be distributed beginning not later than the required_beginning_date over the life of such employee or over the lives of such employee and a designated_beneficiary or over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and a designated_beneficiary code sec_401 provides that where distributions have not begun in accordance with paragraph a 1i the entire_interest of an employee will be distributed within years after the death of such employee code sec_401 ii1 provides an exception to the 5-year rule for amounts paid over life of a beneficiary if any portion of an employee is paid to of for the benefit of a designated_beneficiary id such portion will be paid over the life or life expectancy of said beneficiary and ii such distribution begin no later than one year after the date of the employee’s death or over such later date as the secretary may provide by regulations sec_401 of the code provides in relevant part that for purposes of this paragraph the term required_beginning_date means april of the calendar_year following the calendar_year in which the employee ira holder attains age page with respect to your ruling requests final income_tax regulations under code sec_401 and sec_408 were published in the federal_register pincite federal_register date and in the internal_revenue_bulletin pincite_19_irb_852 date the preamble to the final regulations in relevant part provides that the regulations apply for determining required minimum distributions for calendar years beginning after date for determining required distributions for calendar_year taxpayers may rely on the proposed_regulations the proposed_regulations or the final regulations sec_1_401_a_9_-3 of the final regulations question answer-1 provides in general that if distributions have not begun in accordance with sec_401 distribution of an employee’s entire_interest must be made in accordance with one of the methods described in code sec_401 or iii and iv sec_1_401_a_9_-3 of the final regulations q a-2 provides that in order to satisfy the 5-year rule_of code sec_401 i1 the employee’s entire_interest must be distributed by the end of the calendar_year which contains the fifth anniversary of the date of the employee’s death sec_1_401_a_9_-4 of the final regulations q a-4 a provides in relevant part that in order to be a designated_beneficiary an individual must be a beneficiary as of the date of the employee’s or ira holder’s death generally an employee’s designated_beneficiary will be determined based on the beneficiaries designated as of the date of death who remain beneficiaries as of september of the calendar_year following the calendar_year of death sec_1_401_a_9_-4 of the final regulations q a-4 a further provides in relevant part that any person who was a beneficiary as of the date of the employee’s death but who is not a beneficiary as that september eg because the person receives the entire benefit to which he is entitled before that september is not taken into account in determining the employee’s designated_beneficiary for purposes of determining the distribution period after the employee’s death accordingly if a person disclaims entitlement to an employee’s benefit pursuant to a disclaimer that satisfies code sec_2518 by that september thereby allowing other beneficiaries to receive the benefit in lieu of the disclaiming person the disclaiming person is not taken into account in determining the employee’s designated_beneficiary sec_1_401_a_9_-4 of the final regulations q a-3 provides that only individuals may be designated beneficiaries for purposes of sec_401 a person who is not an individual such as the employee's estate may not be a designated_beneficiary ifa person eg an estate is named a beneficiary of an employee’s interest in a plan or ira that employee will be treated as having designated no beneficiary however q a-5 of _ page sec_1_401_a_9_-4 provides that beneficiaries of a_trust with respect to the trust's interest in an employee's benefit may be treated as designated beneficiaries if certain requirements are met with respect to your ruling_request the issue to be resolved is whether pursuant to the final regulations trust t is the beneficiary of the disclaimed portion of taxpayer a’s iras x and y such that it may be treated as a see-through trust under q a-5 of sec_1_401_a_9_-4 and its eldest beneficiary treated as the code sec_401 designated_beneficiary of said disclaimed ira portions in that respect we note that although trust t is the ultimate recipient of the portions of iras x and y disclaimed by taxpayer b now ira w trust t takes said disclaimed portions as the residuary beneficiary of taxpayer a’s last will and testament pursuant to article third of said will thus for purposes of code sec_401 taxpayer a’s estate is the beneficiary of said disclaimed iras as noted above under the final regulations an estate may not be treated as a code sec_401 designated_beneficiary thus in this case with respect to the disclaimed portions of taxpayer a’s iras x and y taxpayer a is treated as not having designated a beneficiary for purposes of code sec_401 therefore in the absence of a designated_beneficiary distributions from said disclaimed portions of iras x and y now ira w must be made in accordance with the 5-year rule_of code sec_401 i1 as explained in sec_1_401_a_9_-3 of the final regulations q a-2 ' thus with respect to your ruling_request we conclude as follows that for purposes of code sec_401 although trust t may represent a see- through trust as that term is used in the final income_tax regulations promulgated under code sec_401 trust t is not the named beneficiary of the disclaimed portions of taxpayer a’s iras x and y now ira w as such the life expectancy of taxpayer b the eldest beneficiary of trust t may not be used to compute distributions required pursuant to code sec_401 which is made applicable to iras pursuant to code sec_408 from said ira w instead distributions from ira w must be made in accordance with the 5-year rule_of code sec_401 and must be completed no later than date this letter_ruling is based on the assumption that iras x y and w either met meet or will meet the requirements of code sec_408 at all times relevant thereto it also assumes that the disclaimer referenced herein met the requirements of code sec_2518 page pursuant to a power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representative this letter is directed only to the taxpayer that requested it and is based solely on the representations made with respect thereto sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours praviy u fern frances v sloan manager employee_plans technical group tax_exempt_and_government_entities_division enclosures deleted copy of ruling letter notice of intention to disclose


t c summary opinion united_states tax_court susan corso petitioner v commissioner of internal revenue respondent docket no 7676-12s filed date christopher r k cawley for petitioner mary p hamilton for respondent summary opinion ruwe judge the petition in this case was filed pursuant to the provisions of sec_7463 of the internal_revenue_code pursuant to sec_7463 the unless otherwise indicated all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case after concessions by the parties the sole issue for decision is whether petitioner is liable for self-employment_tax for the taxable years and years at issue of dollar_figure and dollar_figure respectively the parties submitted this case fully stipulated pursuant to rule the stipulation of facts and the attached exhibits are incorporated herein by this reference background at the time the petition was filed petitioner resided in massachusetts petitioner has been an ordained member of the clergy since petitioner began to derive income from her performance of services in her capacity as an ordained minister in the first two years after ordination in which petitioner derived net self-employment earnings_of dollar_figure or more from ministerial services were and petitioner timely filed her form_1040 u s individual_income_tax_return on date petitioner states that she submitted a form_4361 the church of divine metaphysics issued petitioner a credentials and a certificate of ordination in and a degree of doctor of divinity in application_for exemption from self-employment_tax for use by ministers members of religious orders and christian science practitioners with her tax_return and that such form was approved by the commissioner and returned to her the parties stipulated that petitioner’s copies of her through tax returns were destroyed in a basement flood as a result petitioner does not have a copy of the form_4361 that she alleges to have filed with her tax_return the parties also stipulated that the tax returns petitioner filed for the taxable years through have been destroyed by the internal_revenue_service irs pursuant to normal procedures neither party provided evidence as to when their records were destroyed federal_income_tax return petitioner did not report any self-employment_tax due on line self- employment_tax of her form_1040 and entered exempt-4361 as a notation next to line petitioner made this statement in a declaration under penalty of perjury attached as an exhibit to the stipulation of facts respondent does not make a hearsay objection to the declaration but did state respondent does not stipulate that petitioner’s declaration establishes that petitioner is not subject_to self- employment_tax federal_income_tax return ingvar bengtsson prepared petitioner’s form_1040 for the taxable_year no self-employment_tax was reported on line self-employment_tax of petitioner’s form_1040 petitioner attached schedule c profit or loss from business for susan corso worldwide ministries which reported dollar_figure in gross_receipts or sales by letter dated date the commissioner informed petitioner that the income she had reported on her tax_return appeared to be subject_to self-employment_tax petitioner contacted bengtsson to help her respond to the commissioner’s letter by letter dated date bengtsson wrote to petitioner please find enclosed four copies of tax form_4361 file three copies together with a copy of the letter you received irs will send you one copy back with approval signature please make a copy of that approval and send to me so i will have it on file for years to come i found that form_4361 was filed in and if we had that approved copy no more filing would be necessary we note that petitioner has not asserted and no evidence demonstrates that bengtsson prepared either her or federal_income_tax return bengtsson also prepared petitioner’s federal_income_tax returns for the taxable_year sec_2001 through and through respondent did not make a hearsay objection to the admission of bengtsson’s statement respondent did not stipulate to the truth or accuracy of bengtsson’s statement that a form was filed in petitioner stated that she filed bengtsson’s letter and the enclosed form_4361 with the commissioner respondent notes that the record does not contain this correspondence from petitioner however on date the commissioner processed petitioner’s federal_income_tax return without making any adjustments federal_income_tax return petitioner did not report any self-employment_tax due on line self- employment_tax of her form_1040 and entered exempt - as a notation next to line federal_income_tax return petitioner did not report any self-employment_tax on her form_1040 on line self-employment_tax of the form_1040 petitioner wrote exempt- form petitioner attached schedule c for susan corso worldwide ministries reporting dollar_figure of gross_receipts or sales on schedule c petitioner listed her principal business as ministry by letter dated date the commissioner informed petitioner that her return had been examined and it was determined that she owed dollar_figure of self-employment_tax by letter dated date to felisha tipton an operations manager in the examination branch of the irs petitioner stated this is not the first time the irs has incorrectly demanded payment of self-employment_tax although i have elected exemption as an ordained minister since petitioner enclosed with this letter her ordination certificate and a copy of a form_4361 that she described as her original form which was attached to both and tax returns we note that the copy of the form_4361 enclosed with this letter was not signed by petitioner nor was it approved by the commissioner a notice_of_deficiency was issued to petitioner on date determining that petitioner owed dollar_figure of self-employment_tax petitioner did not file a petition in response to the notice_of_deficiency on date the commissioner made a default assessment on or about date petitioner submitted a form_4361 to the commissioner by letter dated date the commissioner informed petitioner that the form_4361 she submitted was being returned without action because petitioner had failed to sign and date the form on date petitioner returned a signed and dated form_4361 to the commissioner by letter dated date the commissioner informed petitioner that her form_4361 was not approved because the form_4361 was not received on time on date petitioner wrote a letter to deborah king an employee of the irs to explain her view of the examination of her federal_income_tax return enclosed with this letter was a form_4361 dated date this form_4361 stated that and were the first two years in which petitioner had self- employment earnings_of dollar_figure or more petitioner asserts she submitted this form_4361 at the direction of ms paine an examiner with the irs as evidence of her right to an exemption from self-employment_tax by letter dated date the commissioner requested that petitioner sign a declaration statement indicating that she understood the grounds on which exemption from self-employment_tax could be approved the letter also stated your line on your form_4361 has been corrected to no years of having self-employment ministerial earnings petitioner signed the declaration statement on date the commissioner approved petitioner’s form_4361 submitted on date this approved form_4361 had the years and crossed out by hand but did not include language stating that there had been a correction on line to no years of having self-employment ministerial earnings petitioner received a copy of the approved form_4361 on date nevertheless by letter dated date the commissioner informed petitioner that the approval of her form_4361 dated date was invalid and that her application_for exemption from self-employment_tax was denied the letter stated upon further research of your case we have found self-employment ministerial earnings in and so you should have filed your form_4361 in you are officially denied on our records on date petitioner contacted the office_of_the_taxpayer_advocate on date petitioner faxed a copy of the approved form_4361 to sheila geehan a case advocate at the office_of_the_taxpayer_advocate on or about date geehan furnished a copy of the approved form_4361 to the commissioner by letter dated date the commissioner notified petitioner that her account for the taxable_year had been changed to show no deficiency in tax through and through federal_income_tax returns petitioner reported no self-employment_tax on her tax returns for the taxable years through and through and federal_income_tax returns petitioner timely filed her federal_income_tax returns for the taxable years and petitioner listed her occupation as minister on both returns on both returns petitioner reported no self-employment_tax and entered exempt- form on schedule c for susan corso worldwide ministries petitioner reported gross_receipts or sales of dollar_figure and dollar_figure for and respectively on date respondent issued to petitioner a notice_of_deficiency for and petitioner timely filed a petition disputing the determinations in the notice_of_deficiency the irs’ ministerial waivers unit’s file for petitioner does not contain a form_4361 that was filed in the file does contain a letter from the irs dated date requesting petitioner to provide more information because she reported income on her tax_return that appeared to be subject_to self- employment_tax however the file does not contain any evidence of or explanation for the irs’ determination that petitioner did not owe self- employment_tax for the taxable_year discussion petitioner bears the burden of proving that her form_4361 was properly filed and approved and that respondent’s determination is erroneous see rule a 290_us_111 peverill v commissioner tcmemo_1986_354 tax ct memo lexis at sec_1401 imposes a tax on self-employment_income of every individual self-employment_income is defined as the net_earnings_from_self-employment derived by an individual during any taxable_year sec_1402 the term net_earnings_from_self-employment is defined as the gross_income derived by an individual from any trade_or_business carried on by such individual less the deductions which are attributable to such trade_or_business sec_1402 sec_1402 provides that the term trade_or_business does not include the performance of service by a duly ordained commissioned or licensed minister of a church in the exercise of his ministry if an exemption under sec_1402 is in effect sec_1402 provides specific requirements for a minister to obtain an exemption from self-employment_tax under sec_1402 a minister must file an application_for exemption in such form and manner and with such official as may be prescribed by regulations such a request shall be made by filing an application_for exemption on form sec_1_1402_e_-2a income_tax regs form_4361 must be filed no later than the due_date of the return including any extension for the second taxable_year for which the applicant has net_earnings_from_self-employment of at least dollar_figure sec_1402 the time limitations of sec_1402 are mandatory and must be complied with strictly mcgaffin v commissioner tcmemo_1996_290 tax ct memo lexis at aff’d 112_f3d_311 8th cir see also 89_tc_922 the mere filing of a form_4361 does not constitute an exemption sec_1_1402_e_-2a income_tax regs the exemption is granted only if the application is approved by an appropriate internal revenue_officer id the first two years after ordination in which petitioner derived net self- employment earnings_of dollar_figure or more from ministerial services were and as a result in order for petitioner to be exempt from self-employment_tax for the years at issue she must have filed a form_4361 no later than the due_date of her federal_income_tax return petitioner stated that she attached a completed form_4361 to her tax_return and that such form was approved by the commissioner and returned to her in respondent argues that petitioner did not prove she had filed a form_4361 with her tax_return and that the irs has no record of an approved form_4361 from that period we must determine whether petitioner attached her form_4361 with her timely filed tax_return and whether the commissioner approved such form the parties stipulated that petitioner’s copy of her federal_income_tax return was destroyed in a flood along with copies of her and through tax returns petitioner stated that the form_4361 approved by the commissioner in was attached to the destroyed return petitioner argues that the examinations of her federal_income_tax return for the taxable years and in which the commissioner determined she owed no self-employment_tax is circumstantial evidence that at the time of the two examinations the commissioner had evidence of petitioner’s approved form_4361 by letter dated date the commissioner informed petitioner that the income she reported on her federal_income_tax return appeared to be subject_to self-employment_tax this was the sole issue raised in the letter petitioner responded indicating that she had filed form_4361 despite raising this issue on date the commissioner processed petitioner’s tax_return without making any adjustments to the return respondent has not provided any explanation for this decision in the commissioner again examined petitioner’ sec_2002 federal_income_tax return the examination_report concluded that petitioner had a deficiency in tax because she was subject_to self-employment_tax a notice_of_deficiency was issued to petitioner on date determining that she owed dollar_figure of self- employment_tax after the notice_of_deficiency was issued petitioner submitted a form_4361 that was approved by the commissioner however this approval was revoked the next month following the revocation petitioner contacted the office_of_the_taxpayer_advocate the advocate then forwarded petitioner’s approved form_4361 to the commissioner on date on date the commissioner notified petitioner that her account for the taxable_year had been changed to show no deficiency in tax respondent argues that the abatement of the assessment was in error however respondent has not provided any evidence or explanation for the decision to abate the assessment for the taxable years and the commissioner examined petitioner’s tax returns and agreed with petitioner that no self-employment_tax was owed the only issue relative to the exemption was whether petitioner had timely filed a form_4361 that had been approved by the commissioner this creates an inference that on at least two occasions the commissioner determined that petitioner had filed a form_4361 with her tax_return and that such form had been approved the commissioner’s determinations during the two examinations are consistent with petitioner’s assertion that the form_4361 she filed with her tax_return had been approved petitioner has consistently reported that she was exempt because she had filed form_4361 petitioner’s reporting of no self- employment_tax for these taxable years is consistent with her position that the form_4361 filed with her tax_return was approved by the commissioner over the course of multiple examinations petitioner has consistently stated that she filed a form_4361 with her tax_return and that such form had been approved on two previous occasions the commissioner apparently agreed based upon the evidence we find that more_likely_than_not petitioner filed a form_4361 with her federal_income_tax return and that such form was approved by the commissioner accordingly we hold that petitioner is not liable for self- employment_tax for the years at issue in reaching our decision we have considered all arguments made by the parties and to the extent not mentioned or addressed they are irrelevant or without merit to reflect the foregoing decision will be entered under rule


department of the treasury internal_revenue_service washington d c date number release date cc dom fs fi p uilc internal_revenue_service national_office field_service_advice memorandum for from deborah a butler assistant chief_counsel field service cc dom fs subject deductibility of revolving credit facility fees this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend corporation year year date agreement agreement w x y z issue whether corporation can currently deduct facility fees paid on a quarterly basis pursuant to a revolving credit agreement where corporation has borrowed the full amount available under the agreement conclusion no costs of acquiring a loan are to be capitalized and amortized ratably over the term of the loan facts on date corporation entered into two revolving credit agreements with a consortium of banks corporation entered into these agreements in connection with a corporate merger and for the purpose of paying down prior debt corporation borrowed the full amount available under the agreements both agreements provide that corporation will pay a facility fee to the banks’ agent specifically sec_2 of agreement and agreement specifies that the company agrees to pay a facility fee with respect to the period beginning on the first day of the commitment period to the termination_date the fee is payable quarterly in arrears under agreement the fee is computed at the rate of w per annum on the average daily amount of the commitment during the quarter under agreement the fee is computed similarly however the rate per annum is determined by reference to s p and moody’s rating of corporation’s debt section a of the agreements specifies that if corporation fails to make an interest payment or facility fee payment and fails to remedy the situation within five days the banks have the option to terminate their obligations to make further loans under the agreements and to call due all prior loans agreement has a term of y days and agreement has a term of z years the agreements can be extended upon corporation’s request and the banks’ consent the agreements have been extended on multiple occasions and the amounts of the lines of credit have varied we understand that the agreements are still in effect the agreements appear to provide that the loans made under the agreements will have the same terms as the agreements themselves on its annual_statement for year corporation reported the lines of credit as long-term debt because of its averred intention to borrow these sums on a long-term basis during year corporation paid dollar_figurex in facility fees corporation deducted this full amount on its year return corporation contends that the facility fee is paid quarterly if not paid the banks could terminate the lines of credit and call for the immediate payment of all outstanding amounts accordingly the facility fee is only of benefit to that quarter and should be deductible in the year of payment however the examining agent claims that the facility fee is in the nature of a commitment fee which is a cost of acquiring the loan and which must be deducted ratably over the life of the loan the examining agent contends that because the parties keep extending the lines of credit there is no ascertainable_useful_life accordingly the examining agent disallowed the deduction for the facility fee law and analysis the law is well settled that costs of acquiring a loan are to be capitalized and amortized ratably over the term of the loan sleiman v commissioner tcmemo_1997_530 57_tc_781 65_tc_640 to determine how much corporation may deduct in a given year it is necessary to ascertain the terms of the loans created pursuant to the agreements because this involves an analysis of the facts and circumstances surrounding the agreements and the loans made pursuant to the agreements we conclude that you are in a better posture then are we to determine the terms of the underlying loans and thus the amortization period corporation contends that the fee is paid each quarter for the right to borrow money during and only for that quarter in addition corporation argues that the quarterly fee does not represent a cost of acquiring the right to borrow money over or for the entire term of the credit facilities we are not persuaded by corporation’s arguments first sec_2 a of the agreements states the company agrees to pay to the agent for the account of each bank a facility fee in respect of the period from and including the first day of the commitment period to the termination_date computed at the rate per annum established under the agreement payable quarterly on the last day of the quarter the underscored language suggests that there is a single facility fee required for each agreement that relates to the entire term of agreement and agreement and that the fee is paid in quarterly installments second section of the agreements lumps the facility fees with the interest fees and provides that if the corporation defaults in any payment in respect of interest on any of the notes or any facility fees the banks can terminate their obligations and call the notes due if the quarterly fees represent quarterly commitments as corporation contends then it seems that the corporation would be in default only with respect to the quarter to which the payment relates however because the facility fees are paid in arrears this would be problematical the language in the agreements undermines corporation’s argument here the failure to pay one quarterly installment will trigger the default provisions and give the banks the opportunity to terminate the entire agreement and the underlying loans this supports the argument that the agreements are a single indivisible instrument with a single facility fee paid quarterly and not a series of quarterly commitments or options case development hazards and other considerations please call if you have any further questions by cc joel e helke chief financial institutions products branch field service


internal_revenue_service number release date index number --------------------------------- ------------------------------------------- ---------------------------------- ---------------------------------------------- ------------------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi b2 plr-138433-09 date date legend x ------------------------------------------ ------------------------------------------- country ----------------- date ------------------ dear -------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as a disregarded_entity under sec_301_7701-3 the facts submitted and representations made are summarized as follows x was formed on date under the laws of country x is a foreign_entity eligible to elect to be treated as a disregarded_entity effective date however x inadvertently failed to timely file a form_8832 entity classification election sec_301_7701-3 provides guidance on the classification of a foreign_entity for federal_income_tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if the foreign eligible_entity has one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 plr-138433-09 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as a disregarded_entity for federal tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-138433-09 pursuant to a power_of_attorney on file with this office copies of this letter are being sent to x’s authorized representative sincerely curt g wilson associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes