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 b07 plr-122446-05 date date internal_revenue_service number release date index number ------------------------------- --------------------------- ------------------------------- - legend p ----------------------------------------- ---------------------------------------------------------- ------------------------------ state ------------ member a ---------------------------------------- ---------------------------------------------------------- ---- -------------------------- member b ------------------------------- ------------------------ parent ------------------ ------------------------ company ----------------------------------------- ---------------------------------------------------------- -- a ------------------------------ b ------------------------------- c ------------------ d --------------- date -------------------- date --------------------- date ------------------------- p l r ------------------------ dear ------------------ dear ------------------ this letter is in response to your letter dated date submitted on behalf of member b requesting rulings under sec_29 of the internal_revenue_code facts plr-122446-05 the facts as represented by p and p's authorized representatives are as follows p is a state limited_liability_company classified as a partnership for federal the facility was constructed with equipment that can be disassembled and the facility was constructed pursuant to a construction_contract between a and income_tax purposes all of the interests of which are owned by member a and member b parent is a publicly traded corporation and the parent of an affiliated_group_of_corporations that includes member a and member b pursuant to an agreement entered into on date p acquired all of the interests in company a state limited_liability_company that owns the facility p has represented that company is disregarded as an entity separate from p for federal_income_tax purposes in consideration for its purchase of the interests in the company p made upfront cash payments to c and d the sellers p will also make fixed payments and contingent payments based on production in the facility to c and d subject_to certain adjustments set forth in the agreement b entered into on date and amended on date the facility was designed to produce synthetic_fuel from coal the construction_contract did not limit the amount of damages that either party could seek against the other party in the event of the other party's default under the contract a obtained an opinion of counsel that the construction_contract is binding under applicable state law moved to another site to take advantage of other supplies of coal potential customers or other business reasons the facility's equipment consists primarily of four processor units which include processing vessels and input and output hoppers the processors heaters which heat the oil that is circulated through the processing vessels and a screw conveyor conditioner in which a dust control and protective coating agent is applied to the processed coal p has supplied a detailed description of the process employed at the facility numerous tests on the coal used at the facility and has submitted a report concluding that significant chemical changes take place to the coal with the application of the process to the coal prior to acquiring the interests in the company the facility was relocated to a new site p has represented that following the relocation the fair_market_value of the original property is more than twenty percent of the facility’s total value the cost of the new property plus the value of the original property in connection with the relocation p has made certain modifications to the facility p has represented that these modifications will not significantly increase the production capacity of the facility or significantly extend the life of the facility a recognized expert in coal combustion chemistry and analysis performed plr-122446-05 the rulings issued in p l r which you wish to be reconfirmed in this private_letter_ruling are as follows the construction_contract constitutes a binding written contract in effect before date within the meaning of sec_29 p with the use of the process will produce a qualified_fuel within the meaning of sec_29 production from the facility will be attributed solely to p within the meaning of sec_29 entitling p to the sec_29 credit for the production of the qualified_fuel from the facility that is sold to an unrelated_person if the facility was placed_in_service prior to date the relocation of the facility after the date on which the facility was first placed_in_service or the replacement of parts of the facility after that date will not result in a new placed_in_service_date for the facility for purposes of sec_29 provided the fair_market_value of the original property is more than twenty percent of the facility’s total fair_market_value at the time of the relocation or replacement if the facility was placed_in_service prior to date the described modifications to the processors in the facility will not result in a new placed_in_service_date for the facility for purposes of sec_29 provided such changes do not significantly increase the production capacity of the facility or significantly extend the life of the facility the sec_29 credit attributable to p may be allocated to the members of p to consist of member a and member b under the principles of sec_702 in accordance with the members’ interests in p when the credit arises for the sec_29 credit a member’s interest in p is determined based on a valid allocation of p’s gross_income or loss that arises from the receipts from the sale of the sec_29 qualified_fuel a termination of p under sec_708 will not affect the placed_in_service_date for the facility for purposes of sec_29 or otherwise preclude the reconstituted partnership from claiming the sec_29 credit for the production and sale of synthetic_fuel from the facility to unrelated persons plr-122446-05 ruling_request sec_29 and f provide that sec_29 applies with respect to qualified_fuels which are produced in a facility placed-in-service after date and before date and which are sold before date sec_29 modifies sec_29 in the case of a facility producing qualified_fuels described in sec_29 which qualified_fuels include solid synthetic fuels produced from coal or lignite sec_29 provides that for purposes of sec_29 a facility shall be treated as placed-in-service before date if the facility is placed-in-service before date pursuant to a binding written contract in effect before date sec_29 provides that if the facility is originally placed-in-service after date sec_29 shall be applied by substituting date for date a contract is binding only if it is enforceable under local law against a taxpayer and does not limit damages to a specified amount eg by use of a liquidated_damages provision a contract provision limiting damages to an amount equal to at least five percent of the total_contract_price for example should be treated as not limiting damages the construction_contract executed prior to date includes such essential features as a description of the facility to be constructed a completion date and a maximum price the contract also provides that damages shall not be less than six percent of the total_contract_price p provided an opinion of counsel that the contract is binding under applicable law therefore we conclude that the construction_contract is a binding written contract in effect before date within the meaning of sec_29 ruling_request sec_2 sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer the credit for the taxable_year is an amount equal to dollar_figure adjusted for inflation multiplied by the barrel-of-oil_equivalent of qualified_fuels sold sec_29 defines qualified_fuels to include liquid gaseous or solid synthetic fuels produced from coal including lignite including such fuels when used as feedstocks in revrul_86_100 1986_2_cb_3 the internal_revenue_service ruled that the definition of the term synthetic_fuel under sec_48 and its regulations are relevant to the interpretation of the term under sec_29 former sec_48 provided a credit for the cost of equipment used for converting an alternate_substance into a synthetic liquid gaseous or solid fuel revrul_86_100 notes that both sec_29 and former sec_48 contain almost identical language and have the same overall congressional intent plr-122446-05 namely to encourage energy conservation and aid development of domestic energy production under sec_1_48-9 of the income_tax regulations a synthetic_fuel differs significantly in chemical composition as opposed to physical composition from the alternate_substance used to produce it coal is an alternate_substance under sec_1_48-9 consistent with its private_letter_ruling practice that began in the mid 1990's the service in revproc_2001_30 provided that taxpayers must satisfy certain conditions in order to obtain a letter_ruling that a solid fuel other than coke produced from coal is a qualified_fuel under sec_29 revproc_2001_30 as modified by revproc_2001_34 2001_1_cb_1293 the revenue_procedure requires taxpayers to present evidence that all or substantially_all of the coal used as feedstock undergoes a significant chemical change to meet this requirement and obtain favorable private letter rulings taxpayers provided expert reports asserting that their processes resulted in a significant chemical change in announcement 2003_30_irb_222 the service announced that it was reviewing the scientific validity of test procedures and results presented of significant chemical change in expert reports in announcement 2003_46_irb_1090 the service announced that it had determined that the test procedures and results used by taxpayers were scientifically valid if the procedures were applied in a consistent and unbiased manner however the service concluded that the processes approved under its long standing ruling practice and as set forth in revproc_2001_30 did not produce the level of chemical change required by sec_29 nevertheless the service announced that it recognized that many taxpayers and their investors have relied on its long standing ruling practice to make investments therefore the service announced that it would continue to issue rulings on significant chemical change but only under the guidelines set forth in revproc_2001_30 as modified by revproc_2001_34 this ruling is provided to p consistent with announcement and the service's long standing ruling practice accordingly based on the expert test results submitted by p and its members we conclude that the synthetic_fuel produced at the facility using the described process and specified chemical reagents is a solid synthetic_fuel produced from coal constituting a qualified_fuel within the meaning of sec_29 because p owns the facility and operates and maintains the facility through its agent we conclude that p will be entitled to the sec_29 credit for the production of the qualified_fuel from the facility that is sold to an unrelated_person ruling_request to qualify for the sec_29 credit the facility must be placed-in-service before date pursuant to a binding written contract in effect before date although sec_29 does not define placed_in_service the term has been defined for purposes of the deduction for depreciation and the investment_tax_credit for these purposes property plr-122446-05 is deemed to have been placed_in_service in the taxable_year that the property is placed in a condition or state of readiness and availability for a specifically assigned function sec_1_167_a_-11 and sec_1_46-3 of the income_tax regulations accordingly p’s facility will be deemed to have been placed-in-service for purposes of sec_29 on the date that the facility was first placed in a condition or state of readiness and availability to produce a qualified_fuel as discussed above the issue regarding when the facility was placed-in-service was subject_to examination the service determined without mutual concessions that p’s facility was placed-in- service prior to date pursuant to a binding written contract in effect before date it is the policy of the service that such determinations are not reconsidered absent extraordinary circumstances for example fraud or misrepresentation see c revrul_94_31 1994_1_cb_16 concerns sec_45 which provides a credit for electricity produced from certain renewable resources including wind the credit is based on the amount of electricity produced_by_the_taxpayer at a qualified_facility during the 10-year period beginning on the date the facility was originally placed-in-service and sold by the taxpayer to an unrelated_person during the taxable_year revrul_94_31 holds that for purposes of sec_45 a facility qualifies as originally placed-in-service even though it contains some used_property provided the fair_market_value of the used_property is not more than percent of the facility's total value the cost of the new property plus the value of the used_property revrul_94_31 concerns a factual context similar to the present situation consistent with the holding in revrul_94_31 because the facility was placed-in- service prior to date within the meaning of sec_29 relocation of the facility after date or replacement of parts of the facility after that date will not result in a new placed-in-service date for the facility or otherwise prevent the facility from continuing to be treated as originally placed-in-service prior to date if the fair_market_value of the property used at the original facility is more than percent of the facility’s total market_value immediately following the relocation or replacement the cost of the new equipment included in the facility plus the value of the property used at the original facility revrul_94_31 describes a windfarm that consists of an array of wind turbines towers pads transformers roadways fencing on-site power collection systems and monitoring and meteorological equipment notwithstanding that the windfarm consisted of all of these items the ruling concludes that the facility for purposes of sec_45 is confined to the property on the windfarm necessary for the production of electricity from wind_energy emphasis added the present situation is similar to revrul_94_31 thus for purposes of determining the facility's total fair_market_value at the time of relocation or replacement a facility consists of the process equipment directly necessary for the production of the qualified_fuel starting at the immediate input plr-122446-05 of the coal and chemical reagents to the pug mills or mixers including any coal hoppers and reagent tanks directly feeding the pug mills or mixers through the output from the briquetters or other forming equipment including output hoppers if any hence the facility's total fair_market_value includes the process equipment such as pugmills or mixers the briquetters or other forming equipment the equipment necessary to interconnect such equipment the electrical instrumentation control systems and auxiliaries related to such equipment including the structures that house such electrical instrumentation and control systems the foundation platform s for the above- referenced equipment and an appropriate allocation of the engineering project management overhead and other costs assignable to the relocation of such equipment and construction the facility's total fair_market_value does not include costs associated with the purchase and installation of equipment that supports the operation of the facility but is not directly necessary for the production of the qualified_fuel such as coal beneficiation or preparation equipment eg crushers screens dryers or scales other material handling or conveying equipment eg stacking tubes transfer towers storage bunkers mobile equipment or conveyors certain site improvements eg fencing lighting earthwork paving separate office and bathhouse trailers for facility personnel and buildings if a building for purposes of sec_168 of the code and other administrative assets sampling and quality control are necessary for operational control of a production facility however a particular type of sampling equipment generally is not necessary for the production of qualified_fuel thus the costs of sampling equipment are excluded from the facility's total fair_market_value unless the particular sampling equipment is necessary for operational control of the facility consistent with the holding in revrul_94_31 because p’s facility was placed- in-service prior to date within the meaning of sec_29 relocation of the facility to a different location or replacement of part of the facility after date will not result in a new placed-in-service date for the facility for purposes of sec_29 provided the fair_market_value of the original property is more than of the facility's total fair_market_value at the time of relocation or replacement the cost of the new equipment included in the facility plus the value of the used_property ruling_request to qualify the sec_29 credit p’s facility must be placed-in-service before date pursuant to a binding written contract in effect before date revproc_2001_30 2001_19_irb_1163 provides that a facility including one of multiple facilities located at the same site may be relocated without affecting the availability of the credit if all essential components of the facility are retained and the production capacity of the relocated facility is not significantly increased at the new location plr-122446-05 p has represented that the facility has been modified by the replacement of belt scales sampling equipment a programmable logic controller an electric heater and tubes within the processors p has also represented that it may replace inlet and outlet gate valves within the processors with rotary valves or lock hoppers in the future p has represented that the replacement of any and all of these parts will not significantly increase the production capacity of the facility or significantly extend the life of the facility based on the information submitted and the representations made we conclude that the placed-in-service date of the facility will not be effected provided by the modifications made to the facility provided the production output of the facility is not significantly increased by these modifications the production output is the amount of qualified_fuel including the production of a briquetted fuel product that can reasonably be expected to be produced by each facility using the prevailing practices in the industry regarding the performance of maintenance with regard to the various pieces of equipment in the facility reasonable allowances for shutdowns for repairs and or replacement of parts etc ruling_request sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer sec_7701 provides that taxpayer means any person subject_to any internal revenue tax generally under sec_7701 the term person includes an individual a_trust estate partnership_association company or corporation sec_702 provides that each partner determines the partner's income_tax by taking into account separately the partner's_distributive_share of the partnership's other items of income gain loss deduction or credit to the extent provided by regulations prescribed by the secretary sec_1_702-1 provides that the distributive_share is determined as provided in sec_704 and sec_1_704-1 sec_704 provides that a partner's_distributive_share of income gain loss deduction or credit is except as otherwise provided in chapter of subtitle a of title_26 determined by the partnership_agreement sec_704 provides that a partner's_distributive_share of income gain loss deduction or credit or item thereof is determined in accordance with the partner's_interest_in_the_partnership determined by taking into account all facts and circumstances if the partnership_agreement does not provide as to the partner's_distributive_share of income gain loss deduction or credit or item thereof or the allocation to a partner under the agreement of income gain loss deduction or credit or item thereof does not have substantial economic_effect plr-122446-05 sec_1_704-1 provides that allocations of tax_credits and tax_credit recapture except for sec_38 property are not reflected by adjustments to the partners' capital accounts thus these allocations cannot have economic_effect under sec_1 b ii b and the tax_credits and tax_credit recapture must be allocated in accordance with the partners' interests in the partnership as of the time the tax_credit or credit recapture arises if a partnership expenditure whether or not deductible that gives rise to a tax_credit in a partnership_tax_year also gives rise to valid allocations of partnership loss or deduction or other downward capital_account adjustments for the year then the partners' interests in the partnership with respect to such credit or the cost giving rise to it are in the same proportion as the partners' respective distributive shares of the loss or deduction and adjustments see sec_1_704-1 example identical principles apply in determining the partners' interests in the partnership with respect to tax_credits that arise from receipts of the partnership whether or not taxable based on the information submitted and the representations made we conclude that the credit will be allowed to p and the credit may be passed through to and allocated among the members of p under the principles of sec_702 in accordance with each member’s interest in p as of the time the credit arises for purposes of the sec_29 credit a member's interest in p is determined based on a valid allocation of the receipts from the sale of the sec_29 qualified_fuel ruling_request the sec_29 credit has always been a time sensitive credit in that eligibility for the credit is determined when facilities or wells producing qualified_fuels are placed_in_service and when the qualifying fuels are produced and sold to unrelated persons for example the sec_44d credit as originally enacted in the crude_oil windfall profit tax act of was generally available for post-1979 production sold before date from facilities placed_in_service after date and before date congress has extended the sec_29 credit four times the placed-in-service deadline and the period for claiming the sec_29 credit were extended in the technical_and_miscellaneous_revenue_act_of_1988 for placed_in_service omnibus budget reconciliation act of for placed_in_service and for the end of the credit_period energy policy act of for placed_in_service and for the end of the credit_period and small_business job protection act of date for placed_in_service it is clear from the legislative_history of sec_44d that congress intended the credit to apply to facilities placed_in_service after and that the placed-in-service deadline in sec_29 must be read as applying to when the facility is first placed_in_service within the applicable dates the placed-in-service deadlines contained in sec_29 and sec_29 focus on the facility and not the owner of the facility the legislative_history of plr-122446-05 sec_44d clearly shows that congress wanted to encourage the production of new alternative fuels from facilities first placed_in_service after and not provide a tax incentive for production capacity in service before sec_29 demonstrates that congress knows how to preclude transferees of facilities from claiming the sec_29 credit that provision provides that the extension of the period for placing facilities in service after does not apply to any facility that produces coke or coke gas unless the original_use of the facility commences with the taxpayer accordingly the determination of whether a facility has satisfied the placed-in- service deadline under either sec_29 or sec_29 is made by reference to when the facility is first placed_in_service not when the facility is transferred or sold to a different taxpayer sec_708 provides that a partnership shall be considered as terminated if within a twelve-month period there is a sale_or_exchange of percent or more of the total interest in partnership capital and profits sec_1_708-1 provides that if a partnership is terminated by a sale_or_exchange of an interest the following is deemed to occur the partnership contributes all of its assets and liabilities to a new partnership in exchange for an interest in the new partnership and immediately thereafter the terminated partnership distributes interests in the new partnership to the purchasing partner and the other remaining partners in proportion to their respective interests in the terminated partnership in liquidation of the terminated partnership either for the continuation of the business by the new partnership or for its dissolution and winding up sec_1_708-1 applies to terminations of partnerships under sec_708 occurring on or after date as discussed above the placed-in-service deadline in sec_29 and sec_29 must be read as applying to when the facility is first placed-in-service within the applicable dates the placed-in-service deadlines contained in sec_29 and sec_29 focus on the facility and not the taxpayer owning the facility accordingly the placed-in-service deadline under sec_29 and sec_29 is determined by reference to when the facility is first placed-in-service therefore because the facility was placed-in-service prior to date within the meaning of sec_29 the sale of the facility after date will not result in a new placed-in-service date for the facility for purposes of sec_29 for the new owner further a termination of p under sec_708 will not preclude the reconstituted partnership from claiming the sec_29 credit on the production and sale of synthetic_fuel to unrelated persons plr-122446-05 conclusions representatives we conclude as follows accordingly based on the representations of p and p's authorized the construction_contract constitutes a binding written contract in effect before date within the meaning of sec_29 p with the use of the process will produce a qualified_fuel within the meaning of sec_29 production from the facility will be attributed solely to p within the meaning of sec_29 entitling p to the sec_29 credit for the production of the qualified_fuel from the facility that is sold to an unrelated_person if the facility was placed_in_service prior to date the relocation of the facility after the date on which the facility was first placed_in_service or the replacement of parts of the facility after that date will not result in a new placed_in_service_date for the facility for purposes of sec_29 provided the fair_market_value of the original property is more than twenty percent of the facility’s total fair_market_value at the time of the relocation or replacement if the facility was placed_in_service prior to date the described modifications to the processors in the facility will not result in a new placed_in_service_date for the facility for purposes of sec_29 provided such changes do not significantly increase the production capacity of the facility or significantly extend the life of the facility the sec_29 credit attributable to p may be allocated to the members of p to consist of member a and member b under the principles of sec_702 in accordance with the members’ interests in p when the credit arises for the sec_29 credit a member’s interest in p is determined based on a valid allocation of p’s gross_income or loss that arises from the receipts from the sale of the sec_29 qualified_fuel a termination of p under sec_708 will not affect the placed_in_service_date for the facility for purposes of sec_29 or otherwise preclude the reconstituted partnership from claiming the sec_29 credit for the production and sale of synthetic_fuel from the facility to unrelated persons plr-122446-05 the conclusions drawn and rulings given in this letter are subject_to the requirements that the taxpayer i maintain sampling and quality control procedures that conform to astm or other appropriate industry guidelines at the facility that is the subject of this letter ii obtain regular reports from independent laboratories that have analyzed the fuel produced in such facility to verify that the coal used to produce the fuel undergoes a significant chemical change and iii maintain records and data underlying the reports that the taxpayer obtains from independent laboratories including raw ftir data and processed ftir data sufficient to document the selection of absorption peaks and integration points except as specifically ruled upon above we express no opinion concerning the federal_income_tax consequences of the transaction described above this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling may be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in this ruling see dollar_figure of revproc_2005_1 i r b however when the criteria in dollar_figure of revproc_2005_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely s joseph h makurath senior technician reviewer branch passthroughs special industries cc--


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to plr-141747-01 cc psi b03 date date legend x a b d1 dear this letter responds to your letter dated date and subsequent correspondence on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated under state law on d1 the shareholders of x a and b decided that x would be an s_corporation the shareholders were unaware that it was necessary for x to file a x's form_2553 election by a small_business_corporation with an effective date of d1 x a and b have consistently filed their tax returns as if x were an s_corporation x requests a ruling that it will be recognized as an s_corporation effective for taxable_year beginning d1 under sec_1362 law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation plr-141747-01 sec_1362 provides the rule on when an s election will be effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made if an s election is made after the first two and one-half months of a corporation’s taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year conclusion based on the facts submitted and representations made we conclude that x has established reasonable_cause for its failing to make a timely election and that x is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 containing an effective date of d1 for the election within days following the date of this letter then such election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center a copy is enclosed for that purpose except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether x is an s_corporation for federal tax purposes pursuant to a power_of_attorney on file with this office we are sending a copy of this letter to the taxpayer 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 sincerely jeanne sullivan senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


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 intl b02 plr-124275-08 date september ty ------- ty ------- legend ------------------------- taxpayer --------------------------------------------------- year year year year fc country x country y trust ------- ------- ------- ------- ---------------------------- ------------------ ----------- ------------------------- trustee o trustee r ---------------------------- ------------------------------ law firm p law firm q ------------------------------------------------------------------------------------------ ---------------------- ---------------------------------------------------------- dear ------------------ this is in response to your letter received by our office on date submitted by your authorized representative requesting the consent of the commissioner of the internal_revenue_service to make a retroactive qualified electing plr-124275-08 fund qef election under sec_1295 of the internal_revenue_code code and sec_1_1295-3 with respect to your investment in fc the rulings contained in this letter are based upon information and representations submitted by taxpayer and accompanied by a penalties of perjury statement executed by the appropriate parties 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 facts taxpayer is a u s citizen and a named beneficiary of the trust established under the laws of country x by taxpayer's grandmother a citizen and resident of country y in year the trust acquired shares in fc a corporation organized under the laws of country y at all times since its formation the trust was administered and managed by various foreign nationals who served as the trustees of the trust trustee o who served as a trustee of the trust at all times since inception is an attorney with substantial experience in transnational tax planning and was a partner at law firm p during all the years at issue trustee o is competent to render international tax_advice trustee o and the other trustees had full access to all the records of the trust and trustee o was aware at all relevant times that taxpayer resided permanently in the united_states taxpayer is not a tax professional and has no experience in international tax matters taxpayer represents that as a beneficiary of the trust taxpayer had no control_over the assets of the trust and relied on the trustees to manage the assets of the trust at all times the trustees and in particular trustee o never informed taxpayer that the trust held shares of fc that fc was a passive_foreign_investment_company pfic under sec_1297 of the code for u s federal_income_tax purposes and of the consequences of such investment and of the possibility of making any elections qef or otherwise with respect to such shareholdings for u s federal_income_tax purposes in year after the death of taxpayer's father taxpayer engaged law firm q and others to determine the extent of the family's assets in year during its evaluation of the trust's assets law firm q determined that fc had been a pfic since year and informed taxpayer of fc's characterization as a pfic at that time taxpayer has submitted an affidavit signed under penalties of perjury describing the events that led to the failure to make the qef election by the election due_date plr-124275-08 including the role of the trustees taxpayer has also submitted affidavits of trustee o and trustee r corroborating the representations made by taxpayer taxpayer represents that as of the date of this request_for_ruling the pfic status of fc has not been raised by the irs on audit for any of the taxable years at issue ruling requested taxpayer requests the consent of the commissioner of the internal_revenue_service to make a retroactive qef election with respect to fc for year under sec_1_1295-3 law sec_1295 of the code provides that any pfic shall be treated as a qef with respect to a taxpayer if an election by the taxpayer under sec_1295 applies to such company for the taxable_year and the company complies with such requirements as the secretary may prescribe for purposes of determining the ordinary_earnings and net capital_gains of such company under sec_1295 a qef election may be made for any taxable_year at any time on or before the due_date determined with regard to extensions for filing the return for such taxable_year to the extent provided in regulations such an election may be made after such due_date if the taxpayer failed to make an election by the due_date because the taxpayer reasonably believed the company was not a pfic under sec_1_1295-3 a taxpayer may request the consent of the commissioner to make a retroactive qef election for a taxable_year if the shareholder reasonably relied on a qualified_tax professional within the meaning of sec_1_1295-3 granting consent will not prejudice the interests of the united state sec_3 government as provided in sec_1_1295-3 the request is made before a representative of the internal_revenue_service raises upon audit the pfic status of the corporation for any taxable_year of the shareholder and the shareholder satisfies the procedural requirements of sec_1 f the procedural requirements include filing a request for consent to make a retroactive election with and submitting a user_fee to the office of the associate chief_counsel international sec_1_1295-3 additionally affidavits signed under penalties of perjury must be submitted that describe plr-124275-08 the events which led to the failure to make a qef election by the election due_date the discovery of such failure the engagement and responsibilities of the qualified_tax professional and the extent to which the shareholder relied on such professional sec_1_1295-3 and iii conclusion based on the information submitted and representations made with taxpayer’s ruling_request we conclude that taxpayer has satisfied sec_1_1295-3 accordingly consent is granted to taxpayer to make a retroactive qef election with respect to fc for year provided that taxpayer complies with the rules under sec_1_1295-3 regarding the time and manner for making the retroactive qef election this private_letter_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 a copy of this ruling must be attached to any_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer's authorized representative sincerely s ethan a atticks senior technical reviewer branch international cc


t c memo united_states tax_court estate of winifred hughes deceased dean mcbride executor and commissioner of internal revenue respondent trustee petitioner v docket no filed date david s grossman for petitioner julie l payne for respondent memorandum findings_of_fact and opinion colvin judge respondent determined a deficiency of dollar_figure in the estate’s estate_tax decedent’s husband george robert hughes bob hughes founded bob hughes motors inc d b a advance leasing advance leasing bob hughes died in winifred hughes decedent was the sole owner of the stock of advance leasing from until she died in after bob hughes died dean mcbride mcbride became the sole officer and director of advance leasing decedent issued a durable_power_of_attorney to mcbride in in mcbride executed an agreement and a promissory note on behalf of decedent and advance leasing which stated that decedent promised to pay dollar_figure to advance leasing on demand in exchange for big_number shares of advance leasing’s common_stock advance leasing issued a stock certificate to decedent for the big_number shares mcbride paid the dollar_figure to advance leasing after decedent died in the issues for decision are whether dollar_figure is deductible under sec_2053 as a claim against decedent’s gross_estate based on the dollar_figure promissory note we hold that it is not whether interest of dollar_figure owed to decedent by advance leasing on certain promissory notes when decedent died is included in decedent’s gross_estate we hold that it is not section references are to the internal_revenue_code as in effect as of the date of decedent’s death unless stated otherwise rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and are so found a dean mcbride mcbride the executor of decedent’s estate resided in phoenix arizona when the petition was filed mcbride was a longtime friend of bob hughes and decedent bob hughes died on date mcbride was the executor of his estate mcbride became trustee or manager of the family_trust and other entities discussed more fully below that bob hughes and decedent established to hold almost all of their property b decedent and bob hughes decedent and bob hughes were married around and lived near seattle washington for most of their lives they had two children during their marriage mark hughes and billy hughes decedent had another son and bob hughes had two children from prior marriages decedent and bob hughes had grandchildren bob hughes owned automobile dealerships for many years in burien washington approximately miles south of seattle on date bob hughes and decedent established the george r hughes family_trust grh trust and other entities to hold almost all of their property bob hughes was the trustee or manager of grh trust and other entities that he and decedent had established after bob hughes died on date decedent was the sole current beneficiary of grh trust the children and grandchildren of bob hughes and decedent and certain charities were future beneficiaries mcbride became the trustee or manager of grh trust and the other entities that bob hughes and decedent had established decedent issued a durable_power_of_attorney to mcbride on date at that time decedent was lucid and knew what assets she owned and who her family members were decedent moved to an assisted living facility in peoria arizona on date she was soon diagnosed with alzheimer’s disease she lived there until she died on date c advance leasing organization and operation bob hughes founded advance leasing around he and decedent originally owned all of the stock in advance leasing they transferred their stock to grh trust when they formed it in advance leasing’s office was in burien washington advance leasing sold used cars from through date it began buying cars to lease to third parties some time after but before date billy hughes and jeff ross were independent contractors and salespersons for advance leasing they earned commissions from selling and leasing cars bob hughes hoped that billy hughes would eventually own a car dealership billy hughes was a very good salesman but had alcohol and drug problems advance leasing financed its purchases of cars with loans it obtained from other entities established by bob hughes and decedent at the end of and advance leasing owed dollar_figure dollar_figure and dollar_figure respectively to bob hughes and the other entities when bob hughes died decedent became the sole beneficial_owner of the stock of advance leasing all of which was held by grh trust decedent was never involved in the business of advance leasing the estate of bob hughes reported on the federal estate_tax_return that was filed on date that the stock of advance leasing had a fair_market_value of zero as of date and that its liabilities exceeded assets mcbride signed that return as executor for the estate of bob hughes advance leasing’s financial statements for advance leasing had the following amounts of gross_sales cost_of_goods_sold operating income expenses and net_loss for gross sales-- used car retail sales dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure used car wholesale sales big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number cost of goods sold-- used car retail sales dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure used car wholesale sales big_number big_number big_number big_number big_number big_number reconditioning costs big_number -- -- -- -- -- big_number big_number big_number big_number big_number big_number total operating income-- combined used car retail dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and wholesale sales income sales loss car lease income big_number big_number big_number big_number big_number big_number capital_gain income big_number big_number big_number big_number capital_loss dividend income -- -- -- -- interest_income miscellaneous income -- -- -- -- -- other income -- -- -- other rental income -- big_number big_number big_number big_number -- big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number total expenses dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure net profit net_loss dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure advance leasing had the following amounts of assets liabilities capital and net worth3 for net year ended dec assets liabilities capital worth dollar_figure dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number as discussed in par e below advance leasing’s financial statements for and did not refer to the big_number shares of advance leasing stock issued to decedent or decedent’s dollar_figure promissory note net_worth equals assets minus liabilities and capital if any advance leasing owed the following to bob hughes george r hughes enterprise limited_partnership help h_r properties and the trust year ended dec creditor bob hughes- note payable -- dollar_figure -- -- -- -- accrued int -- -- -- -- -- total -- big_number -- -- -- -- h_r props - note payable dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure accrued int -- big_number -- big_number big_number big_number total big_number big_number big_number big_number big_number dollar_figure help- note payable -- dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure accrued int -- big_number big_number big_number big_number big_number total -- big_number big_number big_number big_number big_number trust- note payable -- -- -- -- dollar_figure dollar_figure accrued int -- -- -- -- big_number big_number total -- -- -- -- big_number big_number grand total dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure advance leasing reported dollar_figure of taxable_income before net_operating_loss deductions on its income_tax return d help grh trust was a general_partner of help children and grandchildren of decedent and her husband were the limited partners grh trust as general_partner held a 581-percent interest in help and the children and grandchildren the limited george r hughes enterprise limited_partnership is described in par d below h_r properties was a schedule c business owned by bob hughes and decedent partners held a 419-percent interest advance leasing borrowed money from help and owed help dollar_figure by the end of e the stock subscription agreement and the dollar_figure promissory note mcbride knew it was important to decedent that billy hughes always have a place to work on date mcbride acting under a power_of_attorney from decedent and as president of advance leasing signed a stock subscription agreement under which decedent agreed to pay advance leasing dollar_figure on demand and advance leasing agreed to issue to decedent an additional big_number shares of advance leasing’s common_stock and advance leasing issued a stock certificate to decedent for the big_number shares the terms of the stock subscription agreement were not negotiated and advance leasing’s business was not appraised the promissory note was not paid while decedent was alive neither the dollar_figure promissory note nor the big_number shares were identified on advance leasing’s and financial statements or on its and corporate_income_tax returns neither advance leasing’s bookkeeper nor its certified_public_accountant whose accounting firm had prepared advance leasing’s tax returns and reviewed its financial statements since the early 1990s knew about the stock subscription agreement or the dollar_figure promissory note f events following decedent’s death decedent died on date mcbride as trustee of grh trust transferred dollar_figure to advance leasing on date advance leasing had not previously demanded payment of the promissory note during advance leasing used the dollar_figure it received for the promissory note to repay dollar_figure to help in billy hughes’s wife filed for divorce his substance abuse problems worsened and he stopped working for advance leasing he entered a rehabilitation center for treatment late in advance leasing ceased operating around g decedent’s estate_tax_return decedent’s estate reported on the estate_tax_return that her gross_estate included dollar_figure of principal advance leasing owed on its notes to h_r properties and grh trust entities owned by decedent but did not include dollar_figure of interest advance leasing owed on those notes as of date decedent’s date of death also on that return decedent’s estate deducted dollar_figure as a claim against the estate based on the dollar_figure promissory note decedent’s estate reported on that return that the stock of advance leasing had no value on decedent’s date of death because liabilities exceeded the fair_market_value of assets mcbride signed the return for decedent’s estate opinion a whether dollar_figure is deductible under sec_6653 as a claim against decedent’s gross_estate based on the dollar_figure promissory note deductibility of claims against an estate_tax may be imposed on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2001 the decedent’s taxable_estate is the value of the decedent’s gross_estate reduced by various deductions sec_2051 one of those deductions is for claims against the estate that are enforceable under state law sec_2053 680_f2d_1248 9th cir an estate may deduct the value of a claim based on a decedent’s promise to pay only if the liability was contracted bona_fide and for full and adequate_consideration in money or money’s worth sec_2053 88_tc_1265 57_tc_833 this requirement prevents an individual from reducing her or his taxable_estate through transactions that are in substance gifts 92_f2d_426 2d cir affg 34_bta_798 the estate’s contentions the estate contends that the estate may deduct dollar_figure on the basis of its obligation to pay the promissory note the estate contends that the note was the result of a bona_fide contract for full and adequate_consideration in money or money’s worth as required under sec_2053 the estate also contends that decedent received full and adequate_consideration for her promise to pay advance leasing dollar_figure because she received big_number shares of stock in a corporation that appeared ready to become profitable the estate argues that by date advance leasing had experienced a dramatic turnaround the estate points out that in contrast to its losses for and advance leasing reported dollar_figure of taxable_income before net_operating_loss deductions on its income_tax return whether decedent received full and adequate_consideration for the stock subscription agreement we first decide whether decedent’s receipt of big_number shares of advance leasing stock on date was full and adequate_consideration for her agreement to pay dollar_figure to advance leasing under the stock subscription agreement the estate contends the big_number shares of stock were adequate_consideration because advance leasing’s financial situation improved dramatically from to advance leasing reported dollar_figure of taxable_income before net_operating_loss the estate contends that the burden_of_proof in this case is shifted to respondent under sec_7491 we need not decide that issue because we decide this case on the basis of the preponderance of evidence without regard to the burden_of_proof deductions on its income_tax return however that return is not consistent with its financial statements which show a net_loss of dollar_figure before net operating losses are considered the estate contends the funds from the stock subscription agreement reduced advance leasing’s debt obligations made the balance_sheet cleaner and made it easier for the company to secure outside financing despite this claim advance leasing did not receive the funds until after decedent died advance leasing’s financial situation remained poor on date james mcbride an attorney for advance leasing and the brother of mcbride testified that advance leasing and its business had negligible if any value when the stock subscription agreement was entered into on date james mcbride advised his brother regarding the stock subscription transaction and he drafted the stock subscription agreement and the dollar_figure promissory note james mcbride stated that it would have been futile for help to demand full payment by advance leasing because advance leasing lacked the ability to repay the more than dollar_figure it owed to help at the end of james mcbride testified that help wanted advance leasing to survive in the hope that it would generate income and repay its debt to help james mcbride’s testimony is corroborated by the estate_tax_return for the estate of bob hughes and the advance leasing financial statements according to the estate_tax_return for the estate of bob hughes the stock of advance leasing had a fair_market_value of zero as of date advance leasing had net losses of dollar_figure for dollar_figure for and dollar_figure for even taking into account decedent’s dollar_figure note advance leasing had a negative total net_worth of dollar_figure at the end of and dollar_figure at the end of advance leasing used the entire dollar_figure it received in from decedent to repay some of the more than dollar_figure it then owed to help thus the dollar_figure payment to help directly benefited decedent’s children and grandchildren we do not believe that the value of advance leasing’s stock increased from zero on date as reported on the estate_tax_return for bob hughes which mcbride signed to dollar_figure on date and then fell to zero on date the date decedent died as reported on decedent’s estate_tax_return also signed by mcbride we conclude that the big_number shares issued to decedent had little or no value when mcbride signed the stock subscription agreement on date thus decedent did not receive full and adequate_consideration as required by section as discussed supra advance leasing’s and financial statements did not reflect the additional big_number shares issued to decedent and the dollar_figure stock subscription agreement note payable to advance leasing neither party offered expert testimony on the value of advance leasing stock on date c a for the dollar_figure she agreed to pay advance leasing in exchange for the big_number additional shares whether the stock subscription transaction was contracted bona_fide the estate contends that the dollar_figure stock subscription agreement the agreement to pay dollar_figure in exchange for big_number shares of advance leasing common_stock was contracted bona_fide we disagree contracted bona_fide means made in good_faith and bargained for at arm’s length sec_20_2043-1 sec_20_2053-4 estate_tax regs see 526_f2d_1012 3d cir 69_tc_408 affd 625_f2d_133 6th cir when family members adopt a course of action with the intent to pass on wealth a deduction for the amount transferred is not permitted under sec_2053 unless there was a bargained-for exchange 16_f3d_462 1st cir affg 100_tc_313 mcbride was decedent’s attorney in fact and advance leasing’s sole director and officer thus he was on both sides of the stock subscription transaction that transaction must be subjected to enhanced scrutiny see bank of new york v united_states supra pincite- 36_tc_900 the estate contends that the stock subscription agreement was bona_fide because decedent wanted advance leasing to continue to operate so that billy hughes would have a place to work mcbride conducted business in the same way that bob hughes did owners of small businesses typically operate other than at arm’s length and james mcbride advised mcbride about fiduciary obligations those points do not convince us that the stock subscription agreement was bona_fide mcbride’s engaging in conduct similar to that of bob hughes does not show that the stock subscription agreement was at arm’s length or bona_fide without a showing that bob hughes always acted at arm’s length when dealing with his related entities in addition whether or not the related entities dealt with each other at arm’s length sec_2053 provides that the estate is not allowed a deduction in this case unless the claim against the estate was contracted bona_fide and for adequate_and_full_consideration we have no reason to question mcbride’s intent to act properly or the quality of the legal advice he received however that does not determine whether the stock subscription was at arm’s length the following facts show that the stock subscription agreement made on date was not bona_fide the terms of the stock subscription agreement were not negotiated at arm’s length advance leasing’s business was not appraised and advance leasing had annual net losses and a negative net_worth in and both before and after the date stock subscription transaction the big_number shares and the dollar_figure demand note payable to advance leasing were not reflected on advance leasing’s and financial statements or on its and tax returns advance leasing’s bookkeeper and its certified_public_accountant did not know about the stock subscription agreement and the dollar_figure note payable and advance leasing and mcbride its sole officer and director did not demand payment of the dollar_figure before date after decedent died advance leasing received and used the proceeds to repay dollar_figure to help the family_partnership in which certain children and grandchildren of decedent and decedent’s husband collectively held a 419-percent interest considering all the circumstances we conclude that the stock subscription agreement was a substitute for a testamentary_disposition to decedent’s children and grandchildren the estate contends that we should not treat the dollar_figure payment as a testamentary_disposition because if decedent had so intended she could have reduced her estate by dollar_figure per year by giving dollar_figure to each of her children and grandchildren each year regardless of how decedent might have done things differently we evaluate the facts before us see 417_us_134 conclusion we conclude that the estate may not deduct dollar_figure from decedent’s gross_estate as a claim against her estate under sec_2053 based on the dollar_figure promissory notedollar_figure b whether decedent’s gross_estate includes dollar_figure of accrued interest owed by advance leasing on certain notes decedent’s estate included in the gross_estate dollar_figure representing the principal_amount that advance leasing owed on its notes to h_r properties and the trust however the estate did not include in the gross_estate dollar_figure representing accrued interest that advance leasing owed on those notes when decedent dieddollar_figure the gross_estate includes the value at the time of death of all property in which decedent had an interest sec_2031 sec_2033 the dollar_figure of accrued interest is included in decedent’s gross_estate to the extent that it had value at the time of her death see sec_2031 sec_2033 fair_market_value is ‘the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or to sell and both in light of this holding we need not decide respondent’s other arguments that the note was not bona_fide or enforceable against decedent’s estate under washington law or that decedent lacked competence to execute the power_of_attorney the estate did not elect the alternate_valuation_date under sec_2032 having reasonable knowledge of relevant facts ’ 411_us_546 quoting sec_20_2031-1 estate_tax regs the fair_market_value of a note is generally the amount of the unpaid principal plus interest accrued to the date of a decedent’s death unless the executor establishes that the value is lower or that the note is worthless sec_20_2031-4 estate_tax regs the fair_market_value of the accrued interest is the amount of unpaid accrued interest as of the date of decedent’s death unless the executor establishes a lower value see id respondent contends that decedent’s estate includes dollar_figure of accrued interest owed by advance leasing because advance leasing could have used the dollar_figure to pay dollar_figure of accrued interest or decedent could have reduced the dollar_figure owed under the stock subscription agreement note against the dollar_figure we disagree we believe that the fair_market_value of the accrued interest is zero because advance leasing was insolvent and we do not believe that a willing buyer with knowledge of advance leasing’s financial situation would pay any amount for the dollar_figure of accrued interest owed by advance leasing we conclude that the dollar_figure of accrued interest had no respondent acknowledges that advance leasing was insolvent and that its liabilities exceeded its assets during value on the date of decedent’s death and is not included in her gross_estate to reflect the foregoing decision will be entered under rule


t c summary opinion united_states tax_court elmo hollie thibodeaux jr petitioner v commissioner of internal revenue respondent docket no 26124-11s filed date elmo hollie thibodeaux jr pro_se sandy hwang for respondent summary opinion kerrigan judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated all section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a federal_income_tax deficiency of dollar_figure for the issue for our consideration is whether petitioner received gross_income of dollar_figure for tax_year background some of the facts have been stipulated and are incorporated in our findings petitioner resided in california at the time of the petition in petitioner worked for conti electric inc and shimmick obayashi joint_venture and received dollar_figure and dollar_figure respectively for a total of dollar_figure respondent received forms w-2 wage and tax statement from conti electric inc and shimmick obayashi joint_venture showing dollar_figure of wages paid to petitioner petitioner filed timely form 1040ez income_tax return for single and joint filers with no dependents for the tax_year his return showed no income and no income_tax withheld petitioner submitted a second form 1040ez to the appeals_office but the internal_revenue_service did not process it on his second form 1040ez petitioner showed no income but claimed a refund of dollar_figure for income_tax withheld on date petitioner signed a form_4852 substitute for form_w-2 wage and tax statement or form 1099-r distributions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc this form shows that conti electric inc and shimmick obayashi joint_venture withheld social_security and medicare taxes totaling dollar_figure petitioner never paid income_tax on his wages for on date respondent sent petitioner a statutory_notice_of_deficiency for petitioner’s tax_year discussion generally the commissioner’s determinations are presumed correct and the taxpayer bears the burden of proving that those determinations are erroneous rule a 290_us_111 under sec_7491 the burden_of_proof may shift from the taxpayer to the commissioner if the taxpayer produces credible_evidence with respect to any factual issue relevant to ascertaining the taxpayer’s liability petitioner does not contend that the burden_of_proof should be shifted to respondent under sec_7491 and the record does not suggest any basis for a shift in addition petitioner admitted to receiving the wages in dispute sec_61 provides gross_income means all income from whatever source derived sec_61 includes as income compensation_for services including fees commissions fringe_benefits and similar items the supreme court has held consistently that gross_income was meant to bear ‘the full measure of the taxing power ’ 348_us_426 quoting 309_us_331 the liability for the payment of the income_tax is on the individual earning the income 281_us_111 the taxpayer has the burden of demonstrating that his accession to wealth is exempt from taxation commissioner v glenshaw glass co u s pincite petitioner a resident of california is a taxpayer subject_to federal_income_tax who is obliged to file federal_income_tax returns and pay federal_income_tax on his income specifically including wages see sec_1 a a a see also 640_f2d_1014 9th cir compensation_for labor or services paid in the form of wages or salary has been universally held by the courts of this republic to be income subject_to the income_tax laws currently applicable respondent determined that for petitioner received and failed to report gross_income in the form of wages petitioner received wages from third-party payors these wages were not excludable from gross_income petitioner argues that his wages are excludable from gross_income he contends that to be includible in gross_income his wages have to come from a privileged activity sec_61 defines gross_income as all income from whatever source derived sec_61 includes compensation_for services sec_63 defines taxable_income as gross_income minus deductions petitioner did not make a valid argument that his wages are excludable from gross_income because of any specific provision of law see rodriguez v commissioner tcmemo_2009_92 we do not need to discuss petitioner’s frivolous and groundless argument see 737_f2d_1417 5th cir heisey v commissioner tcmemo_2002_41 aff’d 59_fedappx_233 9th cir to reflect the foregoing decision will be entered for respondent


t c memo united_states tax_court don warner reinhard petitioner v commissioner of internal revenue respondent docket no filed date don warner reinhard pro_se miriam c dillard a gary begun and caroline r krivacka for respondent memorandum findings_of_fact and opinion nega judge by notice_of_deficiency dated date respondent determined a deficiency in petitioner’s federal_income_tax for of dollar_figure and a penalty for fraud under sec_6663 of dollar_figure apart from computational matters the issues for decision are whether petitioner improperly claimed a loss deduction of dollar_figure from his wholly owned subchapter_s_corporation for and whether the underpayment attributable to the claimed loss deduction was due to fraud justifying the penalty and negating the bar of the statute_of_limitations we answer both questions in the affirmative findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided in georgia when the petition was filed petitioner was an experienced and successful investment adviser he holds a bachelor’s degree in finance and a master’s degree in business administration during petitioner owned magnolia capital management inc mcm a subchapter_s_corporation mcm was the sole owner of a limited_partnership called magnolia capital management lp mcm lp mcm lp was a general_partner of several hedge funds that managed investments for petitioner’s clients all section references are to the internal_revenue_code as in effect for the tax_year at issue all rule references are to the tax_court rules_of_practice and procedure all dollar amounts are rounded to the nearest dollar for both mcm and mcm lp reported the same dollar_figure as their only income on date petitioner filed hi sec_2001 federal_income_tax return the return was prepared by a certified_public_accountant c p a on schedule e supplemental income and loss petitioner claimed a flowthrough loss of dollar_figure from mcm although mcm did not report a loss on its form_1120s u s income_tax return for an s_corporation petitioner claimed a loss deduction of dollar_figure on his own tax_return and applied it against the dollar_figure of passthrough income he reported from mcm the deduction was characterized in a statement attached to petitioner’ sec_2001 return as general_partner expenses paid to reimburse petitioner claimed the deduction for payments he allegedly made to his clients to reimburse them for their losses in the hedge funds petitioner did not provide any detailed information or documentation about these payments to the c p a who prepared his return he simply told the c p a to use the dollar_figure expense on hi sec_2001 income_tax return ten days after petitioner filed hi sec_2001 return he submitted a different version of the return to a bank while applying for a loan this version omitted the dollar_figure deduction petitioner claimed on his filed tax_return from date through date petitioner engaged in a fraudulent scheme to retain his hedge fund clients during a tumultuous year during this time petitioner provided his clients with false quarterly account statements showing materially inflated account values when margin calls on these accounts were issued in date his clients’ accounts were dissolved in a single day some of the clients sued petitioner to recover their lost funds on date as litigation with these clients was pending petitioner voluntarily filed a petition with the u s bankruptcy court for the northern district of florida under u s c chapter no 06-50298-kks during the bankruptcy proceedings petitioner failed to report numerous assets on his bankruptcy schedules including two boats a harley davidson motorcycle investment accounts and dollar_figure of artwork on date petitioner was indicted in the u s district_court for the northern district of florida on counts of criminal misconduct united_states v reinhard no 08-cr-00049-rh-cas n d fla filed date on date petitioner pleaded guilty to seven counts of the indictment including making false statements on hi sec_2001 and sec_2002 income_tax returns in violation of sec_7206 making false statements on a loan application in violation of u s c sec_1014 and transferring assets and concealing them from the bankruptcy trustee in violation of u s c sec_152 in the stipulated factual basis for plea petitioner admitted that he included a dollar_figure fraudulent schedule e expense as part of hi sec_2001 individual_income_tax_return he admitted that he underpaid his tax by dollar_figure and that hi sec_2001 tax_return was materially false as a result of his underreported schedule e income the factual basis for plea also showed that petitioner’s criminal activity occurred over several years and involved numerous false filings and statements including filing a fraudulent tax_return for on date petitioner submitted a form 1040x amended u s individual_income_tax_return for the amended_return removed the dollar_figure schedule e deduction and claimed a net_operating_loss_carryback from a subsequent year petitioner now argues that the schedule e deduction should have been claimed for and on date petitioner submitted documents to respondent in an effort to substantiate the disallowed dollar_figure deduction the documents show petitioner’s amended tax_return is unclear as to whether he reported a net_operating_loss_carryback from hi sec_2002 tax_return or his tax_return on his petition petitioner reported only a net_operating_loss_carryback from hi sec_2002 tax_return respondent’s filings with the court suggest and we will assume that petitioner reported net_operating_loss carrybacks for both years that petitioner made cash transfers from his personal bank account to accounts for the hedge funds in one instance a cash transfer was made to a client’s bank account in according to the documents all of the transfers took place in either or and pertain only to dollar_figure of petitioner’s claimed deductions petitioner did not attempt to substantiate the remaining dollar_figure on hi sec_2001 return petitioner claims that these transfers show that he reimbursed several clients for their investment losses and that he refunded the clients’ previously charged management fees petitioner claims that instead of distributing cash to the clients he reimbursed them by increasing their capital accounts in one particular hedge fund managed by mcm lp in claiming the deduction petitioner relies on a letter submitted by a c p a to petitioner’s public defender in his criminal case in the letter the c p a states that on the basis of petitioner’s representations he believed petitioner incurred expenses related to these transactions in and the c p a did not testify at trial i petitioner’s claimed schedule e deduction opinion the commissioner’s determinations set forth in a notice_of_deficiency are generally presumed correct and the taxpayer bears the burden of proving them erroneous rule a 290_us_111 petitioner does not contend that the burden_of_proof as to any factual issue should shift to respondent under sec_7491 sec_162 allows a taxpayer to deduct all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business a necessary expense is one that is appropriate and helpful to the taxpayer’s business while an ordinary_expense is one that is common or frequent in the type of business in which the taxpayer is engaged 308_us_488 welch v helvering u s pincite the taxpayer bears the burden of proving that reported expenses are ordinary and necessary see rule a the taxpayer also bears the burden of substantiating expenses underlying claimed deductions see sec_6001 65_tc_87 aff’d per curiam 540_f2d_821 5th cir respondent determined that petitioner improperly claimed a passthrough loss deduction of dollar_figure from mcm for the loss resulted from a deduction of dollar_figure against dollar_figure of income that mcm reported for that year petitioner concedes that the deduction should not have been claimed for instead on his amended_return petitioner claims his income for was fully offset by a net_operating_loss_carryback from and petitioner has not provided any evidence of a net_operating_loss for or and we have no way of determining from the record whether a net_operating_loss was available for these years see sec_1_172-1 income_tax regs every taxpayer claiming a net_operating_loss_deduction for any taxable_year shall file with his return a concise statement setting forth the amount of the net_operating_loss_deduction claimed and all material and pertinent facts relative thereto including a detailed schedule showing the computation of the net_operating_loss_deduction see also ames-mechelke v commissioner tcmemo_2013_176 philpott v commissioner tcmemo_2012_307 regardless of whether petitioner had verifiable expenses in when he transferred money from his personal bank account to the bank account of a client we cannot determine that he had an aggregate net_operating_loss for that year accordingly we sustain respondent’s deficiency determination for the tax_year ii fraud_penalty if any part of any underpayment_of_tax required to be shown on a return is due to fraud sec_6663 imposes a penalty of of the portion of the underpayment due to fraud fraud is an intentional wrongdoing on the part of the taxpayer with the specific purpose of evading a tax believed to be owing 829_f2d_828 9th cir aff’g tcmemo_1986_ 96_tc_858 aff’d 959_f2d_16 2d cir the commissioner has the burden of proving fraud and he must prove it by clear_and_convincing evidence sec_7454 rule b langille v commissioner tcmemo_2010_49 aff’d 447_fedappx_130 11th cir to sustain his burden the commissioner must establish two elements that there was some underpayment_of_tax for the taxable_year at issue and that at least some portion of the underpayment was due to fraud 81_tc_640 if the commissioner proves that any portion of an underpayment is attributable to fraud then the entire underpayment shall be treated as attributable to fraud unless the taxpayer shows by a preponderance_of_the_evidence that some portion was not so attributable sec_6663 a underpayment_of_tax petitioner’s conviction pursuant to sec_7206 for filing a false return for estops him from contesting that an underpayment exists for that year see 683_f2d_1285 9th cir 84_tc_636 mcgowan v commissioner tcmemo_2004_146 aff’d 187_fedappx_915 11th cir b fraudulent intent under usual circumstances fraud is rarely admitted and direct evidence of the taxpayer’s intent is rarely available in these instances fraud may be proved by circumstantial evidence and reasonable inferences drawn from the facts 796_f2d_303 9th cir aff’g tcmemo_1984_601 92_tc_661 petitioner admitted as part of his plea agreement that he included as part of his return a fraudulent schedule e expense of dollar_figure therefore petitioner had admitted to fraud and is liable for the civil_fraud penalty under sec_6663 for the tax_year see abdallah v commissioner tcmemo_2013_279 holding that taxpayer’s admissions of fraud in plea agreement established fraudulent intent price v commissioner tcmemo_1996_204 nevertheless for the sake of thoroughness we will examine whether petitioner meets the circumstantial test for fraud we hold that he does circumstances that may indicate fraudulent intent commonly referred to as badges_of_fraud include but are not limited to understating income maintaining inadequate records giving implausible or inconsistent explanations of behavior concealing income or assets engaging in illegal activities providing incomplete or misleading information to one’s tax preparer the lack of credibility of the taxpayer’s testimony and filing false documents including false income_tax returns 317_us_492 morse v commissioner tcmemo_2003_332 aff’d 419_f3d_829 8th cir no single factor is dispositive however the existence of several factors is persuasive circumstantial evidence of fraud vanover v commissioner tcmemo_2012_79 numerous badges_of_fraud demonstrate that petitioner intentionally evaded the payment of tax he knew to be owed he substantially understated his income for the year at issue and other years by claiming deductions he was not entitled to see hatling v commissioner tcmemo_2012_293 he maintained inadequate records and the records he produced lacked credibility and did not substantiate his claims see sowards v commissioner tcmemo_2003_180 his behavior was inconsistent and implausible when he reported substantially higher income on his loan application than on his federal_income_tax return and offered no logical explanation for this behavior see powerstein v commissioner tcmemo_2011_271 he attempted to conceal assets during his bankruptcy proceeding see bussell v commissioner tcmemo_2005_77 aff’d 262_fedappx_770 9th cir and he was convicted of willfully filing a false income_tax return for see wright v commissioner t c pincite nevertheless petitioner argues that he lacked the requisite intent for fraud because the deduction was appropriate and should have been claimed for and petitioner claims that he incurred expenses in and to reimburse his clients for their investment losses to bolster his argument petitioner points to an opinion letter submitted by a c p a to petitioner’s public defender in his criminal case in the letter the c p a acknowledges that petitioner withdrew money from his personal bank account and transferred it to other accounts but the c p a does not make an objective determination of the purpose of the transfers the c p a merely relies on petitioner’s representations furthermore the c p a acknowledges that determining whether petitioner’s reimbursements to clients were ordinary and necessary business_expenses under sec_162 was outside the scope of his opinion letter when he filed his original tax_return in petitioner was aware that the payments he reported would have been made in or not in yet he directed his c p a to claim a deduction for the payments for without any explanation petitioner is an intelligent and well-educated businessman and we find that he knew that a cash_method taxpayer can claim a deduction for an expense only for the year in which it is paid see black v commissioner tcmemo_2007_364 we find that the facts taken as a whole clearly and convincingly establish that petitioner acted with fraudulent intent and that the underpayment attributable to his claimed loss deduction of dollar_figure from his wholly owned subchapter_s_corporation was due to fraud iii statute_of_limitations generally the commissioner must assess tax within three years after a return is filed sec_6501 there is an exception to this general_rule in the case of a false_or_fraudulent_return with the intent to evade tax the tax may be assessed at any time sec_6501 we have held that petitioner’s claimed loss deduction was due to fraud therefore respondent is not time barred from assessing petitioner’ sec_2001 tax_liability see romer v commissioner tcmemo_2001_168 we accordingly sustain respondent’s deficiency determination and imposition of the civil_fraud penalty under sec_6663 for the tax_year 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 none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc fip b04 plr-102502-06 plr-102504-06 date august -------------------------------------------------------------- -------------------------------------------------------------- ----------------------------------------------------------------- -------------------------------------- - -------------------------- ----------------- ------------------ - company a company a ------------------------------------------------------------ --------------------------------------------------------- company b ------------------------------------------------------------ --------------------------------------------------------- parent ------------------------------------------------------------ date a date b date c date d date e date f number number number number number -------------------- ------------- ----------- ------- ------- ----- ----- --- --- ----- ----- ----- ----- ------- --------- ------------- --------------- plr-102502-06 plr-102504-06 number number number number number number number state a state b x --------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------ y --------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- --------------------------------------------- a b system system system system dear ---------------- this is in response to your letter of date a and supplemented and modified by letters of date b and date c requesting a waiver pursuant to sec_101 and sec_7702 of the internal_revenue_code for number insurance contracts failed contracts issued by companies a and b that failed to meet the requirements of sec_101 and sec_7702 as applicable ---------------------------- ------------------------- ---------------------- --------------------- ---------------- ----- plr-102502-06 plr-102504-06 facts the information submitted indicates that companies a and b companies are life_insurance_companies within the meaning of sec_816 company a is a stock_life_insurance_company organized under the laws of state a and licensed to conduct insurance_business in x company a is a subsidiary of parent company b is a stock_life_insurance_company organized under the laws of state b company b is licensed to engage in the life_insurance business in y company b is a wholly owned subsidiary of company a companies a and b join in the filing of a consolidated federal_income_tax return with parent and other eligible affiliates on an accrual accounting calendar_year basis parent acquired companies a and b in date d companies began issuing the failed contracts in date e the companies or predecessors issued the failed contracts on number different policy forms the failed contracts issued before date were intended to comply with sec_101 by satisfying both the guideline_premium_limitation of sec_101 and f and the applicable_percentage requirements of sec_101 and f c the failed contracts issued on or after that date were intended to comply with sec_7702 by satisfying both the guideline premium requirements of sec_7702 and c and by falling within the cash_value corridor of sec_7702 and d certain of the failed contracts are universal_life_insurance contracts ul and variable universal life vul insurance contracts the companies relied primarily on two computer-based administrative systems system and system to monitor the ul and vul contracts’ compliance with the requirements of sec_101 and sec_7702 as applicable system was a successor system developed to monitor the ul and vul contracts the remaining failed contracts are interest sensitive life_insurance contracts isl companies relied primarily on a third computer-based administrative system system to monitor the isl contracts’ compliance with the requirements of sec_101 and sec_7702 as applicable after parent acquired companies companies undertook a comprehensive review of the compliance systems and retained a and b to assist them in that review as a result of that review number ul vul contracts have been identified as having failed to comply with the guideline premium requirements of sec_101 or sec_7702 as applicable these failures represent less than number percent of the approximately number contracts administered on system the companies’ review of system identified number isl contracts that fail to comply with the guideline premium tests these failures represent number percent of the approximately number contracts plr-102502-06 plr-102504-06 administered on system number of those failed contracts are the subject of this waiver request companies have identified five errors that caused the contracts to fail to comply with sec_101 or sec_7702 as applicable error companies have determined that the guideline premiums for some failed contracts were inadvertently and incorrectly calculated using mortality charges based on the cso mortality tables rather than the cso mortality tables error arose because of the failure of the companies’ it personnel to follow correctly the companies’ directions regarding the manner in which the contracts were to be administered under sec_7702 the it personnel when programming certain policy forms on systems a and b either failed to load the correct table of guaranteed mortality charges or failed to change a reference to point to the correct table of guaranteed mortality charges error only affected contracts issued prior to date f this error resulted in the noncompliance of number ul vul contracts error certain contracts designed to satisfy the guideline premium test requirements of sec_7702 gpt were coded incorrectly on system as contracts intended to satisfy the cash_value_accumulation_test cvat error arose because of the failure of the companies’ it personnel to follow correctly the companies’ directions with respect to the manner in which these contracts were to administered under sec_7702 on system the companies’ it personnel in making a programming change inadvertently disabled the gpt testing of certain contracts that were designed to comply with the gpt as a result number contracts failed to comply with the gpt error the companies developed correct specifications that described the attained- age adjustment method for both sec_101 and sec_7702 as part of the system specifications and then directed their it personnel to follow those specifications in creating system however system did not accurately apply the attained-age adjustment method because of a programming error by it personnel that prevented system from retrieving the data needed to perform the adjustment event calculations properly in addition when the companies later implemented certain manual procedures in an attempt to ensure that the attained-age adjustment method was applied properly the companies’ employees did not follow those manual procedures correctly in all instances error resulted in number contracts that failed to comply with the requirements of sec_101 or sec_7702 as applicable error system does not allow any premiums to be applied or credited to a contract in excess of the guideline_premium_limitation that the system calculates for that contract if such a premium is received and if an employee attempts to credit it system automatically rejects the premium and places it into a premium deposit fund or in some other suspense arrangement outside of the contract however the companies plr-102502-06 plr-102504-06 discovered that employees released premiums from a premium deposit account or other suspense arrangement and credited those premiums when permitted by the gpt but with an effective date that preceded the actual date on which the premiums were credited error resulted in number contract failures error this error resulted from the failure of the companies’ it personnel to follow the companies’ instructions regarding the manner in which system was to be programmed to apply the gpt upon receipt of full payment of all scheduled premiums for a contract_year system 4’s programming incorrectly increased an isl contract’s guideline_premium_limitation to the limitation that would apply on the following policy anniversary this error resulted in number contracts failing to comply with the requirements of sec_101 or sec_7702 as applicable companies propose to remedy the non-compliance of each failed contract that is in force on the effective date of this waiver and under which the sum of the premiums_paid as of that date exceeds the guideline_premium_limitation as of that date by increasing the death_benefit payable under a contract which has failed to not less than an amount that will ensure compliance with sec_101 or sec_7702 as applicable or refunding to policyholders the amount of such excess premiums with interest using rates at least as high as those applied for purposes of crediting interest to each contract's cash_value or in the case of a vul contract rates at least as high as those applied for purposes of crediting interest to the contract’s fixed account or a combination of and with respect to each failed contract that terminates by reason of the death of the insured prior to or on the effective date of this waiver ruling with respect to that failed contract and at a time when the premiums_paid exceed the guideline_premium_limitation for the failed contract the companies will pay the policyholders the policyholders’ estates or the beneficiaries such excess with interest using rates at least as high as those applied for purposes of crediting interest to each failed contract’s cash_value or in the case of a vul contract rates at least as high as those applied for purposes of crediting interest to the failed contracts’ fixed account law and analysis in general for flexible premium life_insurance contracts entered into before date sec_101 requires the contract to satisfy either of two tests in order for the death_benefit to be excludable as the proceeds of a life_insurance_contract under sec_101 a guideline_premium_limitation set forth in sec_101 or a cash_value test set forth in sec_101 these requirements differ slightly from those applicable to contracts issued after that date but not in a manner material to this letter plr-102502-06 plr-102504-06 in general for contracts issued after date sec_7702 provides a definition of the term life_insurance_contract for all purposes of the code to satisfy this definition a life_insurance or endowment_contract must be treated as such under the applicable law pursuant to sec_7702 a contract must also either meet the cash_value_accumulation_test of sub sec_7702 or satisfy the guideline premium requirements of sec_7702 and fall within the cash_value_corridor_test of sec_7702 sec_7702 provides that a contract meets the cash_value_accumulation_test if by the terms of the contract the cash_surrender_value of the contract may not at any time exceed the net_single_premium which would have to be paid at such time to fund future_benefits under the contract sec_7702 provides that a contract meets the guideline premium requirements if the sum of the premiums_paid under such contract does not at any time exceed the guideline_premium_limitation as of such time sec_7702 provides that the term guideline_premium_limitation means as of any date the greater of a the guideline_single_premium or b the sum of the guideline level premiums to such date the guideline_single_premium is the single premium at issue that is needed to fund the future_benefits under the contract using the mortality and other charges specified in sec_7702 sec_7702 specifically provides the guideline_single_premium is based on i reasonable mortality charges which meet the requirements if any prescribed in regulations and which except as provided in the regulations do not exceed the mortality charges specified in the commissioners' standard tables as defined in sec_807 as of the time the contract is issued ii any reasonable charges other than mortality charges which on the basis of the company's experience if any with respect to similar contracts are reasonably expected to actually be paid and iii interest at the greater of an annual effective rate of or the rate or rates guaranteed on issuance of the contract the guideline_level_premium is the level annual equivalent of the guideline_single_premium payable until a deemed_maturity_date between the insured's attained ages and with interest at the greater of an annual effective rate of or the rate or rates guaranteed on issuance of the contract sec_7702 the computational rules of sec_7702 and the definitions of sec_7702 apply for purposes of determining both the guideline single and guideline_level_premium if premiums_paid exceed the guideline_premium_limitation sec_101 and sec_7702 allow the issuer days after the end of the policy year in which to refund the excess premiums as may be necessary to cure a failure plr-102502-06 plr-102504-06 pursuant to sec_101 and sec_7702 the secretary of treasury may waive a failure to satisfy the requirements of sec_101 or sec_7702 as applicable these waivers are granted if a taxpayer establishes that the statutory requirements were not satisfied due to reasonable error and that reasonable steps are being taken to remedy the error based on all of the facts law and arguments presented we conclude that the failure of the number contracts to satisfy the requirements of sec_101 or sec_7702 as applicable is due to reasonable error companies’ compliance systems and procedures if properly followed would have prevented the errors described upon discovery of possible errors companies timely reviewed their procedures discovered failures and requested a waiver of their errors finally companies’ proposed method of correcting the errors is reasonable we express no opinion as to the tax treatment of the contracts under the provisions of any other sections of the code and the income_tax regulations that may be applicable thereto the rulings contained in this letter are based on information submitted by the companies 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 a ruling it is subject_to verification on examination this ruling is directed only to the taxpayers requesting it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely s donald j drees jr senior technician reviewer branch office of associate chief_counsel financial institutions products ---------------------------- -------------------------------------